The other day, J.D. at Get Rich Slowly posted an interview with his real-life “millionaire next door.” In a very interesting article, he made the point that you don’t have to earn a Wall-Street salary to accrue enough wealth to achieve financial independence. John, the interview’s subject, did it on a teacher’s salary. The trick, he says, is to spend less than you earn.
True that. I would add that it’s crucial to build your budget so that you do spend less than you earn by including a line item for savings, and then to foster the habit of saving everything else that you don’t spend on living expenses. Even if you’re fighting to get out of debt, at least some small amount of your total income can go into savings. Paid Twice sets the example for this strategy: despite setbacks such as the car crapping out, she and her husband persist in building emergency fund savings while beating back a debt load that started out at a depressingly large figure.
Thanks to the collapse of the Bush economy, I’m no millionaire, but I’m a great deal less perturbed about the pending layoff than one would expect, because I have plenty to live on despite the obligation to help with the mortgage on a second house. The mortgage on my own home is paid for and I have no other debt except a $21,000 loan taken out to renovate the downtown house. Suspecting the university would can me, I started setting aside enough money to pay off that loan last year and for the past several months have had enough to kill it. The reason I haven’t paid it off is that I felt I should hang onto the cash to make it double as an emergency fund in the event I lost my job.
I have, however, decided that next week I will pay off the Renovation Loan. Why? Because by the end of this year I’ll have saved another $24,000! That’s after setting aside enough to cover COBRA until Medicare kicks in and after paying the $1,200 for my car’s 90,000-mile service.
That will have happened because I don’t spend anywhere near what I earn.
First, I’ve always engineered the budget so that $200 a month goes straight to savings. While trying to accrue enough to pay off the Renovation Loan, I budgeted another $204 toward that (started out more, but GDU’s furlough days cut my net income by $180 a month). Once enough was saved for that purpose, I just kept on putting the extra amount in savings: a total of $404 a month.
Second, I have two side income streams, freelance editing and teaching. Every after-tax dollar from those activities has gone into savings. These income sources made it possible to accrue enough to pay off the second mortgage by the end of last year.
Having cut spending by $180 a month, in August when the furlough days end (so we’re told…), I’ll continue to put that much in savings, too. I should net about $5,000 from the three community college courses I’ll teach in the fall, and a conservative estimate of freelance income is about $200 a month, for a total of $1,600 between now and layoff day.
Staying on budget has allowed me to spend less than I put into the credit union accounts set aside for recurring expenses and for credit card charges (I charge everything other than monthly bills on the American Express card, pay it off each month, and collect a kickback of between $250 and $500 at the end of AMEX’s fiscal year). This means a fair amount has accrued in accrued in dribs and drabs and is just sitting in those two accounts. Here’s how that shakes out:
Projecting the amount the regular savings from my GDU paycheck should grow, by December 31, layoff day, I should end up with almost $5,800 to add to existing credit union savings:
Okay. Now let’s add to that the amounts I figure to net from teaching and freelancing, to arrive at the projected 2009 savings as of December 31:
Amazing. The $12,380 I expect to squirrel away from net teaching and editing income plus routine savings from my GDU paycheck plus the $11,931 already on hand comes to $24,311.
That’s with a pretty conservative estimate of freelance earnings, and it doesn’t count the so-called “extra” paycheck coming in July, thanks to the crazy bimonthly pay schedule. Add another $1,200 (some of the “extra” paycheck has to be used to cover regular spending—it’s not really extra) and the vacation pay GDU will owe me in December (around $2,600) and you come up with a projected total of something over $28,000.
This will be my fallback fund in retirement. If utilities and healthcare bills exceed a given month’s income from retirement savings and teaching (as they will in the summer), this “cushion” will keep me from bouncing checks.
It’s come about because I spend a lot less than I earn! Whenever I take a side job, I put the money into savings. My budget covers only the amount I make in my day job at the Great Desert University, and that budget allows for a $404 monthly deposit to savings—soon to be $574, after I pay off the Renovation Loan.
Even though I’ll have to spend almost everything I earn once the day job ends, I’m still planning to deposit at least $200 a month in savings. Assuming I put $10,000 of the accrued savings into my main checking account, things will be tight: in a month when I’m paid for only two weeks of teaching, I barely squeak by. However, when the community college checks come in twice a month, I accrue so much extra that unemployment during the expensive summer months will not cause spending to run the bottom line into the red. I should start August with $11,650 in checking and end it with $11,508. After that, as utility bills fall, spending money rises. After all the bills are paid in December 2010, I should have about $12,970, leaving me $3,970 in the black at the end of the year.
That’s $3,970 that will go into savings…