Who doesn’t want to be free of having to work?
If you’re like me, the dream of reaching the point of not having to work crosses your mind weekly – and on some Mondays, multiple times.
The amount of money you’ll need to save for this type of freedom will vary based on your lifestyle, hobbies and goals. An excellent target is 10 times your annual income.
So, if your household income were $60,000 a year, accumulating $600,000 would likely give you a secure financial future because a combination of the investment income plus Social Security income will provide the 85 percent of your working income – in this example $51,000, you’ll need to live on.
I know, achieving such a goal might sound as likely as winning a gold medal.
Fortunately, your chances are much better than the about 22 million-to-1 odds of striking Olympic gold. In fact, the research firm Hearts & Wallets reports that 64 percent of power-savers reach the security benchmark of saving 10 times their annual pay.
You can become a power-saver with these four easy-to-follow steps: follow a realistic, written monthly budget; pay off all non-mortgage debt, begin living on 85 percent of your take-home pay, avoid lifestyle inflation.
Your budget, of course, must include basic necessities, such as food, shelter, transportation and debt payments.
You also must plan for expenses that occur less consistently, such as car repairs, school supplies and insurance payments.
Living on a budget doesn’t mean you give up all rewards. Plan a few nice-to-have items such as restaurants and entertainment.
Once you have a budget in place, it’s time to accelerate paying off your debt. Some of the keys to rapid debt reduction include:
Focusing on small debts first and paying them off one at a time.
Selling things on which you have a loan – such as cars, boats and other luxuries.
Using tax refunds and bonuses to pay down debt.
By squeezing your budget, you can eliminate your debt. For most people, the debt-payment process will take just 12 to 18 months of dedicated effort.
Once you’re debt-free, boost your power-saving by saving and investing the money you were using to reduce your debt. Remember to bank at least half of any pay raises, bonuses and tax refunds.
This disciplined approach to managing your increasing income will help prevent excessive lifestyle inflation.
Lifestyle inflation is the natural tendency to spend your raises and bonuses on: bigger houses, fancy new cars and more expensive food.
Mary Beth Franklin from Kiplinger reports that you should be on track to 10 times your income if you have saved the following multiples of your income by these ages.
Age 30 – 0.3 times your income.
Age 35 – 1.1 times your income.
Age 40 – 2.0 times your income.
Age 45 – 3.2 times your income.
Age 50 – 4.5 times your income.
Age 55 – 6.2 times your income.
Age 60 – 8.2 times your income.
Age 65 – 10.6 times your income.
Remember, the sacrifice today is worth financial freedom to come.
firstname.lastname@example.org Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www. PersonalFinanceCoaching.com.