Your Cheat Codes For Real Life

We’re in for a real treat today!  MitchTheCatSitter, a frequent and insightful commenter on Ms. Liz has written a guest post for us.

You youngins out there probably know what a cheat code is.  This old lady had to Google it.  A cheat code is a trick that gamers use to bypass the tough parts of a video game in order to win.  Mitch has laid out four cheat codes that will help you bypass the tough parts of your financial life and allow you to live your kick a$$ life.

Mitch is living a pretty kick a$$ life of his own.  He and his wife reached financial independence in their 40’s by working hard, maintaining a high savings rate and investing in real estate.  Pretty much by following the cheat codes he has laid out for us below.

But don’t you dare call him retired as he will be quick to remind you that he drives a bus . . . one day a week, in the winter.  When he’s not playing bus driver, he can be found playing with his backhoe, riding motorcycles, playing bridge, managing their real estate holdings or investing their portfolio.

So without further ado . . . MitchTheCatSitter:


Okay, you’re not in the 1% and may never be. Who cares? Wouldn’t you rather have a meaningful life anyway? Grinding away to climb the corporate ladder has no appeal. Being nimble and sampling all of what life has to offer is what is attractive. Meaning and mobility come waaaayyyyyy before money.

But. Consider. The built in cheat codes for life revolve around money. If you want to be able to spend your 80 to 100 years on earth doing really cool stuff, you will need to figure out how to win the money game. Here are the secret cheat codes you can use to have the life that you value.

The ultimate goal: minimize the time you spend doing un-fun work and maximize the time you have to live life the way you want. How? Save up a pile of money, and get that pile of money to work for you so that you don’t need to spend so much time working at a job. The bigger the pile of money, the more that pile will contribute to your income, and the less you have to grind away at work that you don’t want to do.

Cheat Code Overview

1) Live Frugally: Live on 80% of your salary.

2) Save Aggressively: Take 20% of your salary and put it to work.

3) Invest With Smarts: Have your pile of savings make itself bigger.

4) Time Your Values: Wait until your savings pile is large enough before doing big spending.

Cheat Code Details

1) Live Frugally:

Unless you are below the poverty level, you can always live on 80% of your income. Just decide to do it! Stick away your 20% savings first and pretend that you only earn 80% of your salary. Don’t f*ck this up! Without this step, you will be banging your head against a wall of slave jobs until you croak.

Cheat Helps:

  • Don’t buy new stuff that depreciates in price quickly (cars, computers, technology stuff). If you buy it used, you can dodge major depreciation.
  • Consider if a purchase is a “need” or a “want”. Favor necessities over desires.
  • Look at how you can save on your living costs (invest in housing vs. renting, live with roommates, use smaller spaces, etc.)
  • Don’t fall for the language of consumerism. “Investing” in a vacation is not investing. If you fall for that marketing pitch, you are not paying attention. Understand what is “spending” what is “investing”.

2) Save Aggressively:

Working by yourself, the only way to get to a point where you are free to do what you want will involve amassing a pile of dough. Set your goal of saving 20% of your salary and stick to it!

Cheat Helps:

  • Put 20% away before your paycheck hits your checking account.
  • Save to tax advantaged accounts first: 401k, IRA, HSA, Roth,* etc. These accounts are a bit more “untouchable” than regular accounts and can reduce your income taxes significantly.
  • If you have weak moments, don’t dip into your savings for things that you want to buy! And don’t borrow from your 401k <== big mistake that lots of folks make!
  • Don’t waffle: stick to your guns and your goals. Don’t save only 18% when you have promised yourself that you will save 20%!
  • Many folks are afraid of “locking their money up” in some of these tax favored savings accounts or even in stock fund investments. Consider that, over the long term, you are shooting to get 8% to 10% per year on your money plus whatever tax benefits you can snag. Leaving your savings in a bank account getting 1% or 2% a year is a major fail. You have to invest as well as save to be successful . . . See the next cheat: Investing.

3) Invest With Smarts:

Inflation degrades the value of money that is just sitting around. A dollar that my grandparents hid in the mattress 100 years ago will now only buy about 5 cents worth of stuff. Put your money to work for you making more money. A reasonable goal is to earn 8% to 10% per year on your money.

