How Much Life Insurance Do I Need?
The Role Life Insurance Plays in Your Finances The purpose of life insurance is to...
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You’ve heard before that you have to set money aside — money for emergencies, for buying a car or house, for a kid’s college education, and for retirement. This is hardly news. What you may not have heard before is that setting that money aside helps your future self twice! Below I explain how, and give some pro tips on how to free up some money to actually do this.
The first benefit is the obvious one. Big goals like a college education, retirement, or down-payment on a house aren’t something you can cover out of your regular income (if you can do this, please teach me how!). No, when we’re talking about things that cost tens or hundreds of thousands of dollars or even millions of dollars like financial independence (a.k.a. retirement), we need to save up for them. That’s why you (and I) need to set aside money regularly from our ongoing income.
The less obvious benefit (less obvious at least until I tell you about it ????) is because we’re all human so when we have more money, we tend to spend more money. Then, we get used to spending at that new, higher level. This is why if you want to reach financially independence, especially if you want to get there before you get gray and wrinkled, you have to guard against expanding your standard of living as your income increases over time.
When I realized this, it spurred me to maximize how much I set aside in my 401(k) and Health Savings Account (HSA). What’s even better is that these are both tax-advantaged accounts, so the federal and state governments are actually helping me with it ????.
In his highly recommended book, “Profit First,” Mike Michalowicz offers a compelling metaphor for squeezing more profit out of any business. He points out that most of us, if we have a brand-new tube of toothpaste, will put a large dab of paste on our brush each time. However, if we’re down to the last of the toothpaste and can’t quickly get a new tube, we’ll use far less paste and make it last for days. This isn’t limited to your business — the same applies equally well to your personal budget.
Between these three tips, you could easily turn yourself into a millionaire without ever needing to get into the ranks of “the 1%-ers” income-wise!
As a caveat, beyond the obvious fact that the above amounts are a hypothetical example, they need to be taken with another grain of salt. The reason is inflation. According to the Bureau of Labor Statistics (BLS) inflation calculator, over the past 100 years, annual inflation has averaged about 2.78%. This means that if inflation continues at a similar average rate, a million dollars 30 years from now will be worth about $439,300 in today’s dollars. That’s a lot less, but still not too shabby for something you can achieve without taking extreme measures.
Going beyond helping your future self, you’ll also be helping your present self by setting money aside. One of the therapists I coached recently experienced a slowdown in client traffic. While she’s perfectly aware rationally that this is just part of the normal ebb and flow of business, the loss of income made her very anxious.
I asked her to imagine how her emotions would be affected if she had $100,000 in an emergency fund. As you can imagine, she would have been far less stressed. This is why I coached her to increase how much she sets aside as soon as client traffic recovers. With this recent experience, she’s highly motivated to follow this bit of coaching ????.
What are some of your strategies for keeping your spending below your income and investing the rest for the future?
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.