Financial Freedom for $500 per Month

Image Source: money.usnews.com

Image Source: money.usnews.com

A while back, I posted an article detailing some budgeting issues my wife and I were having as new home owners.  Long story short, we decided to make some cuts to our budget in order to make sure we were diligently sticking to our long term saving and investment goals.

By now, you’re probably well aware of my infatuation with compound interest, so I thought I’d showcase how a little cost cutting here and there can literally give you financial independence in the long run.  No seriously, actual millionaire-status financial freedom!

As I always say, this ain’t rocket science…it just requires a little discipline and willingness to give up a few luxuries.

So with that, lets break down a couple things my wife and I changed budget-wise:

1.) Bar Method workout membership – $150:  A trendy (and expensive) ballet-inspired exercise class enjoyed by my wife. Cutting her membership is a HUGE sacrifice, but I am extremely grateful for the cost savings!

2.) House cleaning service – $200:  $100 per service, twice a month is saving us $200 in total.  Cleaning the house ourselves isn’t actually that bad…I crank up the tunes in the house so we (ok just me) can rock out while we split cleaning duties.  It takes us a couple hours, but we do a much better job than any service would.

3.) Cutting the cable TV cord – $100: Since we rarely have time to watch television anyway, we decided we’d probably be better off without the distraction. We do continue to maintain our Netflix and Amazon Instant memberships, so we’re not complete weirdos. Dropping our cable TV bundle and opting for only high-speed internet (no extras) netted us roughly $100 in savings per month.

4.) Mowing our own lawn – $50: $25 per mow twice a month saves us $50 total. I’m loving doing yard work…seriously.  I take pride in my perfectly manicured lawn.  It’s the simple things in life that make me happy, and certainly, a clean and tight lawn is one of those things.

Badda Bing!  $500 in monthly savings, son!

Now, what to do with all that extra cash…um, how about we invest it!

For our purposes here, I’m assuming that we’ll save $500 per month, investing a full $6,000 per year into a long term portfolio of stocks.  A few great, low-cost investment examples come to mind here:

iShares Russell 2000 Value ETF (Ticker: IWN)
Vanguard Small Cap Value ETF (Ticker: VBR)
Vanguard S&P 500 ETF (Ticker: VOO)

The first two ETF’s (exchange traded funds) are a diversified mix of low cost, value-oriented small-cap stocks. While slightly more volatile, these aggressive options boost long term returns.

The S&P 500 ETF mirrors the performance of the S&P 500 index, a broad measure of U.S. stock market performance as represented by 500 of  the largest companies by market capitalization.

So with that, let’s looks at a chart of the total value over time of investing this $6,000 per year into hypothetical portfolios that earn 8%, 10%, or 12% annually. These are reasonable returns for allocations among the above mentioned investment ideas.

Actual performance will vary, but like I always say, more aggressive allocations to smaller-cap value-oriented stocks should tilt performance upwards over the long term. Remember, with more risk comes more volatility, but this is long-term money that doesn’t need to be touched. Thus, volatility shouldn’t be as important as all out return!

chartAs you can see, with a little patience, compound interest will work its magic on the $500/month I’ll be investing instead of spending.  Depending on my annualized return (let’s face it, I’ll be going all out to push the return aggressively since I’m young), $500 per month for the next 40 years could mean an additional $1.5 million, $2.5 million or even $4.5 million or more when I reach my golden years.

Sure, it’s going to take some serious dedication to keep plunking away this kind of cash regularly instead of spending it. But look, this provides a nice example of how riches are built and fortunes won over the long term.

In our example, $4.5 million dollars can do the world a lot of extra good!

So tell me, any areas of the budget you could stand to cut in order to be a millionaire?

All the best,

Wes

 

 

Comments

  1. says

    I love it! And yeah, I can cut gym my gym membership, my internet (since I’m never home), and I’m actually giving up my apartment next month, so that’ll save me $500 right there! Yea for compounding interest!!

  2. Wes says

    Heck yeah, Molly! I like to ask myself, “do these luxuries I take for granted anyway really benefit my life? Are they really worth it?” Sure they’re nice, but usually not worth the money…especially considering the opportunity cost of investing the dough!

    Take care,
    Wes

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