How do you get those kinds of returns when banks pay so much less than that for a savings account? Buy into chunks of American businesses by buying stock. But do it smartly by spreading your money around so that you are buying lots of different companies and not concentrating your savings into just a few. Use widely diversified funds and ETFs (exchange traded funds).

Cheat Helps:

  • Buy a completely diversified ETF like the Vanguard Total Stock Market ETF (symbol=VTI). This is like owning a piece of every publicly traded company in the U.S.
  • If you shop for other investments, consider the fees and pick the lowest fees for diversified funds. VTI charges only .05%/year to invest your money. This is called “expense ratio” for ETFs. You will not find much cheaper.
  • You may wish to also buy into foreign companies. Buy the Vanguard International Equity Index ETF (symbol=VEU). It has a low expense ratio and buys a piece of 2500 companies in 45 different companies.
  • If you are stuck buying from a list of funds in a 401k, pick the funds that have the lowest fees and that buy into the widest range of company stocks.
  • The above cheats work well for a couple of decades. Buy the funds and don’t sell them; forget that you have them and just let the money pile up. As you get older, you will want to read up on the finer points of investing, or pay to get some help.
  • There are other ways to get 8% to 10% returns on your money. Buying ETFs is the easiest. You can also start a business or invest in real estate. Read “Rich Dad, Poor Dad” by Kiyosaki for more info on having your money work for you.

4) Time Your Values:

Procrastination helps! Why buy TVs, electronics, and stuff today, when you can put off buying until tomorrow? Be proud of the pile of savings that you accumulate. It represents the saved value of your work and also the saved value of your money working for you. Understand this basic idea: both labor and capital can generate value. That means that your pile of money can start paying you a salary just like the income you get from working. If you plow the income from your money pile back into the pile, it grows and can pay you a future salary that will eventually eliminate your need to labor at a job. It is nice to have that option so you can then do whatever you want with your time.

How much of a pile do you need? A bit of math: divide whatever annual income you want by .04 and you have the amount that you need to save.

Cheat Helps:

  • Calculate how much money you need in your pile to figure out the salary you want to get from your money.
  • The better you are at not withdrawing funds from your pile of money, the more income it will make for you when you do start drawing from it.
  • Better living through math: calculate how long your savings and investing program needs to run before you have enough of a pile to get the income you want from the money.

Sample Calculations

Let’s say you make $40,000/year and decide to save 20% of it. Assuming that you get a salary increase of 3%/year and you stay at your 20% savings rate, your pile of money will grow as shown:

Size of Amount You
Year Your Years Your Pile Are Saving
Age Of Money Each Year
2016 22 0 $8,000 8,000
2017 23 1 $16,960 8,240
2018 24 2 $26,974 8,487
2019 25 3 $38,143 8,742
2020 26 4 $50,580 9,004
2021 27 5 $64,406 9,274
2022 28 6 $79,755 9,552
2023 29 7 $96,772 9,839
2024 30 8 $115,616 10,134
2025 31 9 $136,460 10,438
2026 32 10 $159,492 10,751
2027 33 11 $184,921 11,074
2028 34 12 $212,969 11,406
2029 35 13 $243,885 11,748
2030 36 14 $277,935 12,101
2031 37 15 $315,413 12,464
2032 38 16 $356,638 12,838
2033 39 17 $401,958 13,223
2034 40 18 $451,754 13,619
2035 41 19 $506,440 14,028
2036 42 20 $566,468 14,449
2037 43 21 $632,333 14,882
2038 44 22 $704,572 15,329
2039 45 23 $783,772 15,789
9% Return

Then just calculate how much you need to save to get the income you want from the pile of money by dividing your selected annual income by .04. So if you want to generate $30,000 per year from your pile: 30,000 / .04 = $750,000. See the table above for a sample of how many years it might take to hit your goal.

You can choose how much you want to work, how much you want to amass in savings, and how you want to spend your life. The path of saving aggressively and investing smartly allows you to spend the largest amount of time in your life doing more of what you want.

How do you want to spend your life?

Is working until 70 okay?

Or do you want to be free at age 45 instead?

How much can you save each year?

How much do you need to live on each year?

Don’t you want to be able to choose how you live?

