Most people see being able to retire early as a mirage only achievable by the wealthy; the truth if you play your cards right, you can retire by 50 or even 40.
There is an entire movement, the FIRE movement (Financially Independence, Retire Early) dedicated to the goal of becoming financially independent and retire early. In fact, some early adopters of the “gig economy” have been able to retire as early as in their 30s.
Who is FIRE for?
“Financial independence does not mean you have to quit your job. It means that the job needs you more than you need it”
The formula to achieve financial independence is simple: Increase your income + Cut back on expenses + Get out of debt + Invest your savings.
Make a mission out of those steps and you will achieve financial independence. As the old saying goes – The best time to start is always today.
On this Guide
Step 1: Increase your income
Step 2: Determine how much you will need to save
Step 3: Cut back on expenses
Step 4: Get out of debt
Step 5: Invest your savings
Step 1: Increase your income
Saving becomes a lot easier when your income goes up. A lot of people don’t realize it but earning more money can be as simple as asking for a raise, getting a promotion, finding a new job and negotiate a better salary.
When I entered the job market, my goal was to get a promotion every year and a half; by then I already knew the job and was ready for a new challenge and of course more money.
If the company where you currently work does not provide an opportunity for you to be promoted, find a company that does; the important part is to make sure you are advancing your career every year which will translate into higher income.
Create multiple sources of income
Another way to increase your income is by creating multiple sources of income. I am not talking about finding a part-time job, although that’s also an option. I am talking about creating a system where you are making money while you sleep. Here are some passive income generating ideas.
Rent out a spare room using Airbnb
Build a website and set up affiliate links
Invest in Real Estate
Write a book
Make videos and post them on YouTube to get income from ads
Read: 111 Ways to Earn More Money
Step 2: Determine how much you will need to save
FIRE acolytes propose you should aim to save 25 times your annual income, and then at retirement, if you withdraw at the rate of 3% to 4%, the money should last you indefinitely.
This means if you currently have income of $80,000 per year, you should aim to save 25 * $80,000 = $2,000,000. Then every year you should withdraw no more than 4% of the amount saved $2,000,000 * 4% = $80,000.
At the same time, your savings should be earning interest at a rate of return that’s at least equal to the annual inflation rate.
Now I know, you might be thinking how can you save $2,000,000; that’s a lot of money, isn’t it? Here is a full breakdown of how much you would need to save 2 million dollars by age 67 if you start at:
20: $650 per month
25: $890 per month
30: $1,235 per month
35: $1,730 per month
40: $2,480 per month
I have met people in their 20s that spend $600 on a monthly car payment; so saving $650 per month is possible. Even if the monthly amount that you need to save is over $1,000, it is possible. You just need a plan that can help you get there.
The amount you will need in retirement savings will depend on the lifestyle you want to have
Start by visualizing what retirement means to you. For some people, retirement means having the funds to go on long trips and host lavish dinner parties without having to worry about their finances.
For others, retirement simply means keeping their current lifestyle without needing to work for the money.
Once you’re able to picture what your life will be like in retirement, the next step is figuring out how much living that lifestyle will cost per year. Then subtract any retirement income or benefits you’ll be receiving, and multiply the net amount by the number of years of retirement.
The best way to determine how much you will need to save is by using aretirement calculator.
Achieving financial independence will depend more on what you spend than on what you earn. Yes, earning more money helps a lot, but if you then buy an expensive car, the extra income goes away without creating a wealth effect on your finances.
Download our retirement calculator to find out how much you need to save to retire.
This retirement calculator can help answer questions such as:
How much do I need to save to retire?
How much money will I have saved when I retire?
Am I saving enough money right now to retire?
How much money will I have to spend annually when I retire?
Once you’ve figured out how much money you’ll need for every year of retirement, add 10% to 20% to that figure to account for unexpected expenses like increased tax bills, health care costs, and home repairs.
Smart Tips:Open a retirement saving account. If your employer has a matchup saving plan program, that’s like getting free money. So you should at least contribute the amount of money your employer is willing to match.
On my very first job, I started making $50,000 per year, and there was a retirement saving program which my employer was willing to match any contribution I made to the program, to a maximum of 6% of my income
That meant, if I deposited $3,000 in a year to the saving program, my employer would add another $3,000. After a few years, I was able to access those funds and used them as a deposit to buy my first house. The house then became an asset that is part of my retirement plan.
