Savings rate is a good indicator on when you will be able to retire from your 9 to 5 job. Personally, we strive for a savings rate of 25% of our gross income at a minimum.
A savings rate of 25% of gross income will generally allow you to retire in 29 years if you are starting from scratch and investing the full 25%. So, if you start your career at 22 years old and consistently save and invest 25% of your gross income, at worst you should be financially independent and able to retire by the time you reach 51 years old.
There are many variables that could extend or speed up the 29 year timeline, but I like using it as a reference point.
Now, because of this, I consider anyone saving 25% of their gross income to be doing amazing!
With this background, let's go back to last Friday. CNN posted an article entitled, "Former NFL star Chad Johnson says he saved money by living inside Cincinnati Bengals stadium for two years."
The headline definitely grabbed my attention. Since my wife is a huge Cincinnati Bengals fan and is from Cincinnati, I have heard stories about Mr. Ochocinco and his frugal ways. So, I was not overly surprised that he lived in the stadium for two years. As a football fan, I loved this even more.
I get to the end of the article and one of the final sentences says this, "[Chad Johnson] saved over 80% of his playing salary."
Wow! Chad Johnson had a savings rate of 80%! Yes, this is a whole lot easier to do when you are making seven figures, but it is still extremely impressive.
Last Friday I wrote about how open conversations about money will benefit everyone, and I wish I had read this CNN article before publishing my post. Since Chad Johnson chose to be open about his spending and savings habits, he shared some valuable lessons that others should take to heart.
Here are three teachable lessons that stood out to me:
One - You should not spend more money just because you earn more money.
This is often referred to as "lifestyle creep." Lifestyle creep is when your lifestyle expenses increase as you earn more money. Examples of this include getting a raise at work and immediately buying a new car or a pool.
Lifestyle creep can be a killer for building true wealth. True wealth is built beneath the surface, not out in the open for everyone to see. If you have a friend in their 30s who is driving a Tesla, you should not assume they are wealthy (although they may very well be).
Here is one tip to avoid lifestyle creep - do what Chad Johnson did. Even though he received a 1.4 million dollar signing bonus his rookie year, he saved most of it by living as frugally as he could. Do not let a paycheck, yearly salary, or career determine how you live your life.
Two - Do not live a certain way just because your colleagues choose to.
I see this a lot in my profession. Lawyers are suppose to be wealthy, therefore, many try to look the part. Image matters in most professions, but this does not mean you should lease a brand new car every two years. Needing to dress professionally does not give you permission to buy a $5,000 Italian suit when there are much cheaper options that look great.
So, again, do what Chad Johnson did. He was in a profession where his colleagues lived in mansions and drove brand new sports cars. But, he chose to ignore their spending ways and lived the way that made him happy.
Three - Money doesn't buy happiness, it buys you "time".
If Mr. Johnson chose to spend most of the money he made throughout his playing career, he would have been forced to work afterwards to keep up with that lifestyle. However, saving at such a high savings rate, he can now spend his time doing whatever he wants, which may or may not include work.
Reaching financial independence does not mean you have to retire, it just means you have more options. If you consistently make the right decisions financially, you will have many more options far before typical retirement age.
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