I don’t have many regrets from my first thirty years on Earth. However, there is one that makes me wish I had a “mulligan,” or do-over, to relive a decade of my life with a new goal in mind. I read about a 50% savings plan at The Simple Dollar and the concept really intrigued me. According to the plan I would have five years of financial independence banked if I had started saving half of my income when I began my career at twenty years-old.
The 50% Savings Plan
Under the 50% plan workers sock away half of their income and live on the remaining 50%. Sounds pretty aggressive, doesn’t it? Could you live on half of your earnings now? How about when you first started your career? There are several benefits to such a plan. First, to live on half your income you would be forced to make some very conservative decisions regarding major expenses such as housing and transportation. Not much room in this plan for a $1,500 mortgage payment, or a $400 a month new car lease.
Second, by saving such a large amount of money so early you would benefit from the compounding growth of that money over a longer period of time. Many times, new workers opt out of contributions to 401(k) plans and other retirement vehicles because they can barely afford their living expenses. It isn’t until they hit thirty or thirty-five that they finally realize they need to be saving for retirement, and at that point they have lost 10-15 years worth of compounding growth.
Is Saving Half Your Income a Path to Early Retirement?
One of the most exciting aspects of this plan is that for every year you work and faithfully put way 50% of your income, you are “buying” yourself a year without work. In my case, if I had implemented this from the beginning I would have five years worth of 50% earnings in the bank, meaning I could theoretically quit or take a five year sabbatical if I so desired. Of course, to do that the money would have to be saved outside of retirement accounts, so it may make sense to max retirement accounts first and then save the remainder in low cost index funds in taxable accounts. This way some of the money will be accessible before I reached the required age for withdrawal from retirement accounts.
Is It Too Late?
It’s never too late to start the 50% savings plan, but it is so much easier in the beginning. As we get older we get more and more trapped by things like debt, lifestyle, etc, making the very idea of saving 50% of our income seem impossible. Implement this plan early on, before you have the opportunity to acquire such expensive trappings. What if you are like me and find yourself unable to live off half of your earnings? Start paying off debt like a crazy person! Imagine if you didn’t owe a dime to anyone – no car payment, no mortgage, no credit cards, and no student loans. Could 50% of your income provide for food, utilities, medicines, and a few fun purchases each month? Absolutely! And just imagine how much brighter your financial future would be after socking away half of your earnings for the next couple decades.
So what about you? Could you afford to save half your current income?