Lifestyle inflation could very well cause you to inflate the amount of money you require to sustain your current standard of living. When you spend near the amount that you earn, you tend to grow a dependence on the salary you take in. This results in a dependence on the job at which you work and also sets you up for a bit of financial trouble. Spending a certain amount today has a very real impact on your financial future specially when you take into account the very strong powers of compound interest.
How’s it going everybody doesn’t beat the bush today we’re going to look at salaried dependents now salary dependent it’s kind of like saying you’re spending paycheck to paycheck it does not matter what kind of job you’re working at or how much salary you’re taking it you could be taking it $30,000 $50,000 $100,000 as long as you’re spending way too close to the
Amount that your paycheck is taking in this means that you’re really dependent on your job in order to sustain your lifestyle now no matter what kind of salary you bring in if you’re living paycheck to paycheck and you’re not saving too much that means you’re kind of living on the edge and if anything happens you likely do not have that much saved up and it’s not
Going to weather any kind of job losses the way most people look at it is you bring in $1,000 oh i have 1,000 to spend so they’re able to spend all the way up to $1,000 the better way to look at this is if you spend a certain amount of money today you have to look at how much time it’s going to cost you before you can retire early now the larger amount of money
That you spend of course it’s going to cost you more time in order to earn it most people would just look at the hourly rate and then scope oh i’m spending you know a hundred dollars it’s going to cost me so many hours in order to make it now this is the wrong way to look at it because if you invest this money instead it’s going to balloon up and it’s going to be
A lot bigger by the time you retire albert einstein once said that the most powerful force in the universe is compound interest now there’s a lot of wisdom to this and let me just try to illustrate this if you started working at age 25 and then you retire at age 65 it means whatever amount of money that you put in the stock market and invested wisely you’re going
To have 40 years of compound interest working for you historically over the last 90 years so smp 500 has gained about 9.8 percent annual return this is on average nine point eight percent on average every single year now check out this chart i made over here you’ll see an interest rate return of eight percent six percent or 4% you have various years of compounding
That you can choose from so if you’re age 25 and you plan to retire at age 65 whatever amount of money you spend today you can use this multiple in this chart to figure out how much it’s actually costing you how much actually have to earn at sixty-five in order to make up or this amount that you spend this graph here is a result of that previous chart you can
See here the more years you have in compounding of course the higher the multiple here if you assume the 4% compounding is not going to increase as much over the years if you assume 8% compounding it’s going to increase a lot more now let’s say you’re at age 50 and you’re going to retire at age 65 you have 15 years of compounding so the multiple is not as great
So you can kind of look at it like this whatever age you plan to retire at the closer you are to it the less time it has to compound this means that the closer you are to your retirement age the less costly it is for you to actually spend that money the other side of saying this is the farther away you are from your retirement age the more important it is to save
And let the compound interest the compounding of the stock market take effect let’s take a ps or for example because this is something that a 25 year old would likely buy and it costs $300 if in the future we assume that smt 500 is going to get about an 8% return people kind of estimate it’s going to be a lot lower but let’s just go with 8% right now i did just
Say that the smp 500 made an average gains of 9.8 percent over the last 90 years so saying that it will make 8% it’s actually a little bit conservative and saying that if 8% kind of makes up for the 2% estimated inflation every single year so this estimate here includes inflation if we assume that 8% compound interest over the 40 years you’ll have a multiple of
21.7 so whatever one dollar that you spend today you have to earn 21.7 dollars to make up for that one dollar that you spent at 25 at 65 you’re going to go oh my gosh instead of buying that ps4 i have to now work so many hours assuming a ps4 is $300 you multiply this by 21.7 it’s 6500 dollars at the age of 65 in hindsight if you’re at 65 well you know you might go
Oh yeah behind that ps4 what’s so worth it you know right now i’m okay with working so many hours to make that 60 five hundred dollars but if you look at the difference here it’s quite a bit a twenty one point seven multiple might kind of make you think twice before you actually go and buy this game console now let’s be a little bit more conservative here and we
Assume a six percent average annual returns you’re young and crazy at the age of twenty five so you buy a really hot car for thirty thousand dollars another person that’s not young and crazy and instead they buy a 10 thousand dollar car that is usable for the same amount of years that person saved twenty thousand dollars and instead of blowing this money and buying
A hot flashy car they invested instead that twenty k at the age of twenty five with six percent compound interest is actually a ten point three multiple here this means this twenty k is going to balloon up all the way up to two hundred six thousand dollars by the time you retire you can either buy a $30,000 car at the age of twenty five or at the sixty five where
You’re old and you know you can’t really drive that much anymore you can buy a two hundred and six thousand dollar car now this takes into account inflation so you can think of what kind of car can you buy for two hundred six thousand dollars today now this is interesting to look at you can’t really go oh i’m going to save everything because i’m going to spend
It all later because you don’t really know if you’re going to die the next day get run over to buy the bus or something so you still got to spend some money today and live a bit today as well so from a scale of one to ten let’s assume one is where you have basic food shelter and internet and ten is actually spending your whole entire paycheck where most people
Are actually doing and you splurge it and you spend it all the way to nothing then my recommendation is actually dialing it all the way back to zero and put your spending somewhere around a two now this means that you’re not going to buy all the fanciest latest gadgets but you will have a little bit of spending cash to just live a little bit today still just to
Give you an idea of rough numbers where i think people should be spending if you make $50,000 a year and you spend thirty thousand dollars a year in living expenses it means ten thousand dollars in taxes another ten thousand dollars you put in savings so what i recommend here is actually taking perhaps ten to percent of that $10,000 and put that into kind of like
A crazy money fund you just spend this on crazy stuff like going to the movies or something or going to the caribbean vacation once a year you need to have some amount of money where you just go oh i’m not going to think about every single penny here and trying to skip everything so this is the fun money crazy money fund here i hope you guys enjoyed this way of
Thinking of how much things actually cost you the sticker price of whatever you buy today is actually very different if you invested wisely don’t forget to give me a like on this video comment down below let me know if this changes your habit of buying big-ticket items if you’re interested in supporting this channel don’t forget to check out my audible link down
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Transcribed from video
Salary Dependence By BeatTheBush
