Espace MicroCaps is pleased to welcome a new contributor to the blog! He will publish under the nickname Maxwell House to maintain anonymity.
How much money do you need to invest full-time? I asked myself this question several years ago during my investing journey. I read and discussed a lot about this topic to find some answers along the way.
You can read about different opinions and numbers in books, social media, forums, and from other investors saying you need $1M, $3M, $5M, or even $10M+. There is no common ground.
The answer, in my opinion, is… that it depends on your lifestyle. Everyone’s situation is different, and there is no one-size-fits-all response.
What Are Your Options To Save A Sum Of Money You Can Invest With?
- Option 1:
- You have won the genetic lottery and were born in a wealthy family that gives you a generous sum of money. Good for you! However, this might not be the case for most people aspiring to this goal.
- Option 2:
- Win the lottery. What are the odds? You probably understand the value of money if you read this post, and you are investing your money instead of “wasting it” on lottery tickets.
- Option 3:
- Start and build a successful business, and then sell it.
- Option 4:
- Join a startup that gives you stock options, and maybe the stock will appreciate with business execution.
- Option 5:
- The most common option is to have a career working for an employer, save your money diligently and invest it.
- Develop side hustles to generate other sources of income.
What does one of the greatest investors of all time have to say about saving money?
“Do not save what is left after spending; instead, spend what is left after saving.”
– Warren Buffett
What About “Real Life” People?
During my journey, the people I met who were trading/investing full time all had this personality trait in common: frugality.
frugal per Dictionnary.com
[ froo-guhl ] adjective
Economical in use or expenditure; prudently saving or sparing; not wasteful
All around you, during your daily life, you hear people say they can’t save a penny each month. They live paycheck to paycheck, saying, “You gotta live for the day” or “Life is too short” and make excuses not to save. Yet, they drive a brand new car every year, have a bigger house than they need, take many vacations abroad, always have brand new clothes each week, or constantly buy the latest and greatest gadgets. It only means saving is not their priority to fulfill their life, or they don’t see the point in delaying gratification.
A high income doesn’t mean wealth. What happens when you spend all of your income? You have nothing left. Wealth is what you can save and accumulate that will snowball over time.
Saving money is not about making life sacrifices but choosing where you allocate your money to enjoy your life. It is just a question of perception and how you look at it. If you want a brand new car every year because it makes you happy and you can still save money, why not? The goal is not to deprive yourself.
You need to understand that money is about gaining back your time. Money buys time, and saving money will help you to get closer to this goal. It’s a mindset you need to develop or improve if you want to succeed.
OK, I get it… but how much money do I need to save?
Financial Independence Retire Early, “FIRE” or Financial Freedom
Let’s talk about the FIRE movement, which I think is a good framework to assess how much money one needs. You are probably rolling your eyes thinking about how I will tell you to cut your $5.00 latte addiction to save money. My nickname is “Maxwell House,” so yes, I do enjoy coffee quite a bit. It was not by cutting $5.00 lattes that I was able to reach my goal. Believe me, I did splurge in coffee shops along the way and still do.
The concept is basically to save as much money as possible from your income to accumulate enough money to quit the “Rat Race,” the 9 to 5 corporate grind, so to speak, and live off the interests of your investments and do whatever you feel like doing. It did resonate with me. It is like getting your retirement a few years ahead and doing whatever is important.
The “branded” FIRE concept originated in 1992 with the book: Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence by Vicki Robin and Joe Dominguez
The movement gained a lot of traction in the last few years with social media, especially with Mr. Money Mustache’s blog, which has excellent articles and many case studies on his forum to help along your journey.
This concept is not new in itself and has been used by many people to accumulate wealth during our history.
What Can A Full-Time Investor Take Away From The FIRE Movement?
Typically, instead of saving 10% to 15% of your income for retirement like a financial planner would recommend, you would save aggressively 40% to 50% (or more) of your income. If you had a saving rate of 50% of your income at a theoretical 10% return (the S&P500 index has returned a historic annualized average return), you would be able to retire in approximately 13 years by withdrawing 4% of your portfolio. This is called the 4% withdrawal rule. To know how much money that represents based on your annual expenses, you can revert the math and make it 25 times your expenses.
For example, if your annual expenses are $50,000 a year, you will need a portfolio of $1,250,000 (25 x $50,000) to live on the 4% return and “theoretically” never run out of money.
You can play with the parameters and determine how long it would take to reach your goal based on your annual expenses and saving rate/amount with the When can I retire? Calculator by Networthify.
Will My Money Last Forever?
You can also calculate your portfolio’s success rate based on different market cycles and do some backtesting with this tool: FIRECalc®: How long will your money last?
Again with our example of annual expenses of $50,000 and a portfolio of $1,250,000, here are the results:
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.
