Good morning!

Last week, we looked at three different ways that $50,000 can act as a catalyst for transforming your life.

This week, we’ll examine a case study of the type of budgeting it takes to accumulate $50,000 quickly.

I want to acknowledge that everyone’s situation is going to be very different, depending on innumerable factors. So this is not meant to imply that there’s always a simple solution, because we are all on our own very unique journey.

But what I hope it does is provide you with food for thought in setting your own personal goals, along with generating the solid plans to reach them in the months and years ahead!

The greater danger for most of us lies not in setting our aim too high and falling short, but in setting our aim too low, and achieving our mark.”

– Michelangelo

Saving Your First $50,000

To broadly illustrate how to save $50,000, I’m going to use the median statistics to determine our hypothetical scenario.

According to the US Census Bureau, real median household income in 2023 was about $80,000.

Now this includes all ages, geographical locations, single and dual income households, etc. So keep that in mind, because there are many factors that influence household income. And any one of us could easily land on one side or the other of that median.

But for the sake of illustration, we’ll use $80,000 gross annual income.

Of course, first we have to consider taxes, which vary significantly depending on tax filing (single, married filing jointly, child tax credits, etc.). But in this illustration, I’ll assume a single filer that only takes the standard deduction, paying Federal tax, FICA tax, and 5% in state tax.

This sort of tax will likely leave a net income of about $5,055/month.

So how do we squeeze $50,000 out of $5,055/month?

Well, I’m an advocate of setting goals that can be achieved within 3-5 years. That’s about as far out as we can clearly visualize while at the same time remaining dedicated and excited to accomplish the goal.

Starting with zero, building to $50,000 in 5 years would require:

PV = 0 (starting with nothing)

N = 60 (months)

I/Y = 0.5 (estimated 6% annual growth divided by 12 months)*

FV = 50,000 (ending value we’re aiming for)

Hit CPT (compute) and PMT (payment) = $717/month**

*To do the same thing in three years instead of five would require $1,271/month under these assumptions.

**Monthly average returns would vary dramatically from this simplified illustration, depending on how the money is invested and how markets perform over that time.

Now I imagine that sounds like quite a large number on a monthly basis, based on a ~$60,000/year net income. And that would be correct. But it comes down to desire for change. 

We each have to answer this question personally as it applies to our situation: Is seeking to change our lives within five years worth a few temporary changes to the way we live and think about money?

Here are some of the biggest fixed costs that most of us encounter:

• The average monthly rent is just under $2,000/month in the US, with a large number of rentals around $1,500/month.

• Average monthly grocery expense is about $418/month per person, but adding costs of eating out tends to approximately double this number.

• Average monthly car payments on average tend to be $700+.

• Average health insurance premiums average over $400-$500/month per person.

There are several other basic living expenses not included here, but I include these as the biggest four categories. Adding just these together totals anywhere from $3,000 to $4,000.

The Budget Overhaul

So let’s get down to work!

To lay the foundation, note that what I’m talking about here is meant to be temporary. It is intense. It requires tremendous discipline.

Giving greater priority to saving for retirement and allowing for greater discretionary spending is crucial to long-term well-being. But what I discuss here is like a sprint; it’s something to do with all your might for a short time. And afterward, you reap the benefits potentially for the rest of your life, because it opens doors to you that most people never encounter.

Here we go.

Besides the big basic living expenses, there are also smaller ones that add up: utilities, gas, phone/internet, maintenance, etc. These could easily reach $500 or more.

I also want to include about $1,000 for discretionary spending. Those are the things you do because you just want to. And they make for a life of more than just “getting by.”

That means in order to reach $717/month savings, we have to get these four previously mentioned basic living expenses down to only $2,830/month.

Here’s what I would seek to accomplish.

1. Find a rental that is near the median of the price range for my region (so long, of course, as other factors are considered such as safety). This might require moving to a suburb. In this illustration working with averages, let’s go with $1,700 (about middle of the range above).

2. Cut 90% of eating out. Yes this means preparing more food at home, and that means time and effort on my part. But this is essentially like giving myself a $400+ raise every month. I’m essentially paying myself back for my time.

3. Sell the expensive car and buy something that will last at least three years in good condition. Bring this $700 number down around $200 or less (e.g. $10,000 amortized over 5 years at 7% interest).

4. If credit card debt exists, determine if there are any large ticket items that I could do without for the next three years. If so, sell and use the proceeds to pay down the credit card.

