The Time Horizon of Wealth Is Super Long

And when it’s proportional, “earning more money” doesn’t solve the problem.

Photo credit: haley8, CC BY 2.0.

So I’m on my third reading of The Value of Debt in Building Wealth, and I’m thinking about how to apply the math of building wealth to my own finances.

I like the math. It makes sense. It’s solid.

It’s also going to take a really long time to get from The Value of Debt’s Independence level, which is where I am now—and which essentially means that I am out of credit card debt and am no longer living paycheck to paycheck—and the Freedom level, which is where you’ve saved enough cash to have a significant chunk of financial security. That’s the point at which you’re ready to start building wealth.

(If you want to know more about these terms, read the book. It’s so good.)

As I explained in my first The Value of Debt post, it’s going to take me 5–7 years to get from Independence to Freedom. At Independence, you’re supposed to have three times your monthly income saved—not counting retirement savings, which is a different topic—and you don’t hit Freedom until you’ve saved 15 times your monthly income.

If you save 20 percent of your income every month, which is more than a lot of us will be able to save, it’ll take you five years.

Five years actually sounds reasonable. It’s a time horizon that most of us can intellectually/emotionally comprehend. We can almost see ourselves five years from now. We’ll probably be wearing some of the same clothes.

But that assumes you don’t need to dip into your savings, at all, for the next five years.

Which is probably unreasonable. Some of us will have medical bills in the next five years. Others will move, get married, have children, go through a temporary unemployment period. Having saved money will help, we’ll certainly be grateful we’ve been putting a certain percent of our income aside for the past few years, but it’ll also kick that Freedom number further down the road.

So the time horizon starts to get fuzzy, and you start to think—or I start to think, anyway—maybe I’ll never hit Freedom.

Or, in a more universal sense: maybe I’ll never be able to build wealth.

(At this point you’re probably also thinking, “yes, but being healthy/having children/etc. is more important than some definition of wealth that you read in a book.” Absolutely. We’re looking at a specific math problem here.)

You might decide that the best thing you can do to build wealth is figure out how to earn more money. It’s certainly something I’m thinking about.

But since the formulas in The Value of Debt are proportional, earning more doesn’t get you to Freedom any faster. The more you earn, the more you have to save to get 15 times your monthly income in the bank.

Let’s imagine that you were earning $5,000 per month for 12 months and then you started earning $6,000 per month. If you start at Independence, with $15,000 saved, you’ll end those initial 12 months with $27,000 saved, or 5.4 times your monthly income.

But the first month you earn $6,000, that $27,000 turns into 4.5 times your monthly income. Yes, you’ll put $1,200 in the bank instead of $1,000 that month, but it will take you five months to get yourself back to where you were, with 5.4 times your monthly income in savings.

So the time horizon—just like a real horizon—recedes as you get closer to it.

You could increase your savings rate as your income increases, but your cost of living is likely to increase as well. (Yes, even if you don’t go out and lifestyle creep it up. How much did all of our health insurance premiums go up this year?)

And yes, I am well aware that building wealth—or building anything—is a marathon, not a sprint. But it’s hard to continuously run towards a finish line that keeps moving further into the distance.

But, I tell myself, what else am I going to do? The years are going to pass regardless. Might as well try to save as much money as I can and see where I end up.

I wonder if Might as Well Save as Much Money as You Can would make a good book title.