We often only think about the immediate costs associated with our financial decisions.

But the decisions we make go far beyond the specific dollar amount associated with them today.

Those decisions have opportunity costs and compound effects over time.

In this episode, we explore a few examples of how relatively small financial decisions can have much bigger financial impacts than we might realize.

Topics Discussed

  • what financial independence is and how to determine your financial independence number
  • a case study on how one client’s spending on entertainment affects her financial independence number
  • how much that same client could have if that money were invested instead
  • hypothetical calculations showing how much relatively small amounts can grow if invested
  • the amount most lawyers are overspending each month on things they don’t care about
  • the potential trajectory of many of my clients’ finances
  • the value of learning to manage your money

Listen to the Episode 

Work with me

If you’re ready to learn the mindset and strategies to master your money, let’s schedule a call

Connect with me

Social media: Instagram and LinkedIn

Email: hello@rhothomas.com

 

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Lightly Edited Transcript

You’re listening to Wealthyesque. We are a community of lawyers who believe that true wealth is having control of our time. I’m Rho Thomas, and as a busy wife, mom and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back to the show. I hope you’re doing well and having an amazing day so far. Today we are talking about $1 million decisions. The financial decisions we make are about way more than the specific dollar amount associated with them today. Those decisions have opportunity costs and compound effects over time. An idea for this episode came from a conversation I was having with one of my clients. So one of my clients is working to get her and her husband entertainment spending lower to what we want it to be, and they’re also interested in financial dependence, if you’re not familiar with the concept of enable dependence is the point at which you no longer need to earn income because you’re able to cover your living expenses with your assets indefinitely. There’s a study called the Trinity study that looked at various retirement accounts and concluded that 4% is a safe way to withdraw money from the account and not run out of money. So the rule of thumb for reaching financial dependence is when you have 25 times your annual expenses invested, because at that point, one year’s worth of expenses will be 4% of the total value of your assets and so you can withdraw 4% your assets each year to live on and theoretically never run out of money based on the study. So with that background client, I were talking about the concept of financial dependents and her and her husband financial dependents, moralistically, meaning how much they need to have invested to achieve any other dependents. So look at your expenses and multiply that number by 12 to get a rough estimate of a typical annual expenses. Then using a rule of thumb to talk about we multiply the annual expenses by 25. And we got a number that was much bigger than what you were expecting. And we’re talking about the fact that their financial incentives can change is completely within control because it’s based on their expenses. So they have a lot of wiggle room and moving the needle on that number. When you’re thinking about financial dependents every 100 hours you spend each month is another $30,000 You need to save for financial dependents to cover that level of spending. Right so $100 times 12 months the annual spending times 25 to get the financial dependents number every $1,000 you spend each one is another 300,000 that you need to save again 1000 times 12 times 25. The final event is over. So for them I mentioned they’re working to lower the amount spent on entertainment. They are spending about $3,000 a month I don’t think right now, so that’s almost a million dollars right now. $2,000 They need to have invested just to cover their entertainment spending. If they plan to continue spending that amount. If they decrease the amount then they will lower them I think that’s where the concept of millionaire decisions came from because just a few tweaks to the way they entertain themselves and how much it costs for them to entertain themselves can be a $1 million difference in the amount they need to have invested to return to independence. And to be fair, it doesn’t only have to be about their payments, they could decrease their spending in whatever areas I have $3,000 I’m just making the payment at the example because that’s actually an area that does not cut down on but let’s take a step further as I’m adding this line is going to be 1000 months mobile entertainment. So not only what you need to have almost a million dollars to keep up with that same level of spending once you reach financial dependence. But if she were to invest that same amount, you could grow to almost $4.5 million over the next 30 years. She actually must be done working before three years from now. So we can look at a shorter time period like 15 years and it will grow to a little over a million dollars in that timeframe. So decision of how much they’re spending on entertainment. isn’t about $3,000 a month are spending we’re actually talking about between one and 4.5 million when you look at how much money to have invested to get to that level of spending once they reach financial independence and or how much that money could grow to if they invested it instead. And ultimately, they’re fine, right? They’re reaching their goals even with spending $3,000 a month on entertainment they are just looking at wanting to decrease that amount. So that’s why I looked at it but they’re able to make progress on the goals that they have. So we are going to run a few more calculations but in case you’re interested in running some of these yourself in your own numbers I am using the future value of investment copulative from choose fi which I will link up in the show notes. So as a reminder, you can always find show notes for each episode at rho thomas.com/the episode number. So show notes for today’s episode are available at rho thomas.com/ 109 109. Alright, so the calculator includes an 8% interest rate as the default and I’m using that. The stock market on average returns