How to retire early (FIRE-financial independence retire early): A recent early retiree’s tips & advice
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| Sunrise at the beach, Atlantic Beach, North Carolina |
In my previous post, I had shared with you my final days leading up to my resignation and few days after that day. I guess the last day working for a paycheck was Day One of my early retirement. In this post, I’d like to share how I did this so someone reading this post can be inspired to follow.
When someone thinks about money, he/she may automatically assume making more money is the ONLY goal. This is partially true. Simply making more money is only useful if someone can also manage other facets of their money matters. If someone makes $100,000 per year, but spends $110,000 per year, then this person is actually not doing well financially.
This way of thinking was how I got into trouble. I also assumed, like most people, that making more each year would work out in the end. The problem with this way of thinking is flawed. There’s something called ‘lifestyle creep’, which is when your way of living keeps up with your paycheck. No matter how much more you make, it mysteriously finds a way to make it disappear even faster.
When you get a raise, you want to flaunt it or spend it to feel good. You want to book that trip to Las Vegas at a 5 star hotel (because you’ve earned it!) or buy a bigger / newer SUV to show you’re coming up in the world. This is how most of us are living today sadly...This is the ‘Keeping up with the Jones’ mentality kicked up a notch then injected with steroids.
SUV prices are a good example, as they seem to be going up every year. I read recently that an average price of a Cadillac Escalade SUV is about $100k! Obviously, if you’re making tons of money because you’re a rap mogul or a professional athlete making millions (and have your finances well managed) and/or you have an inheritance coming your way, then this is probably ok.
For the most of us, this is NOT ok. If I’m making $100k or less, I can’t afford a car this expensive! Same goes for vacations. If you’re paying for a trip to Las Vegas on a credit card, then you can’t afford it.
Why are we constantly buying things we don’t need, with money we don’t have, so we can impress someone we don’t even like?
There are myriad news reports that show majority of Americans can’t come up with $1000 if an emergency comes up. This was also true for me for majority of my adult life. I think more than ever, we want instant gratification. We want to buy things NOW! and not worry about things like retirement that’ll happen later. Why? Because planning for the future doesn’t give us that instant jolt/instant high like buying a new cloth/car/‘fill in the blank’ does.
To me, managing your finances is a behavioral change. It’s not unlike eating right and exercising. It requires discipline to want to do something right.
Unless you change your own behavior about money, you will live like I did early in my adult life. Always broke with credit card debt that feels like a 800 pound gorilla sitting in the room!
So what can you do?
Answer is easy once you commit to a change, to want to change, to want to see a brighter future.
Here are some things that worked for me and some things that didn’t in my path to early retirement. Please understand these tips are based on my personal experiences. I am no professional CFP (certified financial planner). As always, do your own research/soul searching/etc., to figure out what works FOR YOU. Take bit of advice from one source and from another source and so on, then come up with what works in your situation. Get professional help as needed.
As I mentioned in my previous post, my primary sources of information/motivation were two: Jacob Lund Fisker (Early Extreme Retirement) and Peter Adeney (Mr. Money Moustache). Other secondary sources were other finance blogs, finance websites, and news articles from sources like Wall Street Journal, NY Times, etc...
Always read as much as you can about money matters to get motivated to want to do this!
Do:
- Change your behavior: you need to want to change your attitude about money. Put aside instant gratification and focus on your future. Think about how awesome it would feel to retire early. Stop wanting to buy things to feel better or to impress someone you don’t like. Trust me this feeling doesn’t last...
- Pay off your debt. If you’re like most of us, you probably have debt. Tackle this first. No one ever got rich by paying someone else (like banks/credit card companies/etc.) every month! Commit how much you’ll pay into the debt monthly. Plan when you think you can pay it off. There will be sacrifices, but again, you have to want to do this. Nothing worthwhile comes without sacrificing...
- As you’re tackling your debt, put away money towards retirement accounts religiously. If your company has a 401k plan or similar, then make sure you’re signed up. Contribute as much as you can. Don’t listen to common advice to save like everyone else (about 7 to 10 % of your salary per year). Instead, plan on putting away more. In my previous post, I had mentioned that I put away as much as 24% in my penultimate year before my retirement. Plan / commit to get there yourself. If your company doesn’t have a company sponsored retirement plan, then open up an IRA (Individual Retirement Account) or a Roth IRA. *I would prefer a Roth IRA if situation allows. We’ll cover these topics in detail in subsequent posts...
- It’s vital to understand the difference between simply saving money versus investing money. You MUST invest to be able to retire early. With today’s pitiful savings rates, you won’t make it by simply saving money, then living off of interest like our grandparents did during the 70s and 80’s. Back then, savings rate was around 15%! I don’t think this will happen again in our lifetime...Investing is working the financial markets like the stock market, bond market, etc., while saving is putting money into safe options like savings accounts, CD’s, etc. Investing in the stock market should yield around 10% if invested in a US stock index like the S&P 500 (500 largest US companies). *Current yield on safe options like a savings account range around half a percent in comparison.
- Understand the 4% rule which is the basis of how you can retire early. Simply put, it says: have at least 25 times what you spend yearly invested in the financial market. For example, if you spend $30k yearly, then you need to have $750k (30000 x 25 = 750000). When you have this much invested, you can take out 4% yearly without running out of money in most situations.
- Keep to your budget. You must understand how much you need to live on. Without knowing this, early retirement is NOT possible.
- Embrace slow and steady. Easiest and safest way to invest is to embrace this concept. Compounding interest, who Albert Einstein considered the ‘8th wonder of the world’, is how you get to early retirement!
- Worry about what other people say about you. This is true in life and in money matters. How you choose to live to accomplish your financial goals is your business! Don’t be swayed by what others say. If that person isn’t paying your bills, then why listen at all? If someone asks why you only have a 4 year old smartphone, why even bother answer that? As long as you’re steadfast in your goals, be happy with that. Stop trying to ‘Keep up with the Jones’!
- Be average. Being average today means you’re a consummate consumer. You will consume the latest gadgets, clothes, latest Starbucks Frappuccino, etc. The real problem is this cycle of consuming never stops unless you do. It’s sort of like you’re in the ‘Matrix’ where you don’t know you’re in it, unless you step out of it by taking the ‘red’ pill. We’re constantly bombarded by ads from an early age to buy buy and then buy! I thought it was normal to go to the mall every weekend just to walk around and consume. Don’t be average! Stop being a mindless consumer. Buy because you need it and not because you want it.
- Be greedy. Every money mistake I made can be attributed to greed. Chasing impossible returns on stocks, trying my hands at multi level marketing (Pyramid schemes) and playing innocent sounding games that promised money (I know...) were all the things I did wrong. Like everyone says: if it sounds too good to be true, then it probably is.
***All of these do’s and don’ts listed above will be covered in detail in upcoming posts.
I hope I can convert someone to want to believe he/she can be financially independent and to retire early. Thank you for reading!
Jake
Wandering Money Pig
Please check out our YouTube channel ‘Wandering Money Pig’ showcasing our travels and our Pomeranian dog! https://www.youtube.com/channel/UC3kl9f4W9sfNG5h1l-x6nHw
