Foundational Money Concepts

The key to financial security is having enough money to live on for a long time. Maybe you want to retire early or maybe you don’t want to worry about money. Maybe you want to be able to take some risk like a second career or work for a start-up without financial stress. At the end of the day, you have some future expenses that you need to cover – a lifetime of living expenses and certain goals.

Being able to cover those expenses comes down to your net worth, liquidity, and cash flow.

Every dollar you earn can do essentially two things. You can spend it or you can put it towards growing your net worth. To grow your net worth, that dollar needs to either pay down debt or be invested for growth. You can buy that $100 bottle of scotch, or put $100 towards paying off your car. You can buy that $20 pizza delivery, or put $20 into an investment. The liquor and pizza aren’t going to increase your net worth. Paying off your car and saving for the future will.

These activities add up in the long run, especially when you consider the future value of the money you spend today. What does a $20 pizza really cost? If your goal is to be financially independent in 10 years, we can calculate that $20 today, if invested in the stock market would probably be worth $37-77 dollars and most likely around $54. We will get into how to calculate this later. If your horizon is the more traditional 30 or 40 years (you are in your 20s or 30s and plan to retire in your 60s), this pizza will be worth about $378 in 30 years or an amazing $957 in 40 years. You won’t see oversimplified compound interest examples here. Plenty of blogs cover that. I’ll show you free tools to calculate this very example using historical data of different asset classes and statistical probabilities. The truth is that compound interest calculators really don’t give an accurate picture. There is a range of probable outcomes when you invest. Don’t let that intimidate you though. You will be comfortable with it soon.

The bottom line is the next time you want to spend $20 on pizza or something else, keep in mind how much it is really costing you. I do sometimes buy pizza. I am not saying never buy pizza (grill a store-bought pizza, though..). Just keep in mind what future net worth you are giving up. Maybe look back at every time you bought pizza. 100 times? 500 times? 500 pizzas would be worth $189,000 in 30 years (500×378). That must have been some really good pizza.

Small choices add up over time and our financial lives present us with many choices to make. It is easy to make the wrong choice and it isn’t your fault. High school and even college usually don’t teach financial literacy. You can read dozens of books – but how do you know which books to read? Where do you start?

Start by calculating your net worth. Your net worth is everything of value you own (assets) minus every debt you owe (liabilities).

Examples of assets: house, cars, investments, cash, savings accounts, collectibles that have real value that you might actually sell (guns, Rolex, art). Write them all down and look up their real values. Check a site like Zillow for your house, Craigslist to see what your car would sell for today, etc. Add it all up.

Examples of liabilities: credit card debt, student loans, mortgage, unpaid bills, car loans, personal loans, etc. Add it all up.

Subtract your total liabilities from your total assets. This is your net worth. Maybe it’s positive. Maybe it’s negative. But now you know where you are.

Where do you need to be? This depends on your cost of living. A common rule of thumb, which is an oversimplification we will cover later, is that you need enough invested so that withdrawing 4% from your investments covers your expenses for the year if you want to never run out of money.

If you live on $20,000 per year, you would need $500,000 invested ($20,000 / .04). $50,000 per year would need $1,250,000 ($50,000 / .04) and so on. Instead of dividing by 4%, you can multiply by 25 to get the same answer ($20,000 x 25 = $500,000).

$500,000 and $1,250,000 are daunting numbers if your net worth above is a lot lower. But do you remember the pizza example? 500 pizzas in 30 years would be $189,000.

Maybe you don’t have 30 years. Maybe you are in your 40s or 50s and trying to catch up. That’s fine. Remember that you have social security coming up. If you want a $50,000 per year lifestyle but will collect $15,000 per year of social security, that means you need to cover $35,000 per year of expenses in retirement ($50,000 – $15,000). For that to last forever would require $875,000 ($35,000 / .04).

If you are too far behind, you need to adjust your goal. Instead of amassing a fortune that lasts forever – especially if you don’t have dependent heirs – you need to amass enough to draw $35k as long as you will be alive. Let’s assume you will retire at 67 (full social security for those born after 1960) and live to 97, 30 years. Using a traditional blend of investment mix of diversified stocks and bonds, you need more like $485,000+ to safely withdraw $35,000 per year. If even that seems impossible, lower your lifestyle goal to $30,000, meaning you need to cover $15,000 that social security won’t. This would take more like $215,000-255,000.

If you are 57 and starting from $0, you would need to save about $13,000+ per year in the same traditional investment portfolio used above. More saving is always better and $1,083 per month may be a lot. But it’s $250 per week or $35 per day. What can you do to get there? I have suggestions.

Bottom line:

  • Start by calculating your net worth
  • Decide when you want to be financially independent or retire and what lifestyle you want
  • Do you want to pass on an inheritance?
  • Calculate how much you need to save to get the right size nest egg in time

Start saving:


  • Maximize tax advantaged accounts (don’t worry about early withdrawal penalties, there are loopholes)
  • Determine the right investments for you
  • Minimize investment expenses
  • Stick to the plan

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