You Saved $250,000 — Now What?
In a recent Making of a Millionaire article, I ran numbers you don’t see in articles about money all that often.
In a hypothetical scenario, I illustrated the power of out-sized savings.
Save $2,000 a month for 10 years in a high-yield savings account (1% interest), and you wind up with a little over $250,000. That’s a quarter of a million bucks.
Invest $600 a month for 10 years in stocks generating an 8% rate of return, and you have nearly $110,000.
I picked these numbers for two reasons:
- My gut (and personal past experience) tells me that as the monthly dollar figure you have at the ready increases, your penchant for buying stocks decreases and your comfort level with pure saving increases.
- To emphasize the importance of a low cost of living.
The person in my hypothetical simply had to pull back on discretionary spending and stop investing $600 a month to make room for $2,000 a month in savings. Maybe it’s not so simple, but it’s realistic when you consider an individual uneasy with being in stocks.
If you hit that $250,000 in cash, you’ve got that million dollar view. At or around this number (I’d argue you can even go lower), you’re financially free.
Here’s what I’d do at the $250,000 level, assuming you have a formidably-stocked emergency fund in addition to your quarter of a million in straight savings. Remember, this is not money in the stock market. It’s cash in a savings account.
I’d take $100,000 and invest it in a portfolio of high-yielding dividend stocks. Aim for 5% yield (though you can go higher), which means you’ll generate $5,000 a year in dividend income you can reinvest in your portfolio. It’ll look a little something like this:
At $223,675, you’re basically back where you started after another ten years.
After investing $100,000 of your $250,000, you have $150,000 left. I‘d take this number and calculate my anticipated monthly cost of living alongside it.
Let’s say it’s $2,500 a month. Let’s also say you intend to travel amid your new-found financial freedom. We’ll ratchet your cost of living up to $4,000 a month.
$150,000 / $4,000 = 37.5 months. So, just over three years.
But here’s the thing about this — you, presumably, have adopted a work lifestyle that allows you to do one of two things.
Like me, you work freelance. You write (or something logistically and financially similar). So you have monthly cash flow coming in even if you’re on the road and taking life with relative ease.
Or maybe you have a line of work where you can work super hard for a few weeks or a month, take some time off, then work really hard some more. You have endless ways to make this work. These represent but two.
You can choose how to handle this cash flow versus the $150,000 you stockpiled. It really doesn’t matter.
The point is you can do a lot with $250,000. Reinforcements are on the way via your dividend stocks. Because you continue to work, that cash flow has your back. And you’ve got this $150,000 cash cushion that will sustain for a minimum of years, not to mention your emergency fund, which you hope you’ll never have to touch.
- You eschewed investing because you said it scares your hypothetical person, yet you turned around and put $100,000 in stocks.
- This back of the envelope sketch makes concrete just one way to structure a relevant and modern form of “retirement” for those of us under fifty.
When you achieve something as big as saving $250,000, there’s a confidence that runs alongside it. Or so I’d think. Everyone’s different. Theoretically, hitting this level might make a more modest foray into the stock market with a lump sum of cash less anxiety-provoking. At this juncture, it’s almost necessary if you want to do more with less.
If you adhere to traditional conceptions of retirement, you’ll take all kinds of issue with what I lay out in this article. That’s cool.
Viewing financial flexibility through the lens of cash flow and parked cash allocation isn’t going to sit well with everyone. It might not be feasible for all people. However, it’s more realistic for most people.
Face it, very few of us will amass a million dollars or more AND be able to live the life we want to live when and how we want to live it on the way there. So you gotta be open-minded and get creative.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.