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Episode 2959:
Beating inflation requires a dual approach: increasing your income and reducing expenses. By making intentional financial choices and finding creative ways to earn more, you can safeguard your purchasing power and build lasting wealth.
Read along with the original article(s) here: https://www.keepthrifty.com/how-to-beat-inflation-twice/
Quotes to ponder:
"Inflation is a challenge, but with creativity and diligence, it’s an opportunity to grow your wealth."
"Combat rising costs by earning more and living on less - two powerful tools against inflation."
"Intentional choices and smart financial habits can help you thrive even as prices climb."
Learn more about your ad choices. Visit megaphone.fm/adchoices
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[00:00:30] This is Optimal Finance Daily. Want to Retire Early? Beat Inflation with a One Two Punch by Chris of Keepthrifty.com.
[00:00:40] So, you've figured out whether you'll ever be able to retire. Now, you're itching for that next step, figuring out how to retire early. After hearing all of these amazing stories of people retiring in their 30s and 40s, you want to know the secrets to getting there on your own.
[00:00:57] If you're ready to go there, I'm ready to take you through it. The trick to retiring early is beating inflation. Today, we'll go through how to do that with a one-two punch.
[00:01:09] A Typical Money Situation
[00:01:11] Let's build a baseline scenario to understand why the combination of earning and frugality are so powerful.
[00:01:19] A 2018 college graduate can expect an average starting salary of roughly $50,000.
[00:01:25] Using data from the Bureau of Labor Statistics Consumer Expenditure Survey, let's say the average person making $50,000 is spending about $48,500.
[00:01:37] That's a savings rate of about 3.5%.
[00:01:41] Let's call our hypothetical worker Moe Nay.
[00:01:45] From this point on, if Moe does an adequate job, we can expect annual raises that are roughly in line with inflation, about 2.5% each year.
[00:01:55] While those raises might look fine on paper, they aren't really making anything better.
[00:02:00] If Moe's income goes up at the same rate as the cost of the stuff, Moe will be stuck at that 3.5% savings rate for the rest of time.
[00:02:10] The personal finance community lovingly refers to the distance between the earning and spending lines as the gap.
[00:02:19] And as the experts will tell you, minding the gap is the most important money lesson you can learn.
[00:02:24] With this scenario, Moe hits age 65 with about $725,000 saved up for retirement, which falls well short of a 25 times spending goal of 3.5 million.
[00:02:38] So we need to find a way for Moe to either increase earnings or decrease spending.
[00:02:44] In both cases, Moe is currently tied to inflation.
[00:02:47] So this is really about beating inflation.
[00:02:50] Beating inflation with a frugality punch.
[00:02:54] What if Moe could have a personal inflation rate that's less than everyone else's?
[00:02:59] By being smart about spending, looking for deals, and doing some things by hand instead of hiring someone for every little job,
[00:03:07] what if Moe could keep to a personal inflation rate of just 1%?
[00:03:12] The results are staggering.
[00:03:14] The spending and earning lines move further apart from each other every year by a bigger amount.
[00:03:20] That's a gap that's improving by leaps and bounds.
[00:03:24] By the time Moe reaches retirement age, we're seeing a savings rate of nearly 50%.
[00:03:30] With this simple change, Moe could retire at age 55 with $1.8 million in the bank.
[00:03:37] Beating inflation with an earnings punch.
[00:03:41] What about the flip side?
[00:03:42] What if Moe can be a top performer at work and get 4% annual raises instead?
[00:03:48] Once again, the spending and earning lines are diverging, creating an even bigger gap every year.
[00:03:55] By the time Moe reaches retirement, once again, we're seeing a savings rate of nearly 50%.
[00:04:01] With higher earnings instead, Moe could retire early at age 58 with $3.2 million in the bank.
[00:04:09] Beating inflation with a one-two punch.
[00:04:12] When you put the two together, the gap grows big and it grows fast.
[00:04:17] In less than four years, Moe breaks a 10% savings rate and another four that jumps to 20%.
[00:04:24] By retirement age, Moe's savings rate is almost 75%.
[00:04:29] What does a 75% savings rate mean?
[00:04:33] That means in Moe's last year of employment, one year of earnings is buying Moe three years of retirement.
[00:04:40] That's one heck of a ratio.
[00:04:42] And here's the best part.
[00:04:44] Increasing your earnings and decreasing your spending can be done at the same time.
[00:04:49] Getting a huge raise doesn't mean you need to spend a whole lot more money.
[00:04:53] Pretend that raise never came and increase your spending only as you need to.
[00:04:58] Putting these two together lets Moe retire at age 48.
[00:05:02] What do you think Moe could do with an extra 17 years of freedom?
[00:05:06] What could you do with an extra 17 years of freedom?
[00:05:13] You just listened to the post titled,
[00:05:16] Want to Retire Early?
[00:05:17] Beat Inflation with a One-Two Punch
[00:05:19] by Chris of KeepThrifty.com
[00:05:22] And I'll be right back with my commentary.
[00:05:25] I have to admit, guys, I almost never think about inflation.
[00:05:29] I get that it's a thing, especially right now.
[00:05:32] We're hearing how inflation is super high.
[00:05:34] But your personal rate of inflation can be quite low if you don't operate like a typical consumer.
[00:05:42] One way I've done this is by not replacing things unless they are actually broken
[00:05:47] and not buying things new as much as possible.
[00:05:50] So, for example, I've had my bedside table for almost 20 years now.
[00:05:56] Yep, it's the same one my mom purchased from Target when I was 16 years old.
[00:06:01] It's moved everywhere with me and it's still going strong.
[00:06:05] It has actually never crossed my mind to update or replace it because it works perfectly fine.
[00:06:10] I imagine that's the bedside table I'll have 20 years from now as well.
[00:06:15] And I'm perfectly happy with that.
[00:06:17] I also find it amazing to consider my car purchases.
[00:06:21] My first car purchased in 2004 when I was 17 was a 1998 Honda Civic for $7,000.
[00:06:29] The car I have now is a 2010 Mazda 3 purchased in 2018 for $6,000.
[00:06:37] Both cars had similar mileage when I bought them and were good, reliable cars.
[00:06:42] It still blows my mind that I paid more for a car at 17 years old than I did in my 30s.
[00:06:48] But it just goes to show that we have more control over our personal inflation rates
[00:06:54] than we typically acknowledge.
[00:06:56] I think it's always best to focus on the things we can control.
[00:07:00] So while we can't control overall inflation, we can control our own spending habits.
[00:07:06] That'll do it for today and another installment of Optimal Finance Daily.
[00:07:10] Have a happy Thursday.
[00:07:12] Thank you for being here every day and listening.
[00:07:14] And I'll see you on the Friday show tomorrow where optimal life awaits.