The Golden Triangle of Financial Freedom

As I alluded to in my previous post “The $100 an Hour Rule”, you can conceptualize financial freedom as a triangle, as there are three sides to achieving it: how much you earn, how much of it you save, and how much your savings grow. Really, improving any of these three metrics will help you build wealth, but where what I call “the golden triangle” comes in is in the powerful combination of improving all three simultaneously. Just how powerful? I’ll take some time to explore that here.

We often think of savings in the context of retirement, but as I’ve touched on here before, savings are really for a variety of purposes; funding a retirement may be just one of them, and far from the most inspiring for a young person. Thus I like to think of the goal of investing as financial freedom, not retirement.

The Baseline

Consider a rather typical case: someone making $50,000 a year (let’s call him Otto, as it means “wealthy”) who saves 20% of his income, putting it in a portfolio consisting of 100% stocks. Let’s take that as our baseline. The great website Portfolio Visualizer lets us backtest these scenarios from 1985 to 2022, which for stocks were a relatively average period. If Otto started on that track in 1985, here’s how his portfolio would have grown.

Image courtesy of Portfolio Visualizer.

“Save, Save, Save!” is the Way, right? Or is It?

He cracks $100,000 in 1991, becomes a millionaire in 2014, and ends up with $2 million by today. But can he do better? Remember one side of the golden triangle is the share of your income you save. Let’s crank up Otto’s savings rate up to a full 50% of his income. The figures are pretty much the same, just multiplied. Even if he lives like a pauper in a cheap area 50% is probably around the realistic maximum you can squeeze out of the sort of income Otto earns.

Image courtesy of Portfolio Visualizer.

Leverage up, Young Man!

Saving $25,000 a year, Otto cracks $100,000 in 1987, $1 million in 1998, and ends up with almost $5 million by today. Let’s say he wants to get there, but balks at squirreling away that much of his money. What are his alternatives? An underrated option, and one that doesn’t even require him to alter his income or expenses at all, is to leverage up; as I detail in my post on the subject here, the optimal, i.e. return-maximizing, allocation to stocks is not 100%, but rather around 250%.

Let’s compare Otto saving 20% of his income at 100% stocks (the red line) with Otto saving 20% of his income at 250% stocks (the blue line). Although it’s more volatile, the leveraged portfolio clearly outperforms over the long term. Instead of 10% a year it averages 18% a year. Those eight points worth of return bring Otto to $1 million in 1997, and $10 million in 2020. Notice this is actually somewhat more lucrative than bringing his savings rate up to 50% at 100% stocks.

Image courtesy of Portfolio Visualizer.

Improving Income

The third side of the triangle is how much Otto is earning; doubling your savings rate with the same income is mathematically equivalent to doubling your income with the same savings rate. 40% of $50,000 a year is $20,000; 20% of $100,000 a year is $20,000, i.e. the same amount of money!

Thus Otto working the earnings side of the triangle by bringing up his earnings from $50,000 to $125,000 a year, while keeping the same 20% savings rate, yields the same chart as him bringing his savings rate from 20% to 50%.

Image courtesy of Portfolio Visualizer.

Two sides are better than One

What about combining these sides of the triangle? This is where they go from isolated lines on a diagram to a whole geometric shape. Let’s say Otto keeps his income at $50,000 a year (increasing your income, after all, is easier said than done) but raises his savings rate from 20% to 50% and leverages up to 250% stocks. Below is a chart comparing the growth of his wealth saving 50% of his income into 100% stocks (the red line) and saving 50% of his income into 250% stocks (the blue line). Just like in the chart above, the leveraged portfolio outperforms, only in this case he becomes a millionaire in 1995, cracks $10 million in 2017, and is now worth $31 million. At the recent market peak he would have been nearing $50 million.

Image courtesy of Portfolio Visualizer.

We see here that utilizing two sides of the triangle instead of just one is a force multiplier for building wealth. Using only one method or the other, Otto becomes affluent but is still really just middle class even after almost 40 years of saving and investing. Combining two methods, on the other hand, puts him on track to elevate himself out of the middle class and into the upper class. Yes, really; by 2021 Otto is considered to be an ultra-high-net-worth individual.

The chart is the same as above if Otto instead keeps his savings rate constant at 20% but instead increases his income to $125,000 a year, as that’s mathematically equivalent to raising his savings rate to 50% on $50,000 a year. But what about using all three sides of the triangle? What if Otto leverages up, raises his savings rate to 50%, and increases his income to $125,000 a year?

Three Sides are better than Two

Image courtesy of Portfolio Visualizer.

Well, this is the most powerful technique of all, and demonstrates to maximum effect how utilizing more than one side of the golden triangle is a force multiplier for building wealth. By using all three techniques in tandem, Otto becomes a millionaire in 1993, cracks $10 million in 1998, and cracks $100 million in 2021.

Keep in mind in the baseline case Otto has $2 million as of 2021. Over the course of 36 years increasing his savings rate by 2.5x, his income by 2.5x, and his stock allocation by 2.5x provides him with 50x as large a nest egg in the end. This is a drastic change, but perhaps the idea of doubling both your income and your savings rate sounds too intimidating. What about a less drastic shift in lifestyle? Well, consider the case of increasing all three sides of the golden triangle by 20%: your income goes from $50,000 to $60,000, your savings rate goes from 20% to 24%, and your stock allocation goes from 100% to 120%. Here’s how your wealth grows.

$60,000 per year, 24% savings rate, 120% stocks. Image courtesy of Portfolio Visualizer.

For comparison, here’s the baseline chart.


$50,000 per year, 20% savings rate, 100% stocks. Image courtesy of Portfolio Visualizer.

Individually, those aren’t drastic changes; they might be quite realistic and attainable. If you’re making $50,000, can you add on another $10,000 a year? If you’re saving 20%, can you up that to 24%? If you’re in 100% stocks, can you up that to 120%? Probably yes. At least there would be an excellent chance. Yet such relatively small changes add up to having double as large a nest egg at the end: $4 million instead of $2 million.


It all adds up, doesn’t it? Sure, you have to think outside the box if you want to ascend out of the middle class someday, but it’s a goal that might be much more attainable than you even imagined. My advice? Go out there and get rich!

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