about eight to 10% a year. There are some years where it’s more than that some years where it’s down but on average it’s around eight to 10% So 8% is a pretty conservative estimate of the potential return in the market. So getting into the calculations let’s say you don’t have$3000 of wiggle room or don’t want to tweak your spending $3,000 But let’s say that you aren’t able or willing to free up $1,000 just by managing your money differently. If you were to invest $1,000 per month for 30 years that gives you almost 1.5 million again, assuming that 8% annual return. So you start with nothing and you invest $1000 a month for 30 years, you’d have 1.5 million and most of you are not starting from nothing, right? Most of you are saving something you have something in retirement or some other vehicle so you would end up with even more than that. Now let’s say you didn’t wanna wait 30 years, you want to be done 20 years. That’s still over half a million dollars. It’s almost $600,000 589,000 Again assuming an 8% interest rate investing $1000 a month for 20 years. Even freeing up $500 a month and investing that for 30 years will get you almost $750,000 After two years. So it’s not just about the $500 or the $1,000 it’s about the $1 million plus it could become if you invested it instead. And please understand I’m saying here I’m not saying cut everything and deprive yourself so you can build your investments and reach financial independence as quickly as possible. But I know from working with so many of you that you’re likely overspending by at least $1,000 each month and don’t even realize it because you don’t have a handle on where your money’s going. You’re spending on stuff that you don’t care about that you wouldn’t miss if you cut back. And that’s the money I’m talking about here. That’s driving up expenses and financial independence number and it’s robbing you of the ability to build more wealth. If you can decrease some of that spending that you don’t care about. We’re gonna get to your goals right you can find $1,000 You can invest that gives you $1.5 million in 30 years, and that’s only looking at $1,000 per month. Many of my clients when we analyze their spending and what’s really important to them, they’re able to put three or $4,000 a month or more towards their goals and I’ve done some of these calculations with my clients where it’s like okay, if you continue on this trajectory where you’re currently putting this amount towards paying off your debt, you’ll be done in x amount of time usually something like two to five years. Then after that you shift your focus and put that amount toward your investments. And this is on top of the money they’re investing while they pay off debt. So that will already continue to grow. Then you turn around and invest another three to 4000 a month on top of that. So my clients are gonna end up with multiple millions of dollars and long before that point they’ll have a lot more freedom and flexibility in their careers. They’ll feel less stressed and be willing to take more risks and push back on things and ultimately be better lawyers because they’re not worried about the financial implications of their decisions. They’ll be set up really well to make a career change if you want to whether that’s leaving the law like I did, or taking a lower paying job or working on a part time basis if their firm or company has that. Keep in mind too, that the calculations didn’t account for them making any more money that they could invest, right so we’re assuming they don’t get any pay raises and bonuses, not starting side hustles just the amount that they’re able to put towards investment from their current income. But of course we know that over the years, they likely will get raises and bonuses and they could get involved side hustles if they wanted to and otherwise make more money. So it’s not just the three to 4000 that they’ve freed up so far from the current spending. It’s the millions of dollars they’ll have down the line if they stay on this path. Learning to manage your money as early as possible, we’ll pay you in buckets. If we can million dollars over the course of your lifetime. Finding money doesn’t even impact your life a whole lot because of how often we spend without intention. If you’re not planning your spending, I guarantee you’re spending more than you realize and you’re spending on stuff you don’t even care about. I say all the time that we’re always making trade offs with our money. And so every dollar you use for one thing is a dollar you can’t use for something else. But we haven’t talked too much if at all about the true value of those trade offs. And the compound effect those decisions. Compound interest is the eighth wonder of the world and when you’re investing it’s working for you. Not managing your money intentionally is so much more then than the money that you’re spending. It’s the returns that money could earn for you if you were investing it, the stress that can be relieved if you knew exactly where your money was going, and that you were on track for your financial goals and you have planned for your debt and plan for investing. It’s about the value of all those decisions over time. So if you want to learn to make more essential spending decisions so you can make more money with your investors and other financial goals. I invite you to work with me. As my clients have found the decision to work with me is worth way more than the amount you pay. You learn the mindset and skills to manage your money better for the rest of your life. It’s a million or multimillion dollar decision in itself. So if you wanna learn more about working with me, head to rhothomas.com/call and let’s set up a time to talk. Alright, that’s it for this episode. Come connect with me over on social media I am most often on LinkedIn rho Thomas and Instagram at I am rho Thomas. Subscribe to the show and leave a review both of which help more people find it and please take a second think of a friend or two who would benefit from this information and share this episode with them. As we close out friend I pray that you take the information you learn here. Apply it in your life and open up to the realization that wealth is available to you. As you do that consistently week after week you’ll continue to take steps to regain control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.

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