You can play with the numbers and try different scenarios. You want to change the 4% withdrawal rule as you don’t think it is viable for you? Try with 3%, 3.5%, or even more if you think you will complement your portfolio with other income sources. If you reduce your withdrawal rate to less than 4%, you would need more than 25 times your annual expenses.
By playing with different scenarios, I figured I would need to maintain a CAGR (Compound Annual Growth Rate ) of 4% theoretically to not run out of money. This plan would provide me with a safety net, and I would be able to invest full-time.
How Can You Save 50% Of Your Income?
Increase your income, keep your expenses low, and save the difference. Simple, right?
Actually, 50% is really aggressive. You could start with 10% and increase gradually year after year. The numbers are not fixed and you make your own rules.
You could increase your income year after year with promotions, by taking extra courses, getting certifications, changing companies, etc. You can also work on cutting your expenses year after year. Without increasing your lifestyle too much and avoiding keeping up with the Joneses, you could save the difference. If you can do both each year, you get a double whammy effect and will be able to increase your saving rate.
Control Your Major Expenses: “The Big Three”
What does that mean? You will need to make a budget if you don’t already have one. Here are the primary family expenses that play a huge role in your budget.
- Housing costs: This represents close to 40% of a family’s budget. Here are some aspects to think about: Mortgage versus rent, family with or without kids, size of the house/apartment, location, etc. You need to ask yourself questions to see if you can reduce your housing costs.
- Transportation costs: In the past, we probably used our car 5% of the time during a year. Now with COVID-19 and work from home, it is probably like 1%. Can you or your family own only one car instead of two, or no cars at all if you live in a metropolitan city? Can you carpool to work? Walk? Bike?
- Food costs: Calculate your food costs, and you will see it is a significant expense. How can you reduce your monthly expenses? Buy in bulk and do online groceries, for example. Restaurants are also an easy target. Brown bag your lunch and reduce the number of times you go out at restaurants with coworkers. Funny enough, in my experience, the coworkers complaining they never have money are out for lunch 4-5 days a week to restaurants.
What Worked For Me
Here is a little background. I started working during high school when I was 15 years old at a grocery store. I began to pay for my discretionary items and had to pay for my college education. I was also saving a bit of money in Guaranteed Investment Certificates (GICs). I got a college scholarship and used that scholarship to buy a brand new $2,500 mountain bike at the time.
Did I get into debt at some point in my life? Yes. When I got my first full-time job out of college at 19 years old, the first thing I did was to buy a brand new car. I had this idea at the time that wealth equaled high income, brand new car, etc. I used all the money I had saved in GICs as a down payment on the car. A brand new car cost a fortune in insurance for a 19-year-old guy. I lived in an apartment that cost me $435 a month and had only a bed, an old sofa, a bookshelf, my mountain bike next to my bed, no decorations, and a bedsheet in my window. I didn’t need much and was content, independent, and living the dream…or so I thought. Then I had to borrow $3,000 from my parents the following year because I had some debt, had run out of money, and could not pay for my car payments to get to work. Because I wanted to be independent, my parents made me feel bad enough about it and told me to take responsibility. I got out of debt the year after and repaid the $3,000 to my parents. I never wanted to be in a position to owe someone else money again.
Budget: An Excel spreadsheet is your good friend. I don’t track every penny, but I track by categories and always have. I do a good review yearly or twice a year and I don’t go crazy on the month to month. We just know our fixed costs and variable costs (credit card). We have a set maximum we can spend monthly. Do we sometimes go over? Yes, this is called life.
Career: While I was working, I invested in mutual funds and made sure I got the employer match. I was working full-time while studying at University at night. Bonus point: I got my employers to pay for my University based on getting certain grades. In Canada, businesses have to reinvest 1% in employee education and training. Use this to your advantage to propel your career. I learned how to assess my market value, compared elsewhere, and renegotiated my salary every year. I enjoyed my career, learned many skills, asked a lot of questions, studied more, and got certifications and training to bring value to my teammates and employers. When I hit a wall or didn’t see any promotion opportunities with an employer, I would pursue another challenge with another employer. I averaged around 5 years per employer in my life and worked for about 16 years for an employer, excluding my students’ jobs for another 5 years.
Housing: We bought our first and only house so far when I was 31 years old with a good downpayment. Previously, in my twenties, I lived in reasonably priced apartments and lived with roommates because I was just home during the week to work. On the weekends, I was out of town to see family and friends, and traveling to go biking. This is where my fun money was allocated. I also saved and invested a sustainable amount of the cost difference between renting an apartment or a room and owning a house/condo. When they started their full-time career, a lot of my friends bought a condo or a house right away and couldn’t save as much. With the expensive real estate market in certain areas and especially now with COVID-19, you have to do the calculations and comparisons to see what makes sense for you.