 


* Tax Savings Accounts – Quick Summary:

Traditional 401k – a retirement savings plan that allows you to:

  • Subtract the amount you put into the account from your taxable income, reducing your income taxes for the current year.
  • Earn money in the account tax free.
  • Pay taxes when you withdraw the money in the future.
  • You usually can pick from a set list of funds for your investments.
  • This is offered by your employer. Often your employer will give you money, called matching funds, if you save to the plan. So if you save 5% of your salary, your employer might kick in another 5% to add to your account each year.

Traditional IRA – a retirement savings plan that can allow you to:

  • Subtract all or some of the amount you put into the account from your taxable income reducing your income taxes for the current year. The amount you can subtract decreases as your taxable income increases.
  • Earn money in the account tax free
  • Pay taxes when you withdraw the money in the future.
  • You can set this up with a broker to own stocks or funds in the account.

Roth 401k or IRA – a retirement savings plan that allows you to:

  • Put money in the account without a current tax benefit.
  • Earn money in the account without paying taxes.
  • Withdraw the money in the future without paying taxes.
  • A Roth 401k is offered by your employer and may have matching benefits similar to the traditional 401k discussed above.  A Roth IRA can be set up with a broker to own stocks or funds in the account.

HSA – a medical savings plan that allows you to:

  • Subtract the amount you put into the account from your taxable income, reducing your income taxes for the current year.
  • Earn money in the account tax free.
  • Withdraw tax free for paying medical expenses.
  • Withdraw penalty free for any purpose – after you are over 65.  You will pay taxes on these withdrawals so it acts just like a traditional 401k or IRA.
  • To qualify, you must use a High Deductible Health Plan (the plan should specify that it is HSA eligible) for your medical insurance.
  • You can set this up with an HSA provider, usually a bank, to own stocks or funds in the account.
  • Check out the MadFientist’s article to learn more.
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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

8 thoughts on “Your Cheat Codes For Real Life”

  1. I LOVE this! I wish I had read it when I was 22 and fresh out of school, then I would be much closer to my goal. I’ve got some work to do to catch up but at least I am on my way now. It’s incredible to see how the “money pile” grows if you stick to your high savings rate. I am inspired!

    1. Sounds like you are now well ahead of the curve! GoBankingRates research found that 69% of Americans have less than $1000 in savings.

    1. It is great stuff isn’t it! I love how Mitch the (now) former cat sitter laid it out.

      Wow, you’ve made it through a year! Only five months to go 🙁 Do let me know if there are any topics you’d like to see me cover.

  2. How nice of you to ask-I have three:
    1. I would like to see a comparison of an employee (ee) vs. self employed (se)-non-incorporated, with each earning $35k or $50k in a year. Side by side, with the business deductions reducing taxable income and the extra FICA taxes applied to the se. I have been self employed most of my adult 40 year career and love the deductions, including the ability to transfer “normal” costs to the business side of the ledger (transportation, partial tech fees, business use of house, employer paid health ins., business “vacations”, etc. I have never really seen anyone split it all out before, and the complications of doing so are way above my pay grade. You could even include the additional retirement savings vehicles for se.

    I talk to people (many near retirement) who really should consider PT employment. But I don’t think they realize just how profitable it can be. How great the deductions are.

    2. How keeping your income below a certain threashold entitles you to all kinds of government “goodies”. Let’s say $60k a year. Just a few come to mind-ACA subsidies, no tax on capital gains and qualified dividends. The IRA retirement savers bonus. In my state, additional property tax reductions if you are over 65 and earn less than $25k a year, for example. I am sure there are many more out there.

    3. Explain the tax brackets in simple language. Many people I know think all their income is in the 15% bracket (whichever), not just the top dollars earned. Explain how the taxes are “pro-rated” (for lack of a better word) across all earnings, and that someone in the 15% bracket is really only paying 9% (or whatever) based on an income of X. You could use incomes of $50k, $100k and $200k as examples.

    You might be thinking this is some pretty basic stuff that everyone knows. Not to many of your readers I’ll bet. Bruce

    1. Great ideas–thanks!

      I think #1 is above my paygrade too 🙂 But I’ll start thinking about that.

      #3 would make a great post and it’s one I’m working on personally–managing my 2017 income so I get the benefit of no capital gains and staying below the ACA income threshold.

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