5. There’s not much I can do about health insurance premiums, but it’s worth a look around to determine what might be a cheaper option. There are other health sharing plans, for example, that don’t qualify as insurance but act in very similar ways. (Keep in mind that they may deny claims or exclude pre-existing conditions, and they lack regulatory protections, so understanding the risks is key before considering such options.) I could also examine the benefits and see if another plan with fewer benefits might be worth the cost reduction.

By doing this alone, we could cut out about $1,120/month of unnecessary spending.

So our monthly fixed cost budget becomes something around $2,830/month calculated as:

Rent: $1,700

Food: $480

Car payments: $200

Health insurance: $450

This leaves $500 for other basic living costs as mentioned previously, and about $1,000/month for discretionary spending.

With discipline and a solid commitment to the end goal, it is possible to hit this target from month to month with some variation due to those unexpected expenses which will inevitably crop up.

So from $5,055/month net income, we subtract this total $4,330 to arrive at $725 positive cash flow, slightly exceeding our general target.

Keep The Goal In Mind

I’m not suggesting this should be a permanent budget. Far from it!

It’s an intense budget to stick to, there’s no question.

But here’s what this looks like after five years, assuming for simplicity that all continues uniformly (assuming investment returns equal 6% on average, you only receive inflationary raises to salary/wages, no major surprises happen that significantly cut into the savings, etc.).

In five years, this $717 monthly rate of investment could grow to about $40,000 - $50,000 or more, depending on market conditions.

That’s when you can take your foot off the accelerator and relax; you may never have to budget that tightly again.

Because now you have a few choices which I explained in last week’s newsletter.

Essentially, you can either start investing this cash in a personal business or you can use it as a personal discretionary fund.

But here’s the other part of it. Now that you’ve reached the goal, you get to choose what to do next with the surplus you’ve been saving. You still have over $700 of positive cash flow!

Now you get to reap the rewards.

You can choose to incorporate a little or a lot of that number into your monthly spending. What could you do with this extra $700+ per month? Maybe upgrade the car, move to a new area or save for a nice vacation?

Be sure to always leave a proper amount of surplus to maintain an emergency fund equal to 3-6 months of living expenses. In addition, another account should be funded which pays for those expenses which come around only once a year, or come occasionally but at unknown times (like car repairs or medical expenses).

In addition to this new freedom in the cash flow, you also now have the ability to draw from this $50,000 fund to either 1.) jumpstart a side hustle with the intention of it transitioning to your main business or 2.) add even more lifestyle improvement by supplementing your income with sustainable withdrawals.

This won’t make you rich overnight. But if used properly, it gives you the capacity to improve the wealth of your time, flexibility, purpose and money.

It opens doors of opportunity that could be the bridge to a total transformation of your financial situation.

Action Steps

I get that using these average numbers won’t tell you personally what’s possible in your situation. There are far too many unique situations (child care, student loans, and alimony to name a few) for one generalized illustration to be able to address all possible obstacles and challenges.

But here are four action steps you can take right now to get started:

1. Analyze the last three months of spending to determine the average cost of basic needs (mainly shelter, food, health, transportation, and communication).

2. Ask yourself, “What is the bare minimum I would have to spend in order to create a sustainable basic lifestyle (no bells and whistles).” That includes cutting back on what basic expenses you might be overpaying for (like an expensive car).

3. Then determine IF the five-year monthly number is possible to achieve on your current income. If it is possible, it’s time to answer the question of whether you’re willing to restructure your discretionary spending to whatever degree it takes to achieve it. Only you can answer that question.

4. If the five-year monthly savings of $717 is just not possible or desirable under your personal financial conditions, you could try aiming for half that and increase savings later if things improve. Or, if you receive a significant raise, you could eventually exceed $717 if you want to hit your goals faster!

Remember, starting with anything is better than nothing at all. If you make this your goal, start with what you can, and build from there as things improve.

This Is The Stepping Stone

In summary, budgeting is a tool for creating dramatic change in relatively short periods of time.

It should be with a goal in mind. A big one! And that big goal should ever be held before your mind’s eye to remind you of why you do what you do.

Very likely, your lifestyle can only improve from there, provided you take calculated steps along the way: budget, build, and bridge to greater possibilities.

Budgeting in a void is a slow way to riches. But budgeting with intent, assuming you put the money to use in productive ways, can merge you into the fast lane within a short period of time.

And once you’re there, the possibilities become exponential!

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For additional content, be sure to check out this week’s YouTube episode!

Daniel Lancaster, CFA

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