Transportation: We run our cars to the ground. Yes, our family drives two 10-year-old cars that work just fine, and we do the maintenance and repairs when needed (we know we will soon need to replace one or both, however). The amount of money we save there is ridiculous, and I am not talking about insurance. I estimated we save about $5,000 per car per year, including insurance, compared to a new car.
Food: When I was younger, this was not my best category as I enjoyed going out to restaurants with friends on the weekends. BUT, I was mostly brown-bagging my lunch at work during the week, which helped. Our family now does online groceries. We calculated that we save on average about $200 a month this way, and it is a huge time saver for us. Do we splurge on food and alcohol on the weekends when we host people? Yes. The goal again is not to deprive ourselves.
Discretionary: My bikes are now bought mostly used. I own three different types of bikes. Yes, that is part of my fun money and one of my passions.
Telecom: During my career, I had cell phones provided by employers, which was a good saving. Now we have a $25 monthly cell phone plan with 1 GB of data and a Canada-wide plan with a low-cost carrier. We also have a low-cost internet provider instead of Canada’s major carriers, a Netflix subscription, and no cable. I used this approach since my early twenties and estimated I was saving about $100 to $150 a month.
Travel: I did a lot of travel when I was younger to ski or bike with friends out West. Our family also loves to travel. When we had our child, we decided to travel out West again and make a road trip for five weeks. I used a lot of points/air miles to travel. There were some juicy credit card sign-up bonuses, so I would spend the minimum, cancel, and re-apply later. Wash, rinse and repeat. Is it a pain? It’s up to you to decide, but I got six free flights this way. It helps to cut down on the cost of vacations. This is a priority for us in our lives, and we will always allocate money there in our budget.
Buy used: Shop on Facebook Marketplace, Kijiji, etc. Hands down from family and friends can also help quite a bit, especially for kids who grow up so quickly. We still have lots of furniture from when we lived in apartments.
Negotiate everything: Every year, we renegotiate our car and house insurance. We reevaluate our cell phone and internet plans to see if there is a better alternative. Learn to negotiate and make some calls. It is worth it when you are trying to accumulate more money. I try to fight back as much as possible on price increases that service providers try to pass once I am locked in as a customer. I do not hesitate to switch service providers when I get a substantial saving.
Investing: I don’t have a background in finance but learned the hard way how to invest. I started with mutual funds, then ETFs, and then individual stocks. I focused on microcap stocks that helped me to achieve better returns. I tried a few different approaches and paid an MBA to the market, a.k.a. I lost quite a bit of money and made mistakes. I will still lose money on some investments and make more mistakes in the future, but I always try to improve my process. The first few years were hard, but investing was something I really wanted to improve, and I worked hard on it. I read lots of books, articles, a lot of FinTwit, asked lots of questions, met great people and attended some Espace MicroCaps events. I am thankful for the many people that helped me along the way. If you can generate a return higher than the S&P500 index, you will reach your goal faster.
Once I got the ball rolling in all the aspects mentioned, it became a habit and improved a little every year.
The FIRE concept made perfect sense to me. My personal goal was not to retire but to focus on my health, spend more time with my family, and spend more time investing. Investing was starting to take a lot of time, and it was challenging to balance part-time investing with an unrelated career, spending time with my family, and taking care of my health (which took a toll, but that is another topic). My portfolio grew to the point where I could comfortably withdraw 4% a year to pay for my salary. I figured I would give it a shot and FIREd. Overall, I worked for 20 years, including students’ jobs and my career, to reach this goal.
Like anything in life, I strongly recommend reading more about FIRE if it is an approach that appeals to you. Seek advice from people who did what you are trying to accomplish. Go ask other full-time traders/investors questions about their strategies and how they manage their “lifestyle” risk, so to speak. You don’t have just to manage your portfolio risk as a full-time investor; your annual expenses are not to be neglected either.
The strategy I used and described here is what worked for me, and it might not work for you. Of course, everyone has a different comfort level and risk management with their money.
If you aspire to be a full-time investor one day, it is now time for you to make a plan (if you don’t already have one) and just start to save a percentage of your income each week to get the ball rolling. Then, slowly increasing that percentage.
What will be your strategy?
Here are some books that helped me over the years to develop the right mindset, accumulate money and FIRE.
And Mr. Money Mustache’s blog
NB: This article contains Amazon affiliate links.
About The Author
Maxwell House (not his real name) is a full-time, coffee-fueled investor seeking to find unique investment opportunities with an exceptional management team.
He hopes to inspire others with his journey and to keep learning more every day.
You can contact him via Twitter: @maxwellhouse99.