[Heyo! Got a fun (and smart) guest post for y’all today by Nick Vail of RemoveTheGuesswork.com. It’s a pretty hardcore idea, but if you’re hardcore about growing your wealth, this is the method for you! Starve and stack, baby!]
Want to get ahead quickly and set yourself up for financial success?
Of course you do!
Today you’ll get a new idea that can change the game for millennials. I came across this from speaking with a guy I sat next to on a plane ride. Sharp dude. He and his friends would “starve and stack” their per diems when they traveled for work.
We’re going to take that concept and use it to jump start your wealth. Here’s how it works…
The Starve And Stack Method
So… what is the starve and stack method? First off, it’s not literal. You won’t starve. Please, eat and be healthy. The idea is that when a young person gets married, the newlyweds then spend the first 18-24 months living completely off of one income and saving 100% of the rest. This way, you will save a substantial nest egg early on in your life and let compound interest be your biggest wedding present.
There are two caveats I should mention. The first, if this will put you in a bind to cover your essential bills, just get as close as you can to living off of one income. Live off of 60 or 70% if you can. The second, this is not for saving a down payment on a home. It’s for investing. If you want to buy a home, I would either put off the down payment savings until after the 18-24 months or save extra on the side for it.
How You’ll Benefit
Far too often I hear from people that they will invest “when they can” but right now is not the time. The best thing that young people can do is invest as much as they can early on in their career. I know it isn’t easy. You have student loans, you’re looking for the right job, and you may be saving for your first home.
However, building a nest egg when you are young is the best financial move a young family can make.
Here is an example, John and Jane “starve and stack” after they are married at 23. By 25 they have saved $50,000. To illustrate how this can change the trajectory of their financial future, I put together the following graph. The assumptions are that they will continue saving $5,000 a year until age 65 and have an average annual return of 7%.
As you can see, the difference is huge. Having $50k at age 25 versus age 60 results in a difference of almost $1.65 MILLION dollars! Starting to save later in life is extremely detrimental to your wealth-building efforts.
Sacrifice some luxuries while you’re young so that you can have financial flexibility later. Make it your goal to pinch pennies until you reach $50,000 or more. It’s not easy, but it’s possible. (Note: if you already have $50k saved on your wedding day, set a higher goal. $50k is just a nice round number that I used here. Set a high goal and crush it.)
“Compound interest is the 8th wonder of the world.” – Albert Einstein
How to Make it Happen
Is saving $50,000 in 18-24 months feasible? You bet it is. Here are a few ways you can make it happen:
Max out work retirement plans. If you have a 401(k) or 403(b) available to you at your employer, you can invest up to $18,000 a year (since you’re under 50, those over 50 could invest up to $24,000). For a married couple that both have workplace plans, that is $36,000 per year! This is not even considering any employer match. This is huge.
Max out IRAs. In an IRA, whether Roth or Traditional, you can invest up to $5,500 a year if you’re under 50. If you both contribute, that’s $11,000 per year. You could max out your work plans and max out Roth IRAs for one year and you’re almost at the magic $50,000 mark. (note: Traditional IRA contributions may not be tax deductible if you’re contributing to a work retirement plan, hence my use of Roth IRAs)
Brokerage Accounts. You could invest outside of retirement plans as well. You won’t be receiving any pre-tax or tax-deferral benefits, but you will have more flexibility to use this money before retirement age. Be aware that these are taxable accounts so it’s important to understand how the assets you hold in these accounts will affect you annually at tax time. There are no limits to how much you can invest in these accounts.
There you have it. I know it won’t be easy but I promise that it will be worth it. It will take discipline and sacrifice. You may have difficulty if you struggle from FOMO and have to turn down luxuries that all your friends are partaking in. However, setting your family up for long-term financial success is better than any short-term luxuries.
Starve and stack!
Nick Vail blogs over at Remove the Guesswork, where he helps you to “remove the guesswork” from your financial life. He is also a financial advisor, helping families all over the country pursue financial independence. If you’d like to stop guessing when it comes to your finances and start planning, sign up for his newsletter.