Are you confusing your good fortune due to your own skill rather than due to luck? I’m here to argue that your outsized wealth is mostly due to luck. Therefore, stop deluding yourself into thinking you’re so great!

As President Obama said in a July 13, 2012 campaign election speech, “If you’ve got a business, you didn’t build that.“

When I first heard Obama say this sentence, I was taken aback. From 2009-2012, I had been working on Financial Samurai for three years from about 5 am – 7 am and from 10 pm – 12 pm after working 12-hour days in finance. If I wasn’t building Financial Samurai, who was?!

I had also recently left my finance job because I wanted to be free. All I really desired to do was write while traveling around the world, so that’s what I did.

But as I’ve gotten older, I’ve come to understand more of what President Obama was talking about. Just like it takes a village to raise a child, it takes a lot of help along the way to achieve your goals. Besides, Obama was referring to not building the roads and bridges that helped your business prosper along the way.

I firmly believe that it was mostly luck (~70%) that helped me a basic level of financial independence at age 34. Of course, effort is also required to get ahead, but it’s not the main reason. There are plenty of people who work much harder than you or I, yet will not achieve what we have.

The more we can recognize our luck and not take our luck for granted, the more prosperous we’ll become. I encourage you to list as many fortuitous events that have happened in your life. This way, you’ll appreciate more of what you have and fight harder to achieve your goals and freely help others.

In the good old days pre-pandemic, several friends and I liked having beers after each softball game. We got to discussing what is the one ingredient necessary for achieving financial independence at a relatively early age.

Here were some of their responses:

• Saving aggressively
• Investing in stocks
• Investing in real estate
• Earning side income
• Taking bigger risks in our careers
• Leveraging the internet
• Working ungodly long hours
• Relocating to areas with huge job growth despite the higher cost of living
• Starting a business

Many of these ingredients are great for helping all of us achieve financial independence.

However, the #1 ingredient that drove me, which nobody mentioned, was FEAR. More specifically, the fear of failure. The more you fear something bad happening to you, the more you take action to make sure it doesn’t come true.

Let me share some examples to explain what I mean. Then perhaps you can share your own in the comments section below. 

The maximum 401k contribution limit for 2022 increases to $20,500 from $19,500 in 2021.

I’m surprised the maximum 401k contribution limit is jumping by $1,000. Historically, the limit usually increases by only $500 every two to three years.

Inflationary pressures are likely the main reasons for such a high contribution limit increase. For example, the Social Security Administration raised its cost-of-living-adjustment in 2022 by an impressive 5.9% to account for inflation.

If you are 50 or older, you can add up to $6,500 extra per year from $5,500. This is the government’s way of allowing older workers with typically higher incomes to catch up.

Further, the maximum 401k contribution your employer can contribute for 2022 is $40,500. This brings the total maximum 401k contribution between employee and employer to an impressive $61,000.

Always Take Advantage Of The Maximum 401k Contribution Limit

I always recommend maxing out your 401k as fast as you can. Once you get into a max habit, you’ll rack up some big bucks in no time.

Maxing out your 401k is a learned habit that gets easier over time. Given the contributions are pre-tax, you won’t feel as much pain compared to saving with after-tax dollars. In other words, at a 25% effective tax rate, contributing $20,500 will feel more like you’re contributing $15,375.

So many people don’t even bother to try maxing out their 401k because they don’t feel like it’s possible. But once they try, they kick themselves for wondering why they didn’t max out their 401k sooner.

Below is a simple chart to see how much you can accumulate in your 401k by age or years worked if you contribute $19,000 a year starting today.

The chart is obviously more helpful for younger folks, given older folks had lower maximum contribution limits in the past. For example, when I first started maxing out my 401k in 2000, the historical 401(k) contribution limit was only $10,500.

I’ve also included my high-end 401k target amount by age. It is based off continued maximum contributions plus a constant 4-8% annual return. My high-end 401k savings target can also be considered your overall total savings target. It can include after tax savings as well.

The numbers are for “ideal” conditions. We all know that life, recessions, and buying things we don’t need gets in the way of savings and returns all the time.

