They did not know it was impossible, so they did it!
— Mark Twain
Just to drive the point home from the last post, Let’s see how the wealth ratio works out for the average American family.
Let’s say our hypothetical family makes $40,000 after taxes. That amounts to $3333 per month. Let’s also assume they’re already managing to squirrel away 10% every month. They might feel justified in being proud of this, by the way — it’sway above average. (By the way, the description in that article of “wary” Americans raising their savings rate to a stratospheric 5% is alarming, to say the least.) Suggesting they save 50% probably sounds like a fantasy to them, and 75% downright absurd.
If you have a look at their monthly debt payments, it’s easy to see why:
|Mortgage ($160k at 4% )||$1076|
That’s a total debt service of $2213 per month. I honestly shook my head in disbelief when I looked these up, but sure enough, these figures are quite typical. Doesn’t leave much room to maneuver, does it?
So what does this family’s wealth ratio come to?
$2213 in debt + $333 in savings / $3333 in income = 76%
76% – that means this family could be financially independent in less than 7 years once those debts are paid. Even if you factor out the mortgage, their wealth ratio comes to over 44%. That adds up to a little under 19 years to retirement. That might sound intolerably long to readers of this blog, but if you start out at that rate, it amounts to retiring in your 40s. Not bad considering so many Americans think they’ll never be able to retire at all.
All this family has to do is 1) pay down the debt, 2) not rack up any more debt, and 3) maintain their current lifestyle (perhaps dialed down ever-so-slightly so as to comply with #2).
I won’t suggest that this is easy, but it absolutely is possible. Now just imagine how much easier it would be if this family hadn’t dug themselves into such a giant hole to begin with.