*Note: This post was first published in June 2020 and updated in December 2021*

Let’s kick off this weekend in style – and go on a little day trip.

Assume you are making 40k a year in the currency of your choice. Being a smart and foresightful person, you sock away 25% of that amount, to the tune of 10k a year.

You’ve also been reading this and other personal finance blogs, so you know that over the long run, the best (if not the calmest) harbour for your money is the stock market.

It can sure take you for a ride, but comes through at the end, delivering a return of 8%+ over long stretches of time.

So you crack open your laptop, register an account with a brokerage of your choice and click on “Buy”.

The first 10k you’ve put away doesn’t really do that much for you. An 8% return adds up to just 800 a year. You yawn – and go back to more exciting matters.

The following year, you are starting out with 10,800. You add another 10k. All of a sudden, you’ve got a 20,800 balance in your investment account.

If things go according to plan, that money should return 1,664 in year 2 (20,800 * 8%).

So far so good – and **highly unimpressive.** Thus, you set your investments on autopilot and forget about them.

As a matter of fact, you forget about them for **years**. There’s a life to be lived – and enjoyed.

But assuming you’ve stayed the course, a funny thing happens in year 9. You now have a pot of c.115k. At a return of 8%, that pot generates just a smidge less than 10k.

You’ve now reached your **first **major milestone. That is:

### Your money is about to make more money than your annual contributions.

Have a look at the numbers below:

*Now we are talking! *

But that’s not where it ends.

Close your eyes and let another decade go by. To be precise, 12 years.

In year 21, your investment pot is now worth 494k. Add your 10k contribution and voila: at a return of 8%, your portfolio now generates just over 40k in annual returns.

This is the **second** major milestone:

### Your money now makes more money than you.

This is when the real magic starts to happen. What you once thought is unattainable has now become reality – all through a combination of discipline and an undemanding savings rate.

For those of you more visually inclined, the graph below demonstrates the two milestones in a different way.

The intersection of the blue and yellow lines is the point when your investment returns exceed your contributions.

The point where the blue line crosses the orange one is where your investment returns exceed your total income.

## Holding The Line

At this point, the more mathematically apt readers will realize the following:

**It doesn’t matter how much money you make.**

Play around with the spreadsheet that I’ve uploaded here.

The equation holds whether you are making 40k or 400k. Years 9 and 21 is when the magic happens.

Now, that doesn’t mean that making more money doesn’t leave you in a better place. Of course it does.

Clearing 100k in investment returns a year is far better than only getting 10k. But that’s not the point.

Instead, the fundamental observation is that regardless of your income levels, you can get to a place where **your money works just as hard** – and perhaps even harder – than you do.

Now, let’s play this out a bit more.

## Moving The Dial

Clearly, not everyone gets to make hundreds of thousands a year. Instead, let’s flex another variable here – your annual pay increase.

Let’s say you are able to squeeze out a 3% pay increase every year, roughly in line with inflation, all **while keeping your contribution rate at 25%**.

Alas, it will now take a decade to clear the first milestone. And even 25 years later, your investment returns will lag your earnings.

But are you really worse off?

Clearly not – because your investment portfolio is still throwing off far more money at those points.

There are a few important observations to make here.

First of all, it’s the importance of **investing in yourself**. Just as with compound interest, small earnings increases really do add up over time.

That 3% raise may seem inconsequential – but makes all the difference over long periods. And if anything, you should stay ahead of inflation.

So the time taken to improve your skill set, broaden your network, and perhaps find a new job is generally well spent.

There are many techniques you can use to make more money at work. Use them.

The second observation is even more impactful. It’s the danger of **lifestyle inflation**.

If you keep spending 75% of your earnings, making more money can actually make retirement **more challenging**.

Sure, you’ve saved up more money. But you also have a much higher “cost base” to contend with.

One way to get around the issue is to save a higher percentage (let’s say 50%) of your raises. So if you get a 4k raise, instead of saving 1k (your usual 25% savings rate), try saving 2k.