For the longest time, I’ve wondered whether Social Security is a dependable source of income for traditional retirees. As someone still over 22 years away from being able to collect, it’s hard to believe in the system given it is already underfunded by ~22%.

Therefore, when the Social Security Administration announced the cost of living adjustment (COLA) for 2022, I was shocked! Due to rising inflation, there will be a COLA of a whopping 5.9%! The increase will translate to an addition of $92 to retirees’ average monthly benefit next year.

Earning $1,657 a month or $19,884 a year from Social Security until death is not bad. Further, the maximum Social Security benefit increases from $3,148 in 2021 to $3,345 in 2022.

The average person would need about $500,000 in capital returning 4% to generate $19,884 a year. In other words, we can make the assumption that the average American retiree is a half-millionaire.

As a result, I have no doubt the majority of Financial Samurai readers will be millionaires in retirement as well.

There’s a saying that goes something like this: To feel rich, take whatever you earn and triple it. Once you get there, triple it again. In other words, due to hedonic adaptation, it’s impossible to ever permanently feel rich!

We all know that making a top 1% income or top 0.1% income means you are technically rich. But I’ve noticed on my path to financial freedom there were several times when I felt incredibly rich and money wasn’t the dominant reason.

Let me share some of those times in this post. I’ll also share more classical ways I felt rich.

Maybe you can share some of the times you felt rich as well. The more we can show gratitude for how far we’ve come, the better we’ll feel.

The right asset-to-liability ratio is important if you want to retire comfortably. If your ratio is too low, you may stress too much about your finances because you have too much debt. If your ratio is too high, you might not be taking enough advantage of enough cheap debt to get richer.

As interest rates stay depressed, the propensity to take on more debt increases. Low interest rates also encourages more investment. This can be good for economic activity, but it can also create asset bubbles that end up destroying a lot of wealth. Be careful.

Stay On Top Of Your Debt Load

On the corporate finance side, companies are taking on more debt to fund operations, investments, and acquisitions. The hope is that the return from various corporate activities will surpass the cost of debt in order to bring even more wealth to shareholders.

On the government side, the Treasury Department is issuing more Treasury bonds to pay for more government spending. It is logical to conclude that tax hikes are on the horizon. Luckily for us, the U.S. government can also print an unlimited amount of money to in essence pay back the debt.

On the personal finance side, consumers are taking on more debt to live a better life today. Below is a chart of my favorite type of debt, mortgage debt. Mortgage debt is the least bad type of debt because it generally improves the quality of your life and can often help build wealth through an appreciating asset.

As mortgage interest rates drop to record-lows, millions of Americans smartly refinanced their existing mortgages to increase cash flow. Meanwhile, there’s a growing number of Americans buying new homes to live a better life.

But now, interest rates are ticking up as the economy recovers and the Fed tapers. Therefore, paying attention to your asset-to-liability ratio has become increasingly important.

Given our primary residence is likely one of our largest assets, buying responsibly is prudent. At the same time, living a better lifestyle by owning a nicer home as we get wealthier is also something many people desire.

Therefore, let’s try and figure out the target primary residence value as a percentage of net worth. I’ve got a certain percentage in mind that will help maximize lifestyle. The percentage will also provide enough investment exposure and minimize financial worry for being too house rich.

One great thing about a bull market is that the unnecessary big-ticket stuff we buy declines as a percentage of our net worth over time. If we can survive the initial liquidity crunch, things tend to turn out well.

For example, let’s say you have a $100,000 net worth that is all in your company’s stock. You inexplicably purchase a $50,000 BMW even though you only make $80,000 a year. That’s unwise because you just spent 50% of your net worth and 62% of your gross income on a car. Driving a beater or taking public transportation would have been more appropriate.

However, let’s say your company hits it big and your company stock grows to $5,000,000 in 10 years. If you still own your car, its original purchase price only ends up being less than 1% of your net worth. Meanwhile, you were able to enjoy a fun vehicle for 10 years. Therefore, purchasing a $50,000 BMW 10 years ago turned out to be a good gamble.

I want to do the same type of thought exercise with a house. How much should we really “gamble” to live a better lifestyle today?

Using net worth as a variable to determine how much home one should buy or continue to own is a useful exercise.