In my third millionaire interview, one commenter was a bit put off by the fact that two of the three interviews featured people with incomes of $500k. He was not rude by any means, but wanted to see some alternative interviews:
May I then make the request my own… The interview series has been really interesting. It is useful hearing people’s suggestions and their mistakes. I would humbly request, if you are able to find someone, who’s “E” has been more south of the $500k than interview 1 & 3.
These people would (possibly) have a completely different set of recommendations and warnings compared to the 2 x MD family or 2 x Lawyer family.
In other words, how about interviewing people who make way less and still become millionaires?
Well, this blog kind of fits that request as I didn’t earn $500k per year throughout my career.
Furthermore, I have done many of these interviews over the course of three blogs and I can say that most of them will not make $500k per year. Time will sort this out (BTW, if anyone wants to be interviewed for the series, shoot me an email — people would love to hear your story.)
Another commenter watched our conversation and laid out the following facts:
Forget the earning side for a moment and just look at the savings rate you need:
1. Savings Goal (example: $1M)
2. Time to get there (example: 30 years)
3. Expected Interest rate (example: 6%)
$1M savings = $995/mo or ~$12k/yr @ 6% for 30 yrs. this seems pretty darn doable.
* want $2M? $2k/mo or $24k/yr @ 6% for 30 yrs
* want $3m? $3k/mo or &36k/yr @ 6% for 30 yrs
* want $4m? $4k/mo or $48k/yr @ 6% for 30 yrs
… etc
There’s little magic in how to develop net worth as a W2 earner: save money and invest it. Don’t like your outlook, find out how to (1) earn more so you can save more, (2) find a different investment vehicle (real estate rentals, a side business, etc), or (3) really get extreme on savings/lifestyle to save a higher % of your income.
Some “lucky” people may get there from primary residence value growth, but that’s pretty rare (San Fran, San Jose, NY, etc), so I wouldn’t base your plan on that.
I do think this site is geared more towards higher income earners (since that’s ESI’s path), but the principles apply to everyone.
Very nice comment! I’d like to add on with a few thoughts:
- As I’ve said previously, there are many ways you can become wealthy. You simply need to work the E-S-I scale to do so.
- Personally, I favor an ever-increasing earning capacity as it makes everything else much easier. This doesn’t mean you need to make $500k a year, $250k a year, or even $100k a year. What it does mean is that wherever you are starting from, you should be working to grow your income. Doing so will have fabulous financial benefits over the life of your career. So if you’re now making $50k, work to get to $60k. Then $70k. Then $80k and so on. You can ignore the “E” part of E-S-I and simply stay where you are and get average raises and promotions, but why do that? Financial life so much easier with a higher income.
- No matter what you make, you need to save. The larger your gap the better. We saved a large percentage of our income which ultimately allowed us to retire early. Saving percentages and earning needs work inversely: if you make a higher income you can hit your goal with a lower percent saved. If you make less, you need a higher savings rate to save the same amount. This is why I like earning more — it opens up more possibilities and creates more cushion.
- Once you save, you will need to invest or you won’t make much progress. You have to get your money working for you. My path was index funds for growth initially and then real estate later for income. Your path might be different but you will need growth for much of your investing career and then transition to income, especially if you want to hit financial independence at a lower age. In the end, time is your main weapon for investment growth so invest early and often.
- Looking at the savings rates above from the commenter, someone who makes $70k per year and saves $12k per year has a 17% savings rate. That is by no means unreasonable, especially when you couple consider an employer match in a 401k. For someone who makes $50k a year, $12k is a 24% savings rate. Still very do-able!!!
- It all boils down to math: ((Earnings – spending) * (1 + return rate)) * years = net worth. (For you math geeks, I know this is not the EXACT formula because there is compounding, etc. but it gets the idea across). So pick your poison. If you don’t want to earn more (or can’t), then save more and/or get a better return on your money. Or earn more, save less (as a percentage), and earn a decent return. Or earn average, save average, and be the next Warren Buffett (unreasonable, but it can be done.) In the end, you at least have to do one of the three (ESI) well and the other two at a decent level.
- If you want to retire early, you’re going to need to do at least two of the three well. Otherwise there’s not much chance of retiring before 60 unless you can live on a dime.
To wrap it all up I want to say that you certainly can become wealthy (in this case $1 million net worth) with a lower income as long as you do well with saving/investing and have enough time.
If you want to have more and/or hit your goal faster, you will have to do more.
Thoughts on any of this?
If you’d like more on this topic, see these:
- Examples of How to Get Rich on a Small Income
- Millionaire Interview 52
- Millionaire Interview 43
- Millionaire Interview 42
Don’t Miss a Post
ESI Money is about helping you grow your net worth. The path to get there involves three simple steps starting with the letters E-S-I. You can read more about the site, the author, and keys to becoming wealthy here.
You can sign up to receive ESI Money articles via email or by RSS. For email newsletter subscriptions or RSS updates updates, visit this link.
Comments
Liz@ChiefMomOfficer saysI personally love the stories of people who’ve had great financial success on modest incomes. Dr. Thomas Stanley featured several of them throughout his series. My personal favorite was the story of “Mr. Benjamin”, a man who had amassed a $3 million nest egg and fully funded expensive colleges for his two or three kids (can’t recall the exact number off the top of my head). He was a bus driver. While his coworkers would spend time in between pickup and dropoff napping, chatting, or grabbing coffee, he was learning about investing. So although I agree that increasing the “E” can be one of the keys to wealth, just because you’re in a lower-paying job and stuck there for one reason or another – you too can be successful.
