The Most Important Number You've Never Heard Of
When most people think of numbers in personal finance they think of things like net worth, investment returns, and total debt. They rarely think of the most important number in personal finance – investment rate. Although people are less familiar with the investment rate, the concept is easy: it's just the percent of your income each year that you put into investments.
Two simple examples demonstrate why your investment rate is so important. Imagine you have an investment rate of 1% (so you invest 1% of your income and spend the other 99%). In this scenario, it will take you 99 years to have one year of expenses in your investments. That's going to take a long time for your investments to get you to Assets & Chill!
On the other hand, imagine that you have an investment rate of 99% (so you invest 99% of your income and spend the other 1%). In this scenario, you'll have 99 years worth of expenses in your investments after just one year! You've basically already reached Assets & Chill!
The Power Of Investment Rate
The two examples above showed how powerful your investment rate is. But I'll admit both examples were pretty extreme. I personally don't know anyone with a 99% investment rate. Unfortunately, a 1% investment rate (or lower) is all too common and will never lead to Assets & Chill.
Fortunately, there are a lot of options between a 1% and a 99% investment rate. Our goal for this project is to choose an investment rate somewhere between those two for you.
The calculator below lets you play with different investment rates and see how they affect how long it takes to get to Assets & Chill. Spend some time playing with it and thinking about how many more years you want to work.
Time to financial independence
Assumes $0 starting investment, 7% real investment return, and 5% withdrawal rate.
Get In The Driver's Seat
What we need by the end of this project is for you to choose your investment rate. This is the first step of you taking control of your money. You usually don't get to choose your income or your wealth. But you do get to choose your investment rate.
The key here is that there's a trade-off (as there usually is in life). You have to balance between how many years you want to work and what percent of your income you want to spend (as opposed to investing) right now. If you want to get to Assets & Chill faster, the trade-off is that you have to invest more (and spend less) now. If you want to spend more now, then you'll get to Assets & Chill later. You have to choose the right balance for you.
So now it's decision time. Go back to the calculator. Think through your current age and how many more years you want to work. Spend some time figuring out what percent of your income you can reasonably invest each month.
Feeling overwhelmed about making the decision? Here's a starting place: a 10% investment rate means it'll take about 40 years to reach Assets & Chill. Of course, this corresponds with the cultural assumption of working for 40 years age 25 to 65. How does this sound to you? Adjust up or down accordingly.
Now that you've decided on that investment percent, we're actually going to translate that into a dollar amount. Write it down – we're going to need it for the next few projects.
Up Next
That's it – you've chosen your investment rate. In the next project we'll figure out where to put this money!