Plant the seed
This post is part of the Financial Freedom Guide series
Worried about major expenses down the road like medical bills, long-term care, college for the kids? Turns out you don't have to have it all saved up before you reach Financial Freedom. All you need is:
Plant the seed
Step 1: Save up some solid capital
Ask yourself: How much would you need to invest to reach a particular goal (say, $1M) within 10 years? How long will it take you at a given monthly savings rate? Where will you end up at your current monthly savings rate in 10 years? Go ahead and play around with the calculator:
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Step 2: Grow your seed
Remember how we figured out that the stock market should roughly double your investment every 10 years even after inflation? So let's say you indeed saved up $1M. Congratulations, you capitalist pig! But you are worried about affording a huge $1M expense 20 years down the road?
Easy. Don't touch your money for 10 years. Pursue your passions, start a lifestyle business, or find a half-time job that covers your bills but not much else. Now your $1M should on average double to $2M in 10 years. Tada, there's your $1M expense covered!
Enjoying pursuing your bill-covering passion projects so much you end up doing it for 20 years? Well, now you're sitting on $4M. Spend $1M and you're still at $3M, which should double to $6M 10 years later.
Here's an example to bring it alive
After already using this trick to fund her old age retirement with just $100k by age 25, Alice achieves financial freedom with $1M saved and invested by age 35 - although judging by her good habits, she's probably done by age 30. Her parents are retiring at the same time as her in their early 60ties and Alice by now has two beautiful kids with her husband Bob.
Now Alice starts worrying. What if her parents need expensive nursing home care 20 years down the road - and her kids may want to go to one of those insanely expensive $50,000+ per year colleges? So Alice makes a plan and decides to do what she was planning anyway: Open that florist shop she always dreamed of running. It won't make her rich but it'll pay the bills and she'll enjoy smelling the flowers and making people happy every day. She'll even make a point of delivering flowers to her friends and family every week.
Alice's net worth ($M)
Ten years later, Alice decides to hand the florist shop over to her good friend Beatrice to focus on pursuing her other passion: Writing. This, however, she doesn't expect to pay the bills for at least the first 10 years. Meanwhile in the intervening 10 years, her $1M has doubled to $2M. Alice decides to live on the investment returns of her first million and leave the second million growing undisturbed.
Another 10 years later, Alice is in her early 50ties. She's lived of and maintained her first million - and is starting to get some lucrative book deals! Meanwhile, her second million has doubled to $2M (for a $3M total). Her kids are indeed about to go to one of those expensive colleges (2 kids * 4 years each * $50,000 per year - zero financial aid = $400k!) and her parents unfortunately do need expensive nursing home care (say, $5,000 a month for 10 years = $600k). Putting it all together, Alice is looking at $1M in expenses!
No problem! Alice spends that $1M - not actually all at once, so there's additional investment gain there but let's keep it simple - and is back at $2M. Alice continues to live on the investment returns of her first million and leaves the second million compounding along.
Twenty years later, Alice is in her 70ties. Her second million has doubled twice to $4M and she still has her very first million (for a $5M total). Now it's Alice's turn to need expensive nursing care and this costs her another $1M over the next 10 years. Her other $4M doubles again to $8M, perhaps $15+M by the time Alice leaves this earth full of love and flowers - more than enough to inherit sizable fortunes to each of her kids. In fact, Alice began transferring her wealth to her kids tax free long ago (coming soon - subscribe to encourage us to hurry up).
So you see? All you need is plant the seed. Let the wealth snowball do the rest.
Any questions? Please share them in the comments section.
Go back: How much is enough?