Great points. Like you said, if you don’t earn a lot, then you probably shouldn’t spend a lot. Right now, I’m saving about 45% of my pre-tax income. I have enough in my emergency fund, now it’s figuring out where to efficiently put my money to work for me.
Thanks for the post ESI. Everyone can become financially free – it’s about realigning priorities and spending habits.
Reply
ESI is, indeed, a 3 legged stool, and I love the comment that to achieve FI you “need to do at least 2 of the 3 well”. Increasing E is the biggest lever available, but folks shouldn’t become discouraged if that’s not something they think they can do. Fair enough, but you’d better Crush It on S and I if you’re not going to focus on E.
Another way to look at it, you can do Moderately Well on all 3 if you’d prefer to avoid the “minimalist” lifestyle. Build a reasonable income, live a life with a few thrills, save ~15-20%, and Invest it well. That’s the approach we’ve taken, and I’ll be retiring by Age 55. We’ll never forget the family trips every year while our daughter was home (Europe, The Islands, Sailboat Chartering, etc.), and we’re still able to retire reasonably early. Balance.
Simple algebra, and the 3 Legged Stool analogy works well in describing the reality.
Reply
- Ty says
That comment was spot on. Only thing I didn’t see was to avoid debt. Make interest, don’t pay it.
Reply
- Lew says
Good solid advice! I wouldn’t change this strategy or rename the blog post but I’ve been able to save for retirement using ESI strategies AND also donate a not insubstantial amount to charities and my church.
Sometimes I joke that I could have bought a new car every few years with that money but there’s something about giving that makes you financially prudent. As my grandmother would say there’s always someone with more and always someone with less. Make due with what you have.Reply
- ESI says
I agree 100%!
We donated a sizable amount of our earnings throughout my career.
In fact, I was wondering about what we had given (and how it impacted FI) the other day and started to dig into the numbers. I’ll have a future post with the details.
Reply
- Isabel says
I agree with your original commenter, and would personally like to see more stories of people who make AVERAGE incomes because they love teaching elementary school, or working as a substance abuse counselor, or massage therapist or whatever.
There are millions out there to whom even a $50k or 75k salary seems, and probably is, out of reach. But *there are* still stories out there where average earners do really well in accumulating wealth, by upping their savings/investment games. Instead of just saying “yes, it’s possible, obviously, let’s look at some math” — why not find and feature them?? It would not undercut your ESI model, imo, to show some people who have limited E.
Reply
- ESI says
I may do that in the future. For now, here’s a whole host of examples:
http://www.freemoneyfinance.com/2010/05/an-example-of-how-to-get-rich-on-an-average-salary.html
http://www.freemoneyfinance.com/2009/04/another-example-of-getting-rich-on-a-low-salary.html
http://www.freemoneyfinance.com/2007/11/how-to-get-rich.html
Reply
- Full Time Finance says
I whole heartedly agree with your summary that anyone can do it by tackling the 3 legs.
My biggest concern is, as we get older 1 million becomes less and less the definition of wealth. I.E your probably not early retiring on a million dollars or living like a rock star.
Reply
Our income has always been less than 100k. We had a nice set up with flexibility at work – and a stay at home parent, so never really pursued the earning side as much as we could have. We now have a decent income for the area we live in – but we started off below average 17 years ago. We were still able to pay off all consumer and student loan debt and have focused on building wealth over the last 5-8 years. And we’ve made great progress, partly because we started investing for the company 401k match in our mid-20s and partly because we’ve focused on Saving and Investing pretty heavily in the last 5 years. It can be done.
Reply
- Jack Catchem says
Thanks for the insight ESI! Especially the “ever-increasing earning capacity.” I told myself once I maxed out my earning at Big City PD I would stop playing around on patrol and get serious on getting promoted. Another classmate had the same plan.
Once I “topped out” I realized shifting to a smaller department in a wealthier area would have the same net salary effect as continuing to climb the ladder at Big City.
I transferred and instantly got a raise. Six months later I was making the equivalent of detective pay. It’s been two years and I’m making sergeant pay per salary and lieutenant pay if you add my overtime. I learned from excellent finance blogs that civilians jump jobs all the time, but it is not often seen in the cop world. Thanks for the insight!
My classmate is now looking to transfer? Why? Big City is about politics, not performance. It makes sense to focus on expanding the earnings instalead of being locked in to the prestige model.
Reply
- ESI says
What an awesome story!
First of all, CONGRATS!
Second, this is a perfect example of someone taking the bull by the horns and working to grow their income. Many people say it can’t be done for this reason or that reason, but most of the time there is a way — as this story illustrates.
Reply
- Jack Catchem says
🙂 thanks. I’m hoping to be an example for you in approximately 4 years (just before I 40). I’ll let you know if I get there.
Reply
- Jack @ Enwealthen says
Fully on board with the E in ESI. One of the key benefits of living in Silicon Valley is the high cost of living. With such a high salary due to the high cost of living, my saving 20-25% here gives me the same cash as someone saving 30% elsewhere. It’s a small comfort now, but we’re looking forward to relocating to a lower cost area in the near future and being able to make the most of our savings.
Reply
Leave a Reply
This site uses Akismet to reduce spam. Learn how your comment data is processed.