Spend the other 2k any way your heart desires. Once you are on track, you deserve your journey to financial independence to be an enjoyable one, not a hunger march.

And it goes without saying that you **don’t have to wait** for 9 years. If you are the impatient type, just increase your savings rate instead!

## Hidden Rocks

Make no mistake, there are quite a few factors that can torpedo your vessel as you navigate it towards the calm harbour of financial independence.

The biggest one most people struggle with is actually putting their money into a vehicle that yields 8% over a long period of time.

An active fund won’t cut it. There is a vast probability that you will underperform the stock market.

An expensive or shoddily diversified index tracker won’t get you there either. What you need is a low-cost, global equity tracker. Unless you happen to have a soft spot for US equities, as I do.

Keep your eyes on those investment fees. The asset management industry has come a long way – but it’s far away from giving a fair shake to its customers.

You also need to come up with proper asset allocation. For those who are younger and have a sturdier stomach, a 100% equity portfolio will do. Others might want to sprinkle in a few bonds. Some others might even consider crypto as a small part of the allocation.

Whatever you do, don’t expect a smooth journey. The real path to wealth looks very different from what you see in personal finance blogs or investing books.

Finally, you’ll need to make an adjustment for your own tax situation. Everyone’s circumstances differ, hence I’ve excluded taxes from the analysis above.

Bottom line is, there aren’t many boxes to tick. But you better tick all of them.

It’s like tightening the screws on your wheels. It doesn’t take a long time, but you must do it if you want to make it to your destination on time – and in one piece.

## What Happens Next?

No one knows for sure, but I can make a conjecture or two.

Perhaps you stop stressing out over your job. Why bother if you’ve got an equivalent income stream that doesn’t depend on the mood swings of your boss?

Perhaps you can take more risks – in and outside the workplace. Somehow, playing the game is much easier once you’ve faced down three breakpoints and are up 5 – 1 on the set.

Or you can choose to do meaningful work – even if that implies a severe pay cut.

No, you won’t be able to retire – **not just yet**. The maths of losing your job work in a slightly different way, primarily because you are now relying on the 4% rule.

But make no mistake: having your money making more money than you is a fantastic place to be.

Best of all, it’s fully within your grasp.

So take a few minutes. Play around with the spreadsheet. Day dream of what your life will look like, and… get on with it.

Happy investing!

Excellent. May just be a couple of years till this point for me!

Tough to stop the snowball once it gains proper momentum!

How about the time when a massive fall in the markets is more thsn you earn in a year?

Sort if happened to us recently – that’s the fun part of accumulating wealth the swings becone extreme!

Yep ditto. I found a high savings rate helps

I worked out on 3 years I’d have made up the ‘losses’ made it much easier to keep calm

That’s right. It’s a lot of fun on the way up and… interesting on the way down, that’s for sure.

I’d prob add an expenditure line to that graph as well. Hopefully it sits below the earnings line! Possibly well below?

What’s your plan re work when your portfolio gets big enough?

I’m learning quickly (and the hard way) at the moment that work isn’t just about money, there’s a lot of other non financial stuff rolled up with it, meaning, social, etc.

Hah, yes that’s the intent re: expenditure. It’s really the space between the yellow and the orange lines, and the narrower it is (within reason), the faster your journey will be.

Good question on plan after working. You are spot on in saying that there is much more to it than money. I don’t see myself quitting work altogether anytime soon. The trick is finding something enjoyable and challenging, yet not as disruptive to my personal life as my current gig.

Time will tell what that might be!

That is very much the trick. Not so simple to do. I have a suspicion even harder if you are anchored to high salaries

Any chance you could extrapolate your timeline to 40years and onwards.it would be of use to my kids!!!

Hiya. I’ve actually posted the link to the spreadsheet above. You can just copy-paste additional lines at the bottom – or change assumptions to reflect any other special circumstances.

Let me know if you struggle and I’ll be happy to give you a hand.

