Compound interest is the most powerful force in the universe, it’s also the most difficult to grasp. Money buys you time, how often do we hear that if you save $20 today compounded over 40 years you’ll have X amount of dollars saved. I can’t even plan for next week yet we expect people to plan out for 40 years?
It isn’t easy to see how a few hundred bucks a month can add up to hundreds of thousands down the road. Our brain simply doesn’t work that way. You’re presuming there are no life changes, no bear markets and that people will continue to contribute every month regardless of the market. Instead of measuring in years you should benchmark your savings to improve your saving rate. Applying benchmarks on an annual basis is much simpler and more attainable than focusing on decades. Start with the small wins, celebrate it mildly when you achieve it. For those saving for retirement over time your small wins will snowball into a financial avalanche.
When starting out even if you’re in debt you should save up to the 401K employer match. Push to increase your savings rate every year. Here are some benchmarks to reach:
When your portfolio hits $10,000.
When your portfolio gains more than $1,000 in year.
When you are able to save more than $10,000 in a year.
When you reach 1X your salary by 30.
When you reach $10,000+ in investment gains in a year for the first time.
When you max out all your retirement accounts.
When your portfolio reaches six figures.
When you reach 3X current salary by 35.(This is needed if you want early Financial independence.) If not 3X salary by 40.
When your portfolio gains are greater than your annual contribution.
When you reach 5X your annual income.
When your portfolio increases from gains and contributions that surpasses your annual salary.
When every year your portfolio increase with contributions and market gains greater than your annual salary.
When the gains in your portfolio on an annual basis without contributions covers 100% of your living expenses.
At this point you’ve crossed over into true financial independence, where you can choose to work if you want to. Last year in our household our portfolio gains with contributions surpassed our combined income for the first time. My goal is to aggressively save and invest so that my portfolio every year exceeds our combined annual income. Of course bear markets will happen, as long as I can average my net worth goal over the next 10 years I will achieve early financial independence. Don’t worry about saving over decades, instead focus on short term benchmarks. Your future self will thank you.
How do you measure your savings? Do you use benchmarks? How do you measure success?