As I was updating my net worth this month I realized that my net worth has increased over $31,000 in the past 12 months. Wow!
That’s over $2,500 a month.
And we’re talking after tax here. I paid $10,069 in federal income taxes, $3,119 in Social Security and $1,077 in Medicare taxes in 2011. That’s another $14,265 I made but didn’t spend (I don’t count taxes as spending).
Of all the money I earned last year, I didn’t spend approximately $45,000 of it. I won’t give out my exact income, but I will say that’s over half of my pretax income.
Let me say that one more time: I did not spend over half of my pretax income last year.
Wow. I’m actually really surprised because I’ve never looked at it this way.
I do realize that I can never spend taxes so I never really had the chance to spend that $14k. I also realize that some of that $31,000 might be from investment gains (although it’s also possible I’ve lost money in the market over the last year, I’m not sure). But even if we take away the taxes and a few thousand for potential investing gains, I still didn’t spend somewhere between $20,000 and $30,000 I earned in the last year.
How did I do it?
Restricted Accounts
First and foremost, I actually don’t have access to a lot of my money. Lots of it is in my 401k, and a good chunk is in a Health Savings Account. I can’t spend that money unless I want to pay big penalties and taxes. Knowing myself I probably wouldn’t have spent it anyway, but restricted accounts are a great way to make sure you save money.
My personal finance teacher in college said to “pay yourself first”. When you pay yourself into a restricted account, it’s probably going to stay there.
My Lifestyle Inflation is Minimal
Let’s compare my life today to my life in college:
College:
- A job (going to school 9 months, job making money in the summer)
- A side job (writing)
- An apartment (with roommates)
- A 4-door sedan
- A few hundred dollars worth of electronics
Today
- A job (salaried position)
- A side job (this site)
- An apartment (with my girlfriend)
- A 4-door sedan (albeit a newer one than I had in college)
- A few thousand dollars worth of electronics
- Travel overseas about once a year on a strict budget
My lifestyle has gotten a little more expensive, but I’m pretty much living the same life I was before and adding in one trip a year to a far away place. I don’t let the amount of money I CAN spend dictate how much I DO spend. I just spend what makes sense and save the rest.
Readers: How much of your income are you saving? Has your lifestyle gotten more expensive in the last few years?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
We are in the 40% range, but that number is going to go down to probably low 30% since we now have to pay for daycare, which is retardedly expensive. We still have some cutting out we should do (we eat out more than we should).
Overall we are in a good place, It helps we both had good financial role models in our parents and we are both on the same page for our goals, both long and short term
Being retired, we work the other way round: we only draw what we need.
Our main source of income is dividends. For that purpose, we divided our stock portfolio into dividend paying and appreciating. (Or both, if we can manage that! LOL) So far we’ve drawn less than what we earned, and reinvested the difference, so our portfolio is still growing. We’re realistic enough to know that won’t happen all the time, since we know recessions come more than once in 10 years and last for 2-3 years.
In total, if we can live on what we draw and have the pot still grow, our Drop Dead Money plan is working. So far, so good – touch wood, praise the Lord, smile wide! 🙂
If you keep up living on less than 50% of your income, you’ll reach your drop dead money goal sooner than you think.
I spend much less than I earn. On a post tax basis I probably save 50%+ unless there is a large expense coming up. I save mostly for retirement and to help pay off my girlfriend’s student loans once we eventually get married. It really helps open up our options to save so much!
Big bucks Kevin! Nice work on the NW increase.
B/c work was so damn hard my first two years out of college in Manhattan, I swore to save 50%+ of my after tax income until I could get out. I did that for 13 consecutive years until I was finally able to engineer my layoff this year.
I SWEAR if you keep up your 50%+ after tax savings, in 10 years you will have so much you will feel wonderfully free to do whatever you want!
Nice job! I employ that trick too… Keep my checking account thin so I don’t spend much! Great strategy! Financial tricks like these are great! 🙂
Over the course of my entire working career, I saved 50.1% of my pre-tax income. I retired at 39, haven’t worked a day since, and haven’t looked back. That was twenty years ago and I’m still going strong. Yes, a decade like this and almost anyone can retire. If you’ve got family obligations or start out with debts like me, it’ll take a bit longer, but “extreme” early retirement is within the reach of almost everyone if you just follow this “50% Rule”.
Nice work keeping the lifestyle inflation to a minimum. I agree with Sam – if you imagine where you will be in 10 years, you will have a lot of freedom. Nothing better than that!
I think that’s great — good for you.
I’m woefully lacking in this department. Congrats on the net worth and realization that you are saving an awesome amount! After month 1 of my budget spreadsheet I’ve identified my “problem areas” so I’ll work on getting that 50%!
Okay, by your calculation I should be rich!! I’ve pretty much never spend more than half of my pre tax income. Of course, I live in The Netherlands and pay about 40% income tax and then there’s city tax and VAT etc. etc. And of course what little I have left after all these taxes to set aside for my future self…
But love the upbeat tone of the post nonetheless. 🙂
Just figured this out a week or so ago for a post. We come in around 75%. Lately our lifestyle has become less expensive. We canceled our satellite and one of our smart phones. We’re trying to gear up for the possibility of living on a single income.
Nice work! I’m saving a whole lotta nuthin’ right now because of our income drop (had a baby, wife’s at home), but am working on getting my income up to change that. I’d love to get to the point where we are putting half our after tax income away.
I’m not sure how much I spend of my pre-tax income proportionately… so much goes to debt repayment though. Once that’s out of my budget I will save a lot more.
Your gross income for 2011 is approximately $54, 850.
I spent 43% of my income in 2011 and saved the rest… and that was with paying $20,000 cash for my wedding (including jewelry, dress, honeymoon, etc).
We’re sensible to grasp that would not occur all the time ..I stay in virginia and pay 37% income tax and there’s city tax and VAT etc. etc. And by all means what little amount i left back all taxes aside for my future self…nice post thanks