(Guest Post by Corey)
If you know anything about Budgets are Sexy, you know that J Money is well on his way toward a million dollars. Not only does he have 83 people in his Million Dollar Club, but he also gives regular updates on his net worth. If either of these two things doesn’t inspire you to shoot for a cool million, I don’t know what would.
Yet, if I were to be honest, I don’t aspire to be a millionaire. I hate to say it, but there’s a reason why I haven’t joined the million dollar club. (I don’t mean to hate because it does a lot to get people on the right track, but…) If you really look at what a million dollars can do for you, I think you will come to realize that it is nothing special. That’s right – I said it. A Million dollars isn’t worth that much these days, especially if it makes up your entire fund for retirement.
Instead of focusing entirely on one lump sum, I want to emphasize cash flow. Cash flow is more important to focus on because that is what really matters when it comes to living out the years when you are old and wrinkly. When it comes to paying all of your bills, do you figure out how much you have in the bank or do you figure out how much you earn for the month or year? I think it’s more of the latter.
A Million Dollars Sounds like a Lot
Most people associate a million dollars with either the lottery or a huge pile of gold – a million dollars is something that exists only in dreams. So, when they think of having a million dollars all to themselves, it sounds a little crazy. Considering that the average US family earns less than 50k per year, it makes sense that only a few would think 1 million dollars is within their reach.
As a result of this perception, many ambitious individuals set their retirement goals on this large number. Because it sounds like a lot of money, they figure if they could have 1 million dollars by the time they retire, they will be set for life. I know that I have thought the same thing. If someone gave me a million dollars, I would be tempted to quit my day job because it sounds like so much money. I’m sure most of you have thought the same thing.
Why a Million Dollars Ain’t All its Cracked to Be
Yet, even though a million dollars sounds like a lot, it really isn’t that much when it has to last you the rest of your life. It is often said that the safe withdrawal rate for retirement funds is around 4%. This means that you can withdraw 4% of your total lump sum and survive for another 30 years or so. If you have exactly one million dollars to start with, this means your annual income is a whopping $40,000. While I could live on that, it really doesn’t sound like that much, does it?
I’m sure that is how we all feel. Yet, the problem with this is that it often takes 40 years to reach this landmark. With enough discipline to save and invest your money over the length of your career, I think that many people could reach the million dollar mark. But, if we’re going to be honest – who wants to go through all of that work? 40 years of ceaseless discipline takes a lot out of a person. If often equates to years of sacrificing the things you want now, just for financial security later. It definitely isn’t that sexy, that’s for sure!
Why Cash Flow is Better than a Lump Sum
If was at the same time that I was working on my early retirement plan that I started to realize how long it would take me to save up enough money to quit my day job. Saving enough money in the bank in order to continue my current lifestyle would take me decades to accomplish. That’s when it hit me.
If I started a business that would generate enough income to replace the income from my day job, I could retire early. The only catch is that it would have to be profitable enough that I could hire someone to take care of many aspects of running the business and leave me with money in my pocket. In other words, my net profit (after all expenses) would have to equal the income from my day job. That doesn’t sound easy either, right?
Most businesses require upfront costs like purchasing land or mandatory operating expenses like a mortgage, insurance, etc. This often limits the profitability of small businesses because there is so much overhead. After considering this, I decided to focus my efforts on the online world because of its small overhead. The only expense that I have for a blog is $10 per year for the domain and $100 per year to pay a company to host it for me. By creating and running online blogs, I imagine that I will be able to generate enough income to replace my pathetic income from my day job in the next year or two. I’m not confident that the online world will continue to be as profitable in 10 or 20 years, so I am going to use my income as an investment to get into real estate. People will always need to rent a home or apartment, right? As my online business develops, I should be able to hire out more aspects of running the sites, while keeping a huge profit for myself. I hope that this will allow me to increase my free time and help me see retirement at an early age.
By focusing on building up cash flow, I don’t have to wait around for my yearly contributions and compound interest to slowly add up to a large lump sum. Instead, I am able to reap the same benefits in a short period of time. It seems like the best of both worlds: an early retirement with the same size income as those who save their whole life.
Do you look at the cash flow in your retirement planning?
Corey is a personal finance blogger at Passive Income to Retire and 20′s Finances. He writes about his financial goals, including his most recent aspiration to retire by the age of 27, in order to persuade others to get a handle on their own finances.
EDITOR’S NOTE: I actually agree with a lot of this (though a million dollars STILL is a lot of money). My mind is slowly morphing into the “cash flow” mentality as well, and I think being able to live your life *as if* you were retired earlier on is a lot better then when we’re old and not as healthy. And unfortunately it’ll take many of us 40+ years to get to that point w/ our current savings habits. That being said though, “starting your own business” is def. not for everyone, and that’s OK too – we need all types of people to run this world :) So if you fall more into that category, keep rockin’ what you’re doing over there but just increase your savings/debt ratio a notch so you don’t have to wait that long. There are plenty of ways to get to retirement! (Thanks again Corey, great post)
(Photo by stevendepolo)