Last week I talked about how I’m starting a new job. I was only at my current job for about 8 months before providing my notice, so I wanted to give at least 3 weeks notice for proper transition of projects and give them a bit of time to fire up the ol’hiring process.
The last few weeks has been batshit crazy! Not just with transitioning and closing off projects, but being pulled into all these little one-off requests which are a nuisance. But I can’t complain given I will be switching jobs and boosting my income by over 30% with this move.
ALSO on the books was ramping up Wedding planning! Mrs FN and I will tie the knot May 2019. So details are starting to be schemed, budgets re-worked, and excitement building!
But ENOUGH about me! Let’s move onto today’s topic of building wealth. There area few key components you can break it down into:
No secret here. The FIRE community is focused on reducing expenses which we are all familiar with:
- Reduce waste
- Focus on needs
- Be environmentally aware
Zeroing in on expenses is important as it’s really where you can make an environmental impact.
By eliminating waste, we can often find what is truly important in our lives. Rekindling relationships with loved ones / friends or raising families and passing on values to our kids. Maybe some boardgames and jammin’ out with buddies on your guitar!
We also focus on expenses because it is in our immediate control. It’s lifestyle change. We aren’t going out into the world shaking trees and disrupting other people’s lives. I think many, not all, in the FIRE movement are sick and tired of their jobs. For that majority, they’re so uninvolved in their career that they prefer remaining in a comfort zone – they are afraid to make a big jump or take a risk.
I’ve talked about a few different ways to save more, usually focused on the expense side of things, such as living within your means and more! These posts can be found in my “Saving” category.
BUT, don’t lose focus of the other side of your income statement (remember this? How we track ins and outs and changes in net worth?). Boosting the amount of income can have impactful results on your net worth. Let’s walk through an example:
- Savings rate of 25%;
- Gross salary is $67K with an average tax rate of 28%;
- Annual expenses are $40K;
- Annual RRSP savings are $8K including employer match;
- Annual TFSA/Non-Registered savings are $5.3K. I will call this “Other” savings.
- This is roughly 60% into RRSPs and 40% into Other accounts.
- Your target FIRE number is $1M.
You decide to review expenses and are able to reduce waste. Your savings rate jumps to 30%, equal parts RRSPs and Other. That extra 5% occurs every year and is invested boosting your retirement nest egg by 20%! Why 20%? Because the ratio of the increase is 30% / 25% = 120%.
- Your RRSP contribution goes up 20% from $8K to $9.6K.
- Your Other contribution goes up 20% from $5.3K to $6.4K.
- Expenses reduce from $40K to $37.3K.
- So if you’re targeting $1M, you now have an extra $200K! Not too bad – look for other ways to boost that savings rate to get to 50% or more!
Now you’re feeling saucy and have taken a bit of a chance. You got that promotion at work or changed employers because you’re ambitious about your FI goals (or maybe you really wanted that new position!). In any case, you’re now getting a boost of 15% to your income.
Assuming your marginal tax rate is 35%, and you’ll be able to invest about 6% of this raise into your RRSP with a company match, you walk away with 15% x (100% – 6%) x (100% – 35%) = 9.2% boost to take-home pay.
So what happens?
- Your 6% into the RRSP is pre-tax so you save that 35% that would have otherwise gone to the government. With a 6% company match, you sock away a total of 12% into the RRSP. This simply boosts your RRSP by the 15% raise since you were already contributing the 12% on your previous income, right?
- Now you’re sitting on a 9.2% boost to your take-home pay. Don’t get suckered into lifestyle inflation! Put that shit away and let it compound. At the very least, put away the majority. Let’s say you decide to allow 4% towards your lifestyle and sock away 5.2% into your TFSA or non-registered accounts (Check here to learn more about the types of investment vehicles in Canada). This is 5.2% / 9.2% = 57% of take-home pay.
- So working from the 30% savings rate you already got to…
- The RRSP contribution would grow from $9.6K to $11.0K and the RRSP target would grow from $720K to $825K. This is simply a boost of 15%.
- What was the increase on the other 40%?
- Well assuming there’s no waste in this example and we’re tracking everything to the penny, your total net income would need to be your expenses + take-home pay savings, or $37.3K + $6.4K = $43.7K. Your take-home pay increased by 9.2% but you’re allocating 4% towards lifestyle and 5.2% towards savings. This would increase expenses from $37.3K to $39.0K, and savings from $6.4K to $8.7K.
- Your new TFSA/Non-regiestered balances at retirement would increase from $480K to $652.5K!
- You have now boosted your FIRE number from $1M to $1.48M, an increase of 48%. 20% attributable to cutting expenses, and 23.3% due to your income boost from one daring choice. 120% x 123.3% = 148%. Obviously you don’t need to cushion your FIRE number necessarily, you could choose to move your FIRE date up.
*I just made the initial assumed numbers up so there could be some figures that look wonky but tried to give a relatively realistic example.
To build wealth, it’s important to remember that you can boost revenue and reduce expenses. It doesn’t have to be one or the other. Doing both of these things compounds your net income (income – expenses), which quickens your FIRE. Your income and level of spending should not be related – spending should not be dependent on income passed a specific comfort level.