The whole idea of “save each month and let your money compound over 40 years and retire a millionaire” is preached by financial advisors and media conglomerates who are selling you the very products that you’re supposed to use to make all this money. Talk about skewed incentives, right?
There’s a lot of assumptions in that approach of monthly savings as an approach to retirement. First of all most people are short term thinkers and aren’t actually saving. Something like 80% of Americans live paycheck to paycheck and don’t have any savings. Where are all the so-called millionaires that are using this “tried and true” method of saving?
Second the compound interest numbers often don’t adjust for inflation — compound inflation eats into compound interest. Not to mention you’re putting a long-term, multi-decade bet into the government and some financial institution that doesn’t exactly have the best track record.
Lastly, a lot of the compound interest calculations are arbitrary, but in reality you have to actually plug it into a financial instrument (stocks/bonds) and nobody knows how those are actually going to perform over the next 30 years.
My general philosophy is that until you have a lot of money to invest (500k-1m+) a lot of these financial tools aren’t really worth it. So this is how I think about it: Let’s say you have a chunk of money, like 30k, and invest in some municipal bonds, etc and make a pretty low return of say 3.5%, (which isn’t hard to do). That 30k will give you a monthly return of $87. Pretty shit.
Now, let’s say you have 1 million $ in the bank. You can take that money and make the same investment in a bond and it’ll pay you $3,000 per month…basically you can live off of that passive income for the rest of your life.
The question then is how to make that money to invest. That’s why I’m more interested in working hard to start a business and build things that can produce millions by the time I’m in my early thirties, which will then allow me to reinvest it, make my yearly passive gains, and at least then give me some options on what to do with my time.
It’s feasible to do this in a few years, and sure beats the hell out of pinching pennies and ‘hoping’ that everything goes well (my health, stock market, a stable job and savings rate, government stability) and that I will have all this money saved for retirement.
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.” – Nassim Taleb