Step 3: Cut back on expenses
If having daily lattes makes you happy that’s not something you should cut back on. I, for instance, love having a good pizza on game night; so that’s not something I would cut back on.
However, we often spend a lot of money on things we don’t need. It is those things that I want you to cut back on first. In fact, we find that the biggest hurdle to overcome is changing our mindset.
Yes, driving a high-end car feels nice, and we might even think we deserve it, but unless you have the money to buy the vehicle in cash that means you cannot afford it. We tend to get chained to monthly bills without realizing how we got there.
Cutting back on expenses is about building better spending habits, and that’s achieved by working with a budget.
A budget will help you track whether you’re staying on the course you’ve designed for yourself. If you’re not, you will be able to tell where your money is going, adjust your budget or your financial priorities.
Making adjustments to your budget
As you reach some of your financial milestones, adjust your priorities. Saving for retirement is a long term game; if you make a wrong money decision, or accidentally overspend, one month, don’t let it ruin your motivation so you can get back on track.
Step 4: Pay off debts
Nothing can slow down achieving financial independence more than having high-interest consumer debt. The higher your debt payments are the less money you will have available to spend on other things; it’s that simple.
But if you are trying to save for retirement, how much money should you allocate to paying off debt vs. saving for retirement?
Debt reduction needs to be your priority if you want to retire happy.
You don’t want to be part of that 30%. Debt has become big business; even when you don’t need a loan or a credit card, banks work hard at giving you reasons for getting you in debt.
Maybe it’s a home renovation, a dream vacation, or simply having more cash available. You should avoid the temptation and make it a priority to be debt-free by the time you retire.
Step 5: Put your money to work
Once you have found out how much money you are going to need to save for retirement, you are working with a budget, and have taken steps to eliminate debt, it’s time to put your savings to work.
As Gordon Gekko put it “Money Never Sleeps” (Movie: Wall Street). Putting your money to work is another way to create passive income; the sooner you start investing, the larger your potential returns.
Earlier I mentioned that when I entered the job market I started an employer-funded retirement saving plan. If I deposited $3,000 into the fund, my employer would add another $3,000 on top of my savings; so the annual savings were $6,000.
While the money was on the account, I invested it into energy stock which gave me a 7% return on my investment. Not bad for a starter. Within 5 years, I had already accumulated enough for a 10% down payment on a house, so that became my second investment.
When you save money the power of compounding works in your favor. Albert Einstein said it “The most powerful force is the power of compounding”
Investing is not just for the rich; it is for everyone, even if it means you can start saving $100 per month. Speak with a financial advisor or a financial planner at your local bank; they’ll be able to offer personalized advice in shaping a portfolio that will help you achieve your financial goals.
If you are interested in a more DIY approach, robot-advisors are a great option, especially if you are starting. Instead of a person selecting a portfolio for you, the process is automated.
You can plug in your financial goals, and the program will select a portfolio for you, then help you manage it so that you get the best possible return on your investment.
These Robo-advisors are ideal because they have a lower minimum requirement than most financial advisors, so you can still get in the game even if you don’t have large funds to invest.
Never invest in something you don’t understand
This is one of Warren Buffet’s key ingredients for successful investing. Never invest in something that you don’t fully understand.
Depending on your level of knowledge, this could be anything from real estate to bitcoin to a family member’s business. These types of investments can be tempting because if you’re successful, you can stand to make thousands or even millions of dollars with a small initial investment.
Whether you’re investing in a company or a financial product like mortgage-backed securities, you need to understand where you’re putting your money, and what it’s doing for you.
The Bottom Line
If your dream is early retirement, these steps should help you get started. Even if you don’t know much about money, or feel that you don’t have enough, you can start with what you have, and work upwards from there.
We all want the freedom to make impulse purchases, or take our spouse out for a fancy meal just because. Sticking with your budget may involve short-term sacrifices, but for people who want to retire early, it’s worth it.
The road to financial independence is paved with by spending less than you earn, putting your savings to work, and working with a budget so you can plan and monitor how you are achieving your financial goals.
At the end of the day, our money is a tool to take us where we need to go. If you follow a sensible budget and make smart investments, you will stop chasing money and finally be able to achieve financial independence.