“You only need to get rich once” – Warren Buffett
(Photo: Steve Jurvetson)
Sometimes a simple quote can change your whole life. For me it happened over a decade ago when I was reading the book The Warren Buffett CEO, by Robert P. Miles. In the book, Warren’s quote “You only need to get rich once” hit me hard and altered how I viewed wealth forever. The quote was in response to one of his CEOs who wanted to short Internet stocks during the height of the dot-com mania, to which Warren advised against doing using that witty line.
To some that quote meant that there is no reason to risk something when you are already wealthy, but to me it was something much larger. To me, it was an understanding that becoming rich is a destination that you only need to arrive at once in your life. Even though what I am about to explain may seem obvious it will change how you view wealth and becoming rich forever.
So what do I mean by Escape Velocity and how does it relate to money?
Let’s say we wanted to shoot a rocket into space so we build one and launch it. The rocket goes up super fast but eventually slows down and then comes crashing back to Earth. We feel defeated so we now decide to build a rocket twice as powerful. This time we launch this multi ton super rocket and it flies to the edge of space but it eventually slows down again, and not able to escape the Earth’s gravitational pull, eventually comes crashing back to Earth again. This time instead of building a more powerful rocket, we build the same multi ton super rocket but simply remove a few pounds of cargo and launch it again. This time the same exact rocket breaks the Earth’s gravitational pull and goes into space and instead of coming crashing back down it escapes Earth’s gravity and travels into space. That rocket will be traveling in space forever and will still be flying long after our great-great grandchildren have passed away. A few pounds of weight is the difference between having our rocket crash back to Earth or having it travel billions of miles for thousands of years.
So how does this relate to wealth? The exact same way. The difference between being poor and always working versus never working and having your money work for you is what I call the escape velocity of money. The difference is tiny but it can make all the difference in the world because once you reach it, you no longer have to work ever again and your money will work for you forever.
How much money do you really need to never work again?
The escape velocity is different for each person but it is probably not as large as you would think. You can calculate it a few different ways, but a safe rule of thumb is that if you can live on roughly 3% of your net worth a year you will never run out of money if your money is invested in diversified low cost fashion. So if you could live on $30,000 a year you would need to have $990,000 saved up. The interest on your investments will never run out as long as you live on 3% of your money. You would never have to spend another day working at a day job ever again. Having $990,000 might seem like a big number, but it is not as large as you would think. If you are 40 years old or older you’ve probably had over 1 million dollars pass through your hands; you just didn’t hold on to it. If you held on to every penny you ever made, you would have enough now to never have to work again. Of course that scenario is only possible in theory not in real life but the concept is the same. The quicker you can derive at your escape velocity the quicker you never have to work.
Let’s take a far-fetched, over simplified example of two people, Bill and Todd. Both are the same age and both get a job making $75,000 a year and start working at age 19 and let’s say for the sake of this example neither one ever gets a raise. Bill lives well below his means and is able to put away $40,000 a year. Todd, on the other hand, lives much more comfortably, buying fancy cars and other luxuries. Todd saves nothing. Meanwhile, Bill invests his money wisely and is able to capture roughly the historic return of the stock market of around 9%. (We are being optimistic here)
By age 25 Bill has been living in a small apartment, driving an older car and has been living very thrifty never indulging and he has saved over $300,000. Todd, on the other hand, rents a huge house, is leasing a BMW and he has been living pretty comfortably spending $75,000 a year on his lifestyle.
Flash forward to 10 years later, Bill is 35 now, lives in a small but comfortable house but is still driving an older car. He has, thus far, managed to save over $1.3 million dollars; Todd has been living large but has not saved anything. Bill in envious of Todd, after all Todd for over 15 years has been living a great life. He has a two large Mercedes, a beautiful house with a big pool and takes fancy vacations. Bill wishes that some day he can do that, since he is living on almost half of what Todd is living on and although he is not struggling he is not enjoying all the luxuries that Todd is.
After another 5 years goes by, both are now 40 years old and something amazing has happened. Bill has over $2.5 million dollars saved up. Let’s look at that number more closely. Bill now can live on $75,000 a year (3% of his net worth) from his investments alone and never run out of money and he never has to work another day in his life ever again. Bill can now live the way Todd has been without lifting a finger ever again. Todd must keep working to maintain his $75,000 a year lifestyle. Bill has reached his escape velocity and he now retires at age 40.
Even though both are now living on roughly $75,000 a year and both can afford the same luxuries the only difference is that Todd must wake up each morning and go to work. Bill has all the free time in the world and can travel and have all the luxuries just like Todd by doing absolutely nothing. Bill has reached the escape velocity of money, where he can live on the interest on his savings forever.
|Bill’s Age||Bill’s Yearly Saving||Total Saved (Assuming 9% Return on Investment)||3% of Net Worth (Amount he can live on each year without working)|
If Bill had decided to retire at age 35 and start withdrawing $75,000 a year then he would eventually run out of money (his rocket would come crashing back to Earth), but since he waited till he was 40 he can now live on $75,000 a year and never run out of money. Since Bill has reached the Escape Velocity of money we can say that his rocket will travel forever. Waiting those extra 5 years meant the difference between eventually going broke and not having to work ever again.
If Bill lives to age 70 he never has to work again, if he lives to age 100 he never has to work again. Let’s now suspend all disbelief and pretend that Bill and Todd drink from the fountain of youth and both will now live to age 1000. Because Bill saved till age 40 he can live the rest of his 960 years without working single day. Bill can live like Todd for almost 1000 years because he chose to live on $35,000 a year instead of $75,000 for those first 22 years of employment. That is the power of compound interest and escape velocity.
Your escape velocity number is not as large as your think, as a matter a fact you probably have had the amount of money you need pass through your hands in your lifetime already.
Find your escape velocity number and try to reach it smoothly and easily. In life you can have all the luxuries you want if you can put off the instant gratification of having them till after you are rich.