This is a great reminder for people to put money to work and avoid lifestyle inflation. My husband and I maxed out the retirement plans from the beginning of our careers, and for a while it looked like nothing was happening, but you’re right — once we hit years 15+, the figures were quite significant. We both consult part-time now b/c we can supplement with our portfolio, and it made more sense to focus on managing our investments and experimenting with business, where we could build additional equity, than working traditional jobs — our portfolio can now outearn that.

That’s right. With investments, it’s best to completely forget about them for a decade or so, as there’s painfully little going on there at first.

Unfortunately, that’s why so many people just give up… you don’t get that instant dopamine rush everyone is so used to these days

Nice post.

Even the small amounts of passive income on a sum like £10k gets me pretty excited. Always nice to think something is working for you in the background.

As my income grows I am hoping to adjust my contributions accordingly. These numbers may then actually be possible long term!

All the best!

Josh

That’s right. And you’ve probably got more of the biggest asset (time) than the majority of the readers of this blog.

An interesting way of visualising the effects of your assumptions on your goals. At presence I save a large potion of my income, cool seeing how quickly the returns compound on themselves.

The savings rate makes all the difference in the world. If you move it up to 50%, it only takes 14.5 years or so to get to the point where your money makes more money than you.

Quite tough to do for people on lower incomes but quite realistic as you move up the spectrum. Even more so if you are in a dual-income household (assuming your partner is on the same wavelength).

And while 15 – 20 years seems like a long time, if you start early enough you get to that point when you are 40 – 45, which is a ridiculously young age to retire.

Thanks for the great post.

1. Is the 8% return nominal or real? Depending on what period you look at, people normally use a different average return for the stock market. What is this 8% based on? (Of course, I understand that’s not the point you are trying to show here).

2. This might be a stupid question. Of course, I understand that the market’s average return over a very long period of time is 8% (so there were lot of ups and downs, but this is how much the market returned on average). Since you compound the monthly contribution on an annual basis (I assume), does it make a difference that you will not have 8% every year. Some years you will have less, some years you will have more.

Would the result be the same if you’d compound it with the actual returns that occured over the year versus average of 8% compounded it every year? I don’t think so, but I might be wrong.

Thanks Jon.

On #1, the return is nominal. I’ve had quite a few questions on my return assumptions over the past few weeks so think I might end up doing a separate post on what historical returns look like over various periods of time. In the meantime, here are my thoughts on using nominal vs. real returns:

https://bankeronfire.com/are-we-there-yet-why-your-fire-number-could-be-way-off

I’ve uploaded the spreadsheet as well so you can plug in another number into cell C3 to see what it does to the maths. For reference, using 7% pushes out the first milestone by a year and the second one by three years or so.

On 2, not a stupid question at all. I haven’t run the maths but have a strong suspicion the result would be different. Sequence of returns does matter.

However, given we are talking about regular contributions made over very long timeframes (10, 20+ years), I think the difference would be immaterial. The actual return achieved (i.e. your first point) would have a much bigger bearing on the ultimate outcome.

Hope this helps!

Great article! I love the simplicity of the way you look at it. As a result of this exact phenomenon, my net worth ended 2020 larger than the sum of all of the paychecks I have ever received since my first job in 1996. Like you say, at some point your investments will start making more than you do, but now, my investments are worth more than I have ever made by working. Not only do I have more money than I have ever “earned” but I have also lived a pretty great life all along. Just spend less than you make and invest the difference. Compound interest really is the 8th wonder of the world.

Thank you!

It’s quite simple at the end of the day, isn’t it? Not easy, not quick by any means, but pretty simple.

As always, the problem is that a decade is a long time. Hence most folks have trouble getting started. Valuable years go by, and missed opportunities to build wealth compound just as quickly.

I love the ‘What Happens Next?’ section at the end of this article. At what point along the journey to FIRE do you think it’s wise to think about paying off the mortgage?

So the way I’m thinking about it is I will pay off the mortgage when the opportunity cost of investing the money at higher returns (i.e. in the stock market or real estate) doesn’t move the needle anymore on how our net worth evolves.

At the moment, with a c. $1m mortgage on our “principal” property, I’m not quite up there yet. Need to sweat that equity for a few more years at least!