I actually don't think it's a catch 22...people are just led to believe it is because of society's values. You think you're supposed to buy things as soon as you have the money to, and don't recognize the snowball effect of investment.
If you're a gamer that plays RTS games, think of Starcraft or Age of Empires. If you manage your resources poorly, you hit constant roadblocks. You don't have enough money to do the upgrades you need for economy because you spent too much on military units, for example.
You have to follow a build order for life. You don't start building military units until the economy is going. In this case, economy = investments, military = luxury (car, vacation, new computer, etc).
Every dollar you spend on a luxury permanently reduces your income, compared to investing. Just like how every Zealout you build early on in Starcraft could have been two Probes that would have been getting more materials for you.
If you live at a basic level and invest all your income, most lower middle class people could actually be at the point where they can work part time by 5-6 years in.
For example, if you make $50k/yr but live in $25k/yr, and save $25k/yr, and that $25k brings in a return of 7% (the average annual return of stock market index funds over any ten year period)...
By four years, you'll have saved $100,000...but your investment account will be worth $118,768. (May be higher, may be lower, depending on market conditions, but if you don't touch it for ten years, the average will resemble this. Remember, if the market dips, your next dollar is buying more shares, so when the market recovers you'll actually have more.)
By year 8, you'll have saved (by hand) $200,000, but you'll have in the bank, $274,500.
On year 9, you'll hit $320,000...but you'll be making $22,428/yr on your index funds. Your investments almost cover your $25k/yr living expenses. You could pay off your house, switch to part time work, and coast. Or keep going.
At around 15 years, you never have to work another day in your life.
There's a general rule for long term retirement: Most general investing methods (apartment buildings, rental properties, stock indexes) average to 7-8% return. Key word: Average: You may lose 10% a year for 3 years and gain 20% for four. The point is, you don't pull money out of the stock market in a panic, you just make sure money is spread around a ton of stocks and then don't touch it for ten plus years, and you'll get the average.
But, inflation historically averages 3% loss in value per year. Therefore, you need to grow your investment 3% per year. So, if you make 7% average and spend 4% of your value every year, you'll remain flat on average. Therefore, to live on $25,000/yr and never work another day in your life, giving yourself a 3% raise every year so when you're old you'll be making way more (because, inflation), you only need $625,000, invested. You'll make $44k off that $625k, so as long as you spend less than $25k/yr, you'll have more money than you had last year.
For those who are thinking: "Living on $25k/yr for the rest of my life, though?"
Well, you could certainly go for more. A person with $100k income could retire for $50k/yr in the same time period.
Turns out, things are really cheap when you:
- Cook your own food
- Don't have to drive to work every day (less car maintenance, less gas)
- Can take vacations on "off days" when most people are working, getting cheap tickets
- Spend time to repair your own stuff
- Spend more time shopping for good deals instead of buying fast on convenience
etc. Break down your finances; how much of it comes from wasteful spending, eating out, etc?
Also, if you have a paid off house, $25,000/yr is actually plenty of money in most regions. There's a blog,
Mr. Money Mustache with a guy who supports a wife and son on $25k/yr from retirement income. He drives a 40+ mpg car, generally bike rides to do his daily food shopping, and has a paid off house. Home gym because he picked up used equipment and fixed it up. He lives pretty lavishly, because he can spend time doing what he wants to cheaply. His net worth is about $800k (650k stocks, 150k house), or at least was at the time he started the blog, and he lives like a king on 25k/yr.
