One of the most common questions I get is, “How can I retire early?”
While it’s never been easier to get rich slowly (save 10-20% and invest in index funds), it’s actually a lot harder to fast track your financial independence (when work is optional). And when I am saying fast track financial independence, I am talking about retiring in 10 years or less from today, even if you are starting with very little.
FAST TRACKING TO EARLY RETIREMENT REQUIRES YOU TO LIVE DIFFERENTLY THAN MOST PEOPLE
Chasing early retirement definitely isn't a cake in the park. It takes dedication, persistence, and most importantly... SACRIFICE. There will be times where you want to dip into your pool of investments, but you have to think of this money as non-existent.
I can't tell you how many times I've seen people take a withdrawal from their retirement account for an 'emergency.' Unless you need expenses for a house about to go into foreclosure, funeral or medical expenses, nothing is MORE important than being in a good position financially at retirement.
Whether you are just starting your financial independence journey or you are 10 years deep in it, here’s how to fast track and go from broke to financial freedom and early retirement by age 50.
1. START BY DOING THE SIMPLE MATH: HOW MUCH DO YOU REALLY NEED? (IT’S LIKELY GOING TO BE MORE THAN YOU THINK)
The average american makes about $50,000 a year before taxes so lets start with this analogy. If you are able to save $5,000 per year maximum, even with an expected compound interest rate of 6%, you would have about $433,000 in 30 years. While that might seem like a lot of money today, it’s not going to be that much in 30 years, because of two expected variables–taxes and inflation. You will need to pay tax on that money when you take it out, assuming a 30% tax rate that cuts the after-tax value to $308,000, which when adjusted for 2% annual conservative inflation amount (it could be higher than this even!), then the future value of that money after taxes and inflation is approximately $170,000.
While $170,000 is still a lot of money, it’s not going to be in 30 years. It definitely won’t be enough to live on for 20+ years.
Typical wisdom is that you need 25x your annual expenses to retire early. This is the best starting point so lets start here. Multiply 25x by $50,000 (or whatever your annual income is). The average American will need to save $1,250,000. That’s a big number, but it is a good target.
Now do this simple math!
2. THE ONLY BUDGET YOU NEED: FOCUS ON MINIMIZING YOUR 3 GREATEST EXPENSES (HOUSING, TRANSPORTATION, & FOOD)
Keeping a budget is really hard and it’s what stops most people from really fast tracking their financial independence. Of course, it’s important to keep track of your money, but if you really want to save, then you need to look first optimize your three biggest expenses–housing, transportation, and food.
The average American spends 70% of their money on housing, transportation, and food, so if you can spend less on them (say 25% or so, then you can bank the difference). If you move to a smaller apartment, walk to work, and cook at home, you could realistically increase your savings rate to 25%+ or even higher.
By reducing what you spend on my housing, transportation, and food costs, you can increase your savings rate to 40% and sometimes as high as 80%. Cut way back on your living expenses and invest the difference.
3. START A SIDE HUSTLE
After doing the simple math from step 1, you will realize that it will be very difficult to invest enough money for early retirement on only $50,000 a year. You will need to make more money. A lot of people get intimidated by this idea because of fear of 'not enough time,' but I am telling you... with the power of the internet the possibilities to make an extra few thousand dollars online is endless. And you only need a few hours a week!
Once you find a side hustle, invest 100% of that extra income towards investments. You will not believe what even a few hundred dollars a month could do for you.
Here is a blog post I wrote on 40 Side Hustles You Can Do From Home.
4. INCREASE YOUR INVESTING RATE AS QUICKLY AS YOU CAN (25%+ IS IDEAL, BUT WITH EVERY 5% INCREASE, YOU CAN RETIRE UP TO 10 YEARS EARLIER)
First, it’s essential to switch from a saving to an investing mindset. It’s not possible to fast track financial independence by keeping your money in a savings account–investing is an essential ingredient. If you really want to make money, then you need to be investing as much money as you can.
If you increase your savings/investing rate 1% every year, you can retire up to 2 years earlier, or if you save just 5% more then you could retire 10-15 years earlier.
The math is pretty simple and the higher your % saving/investing rate, the faster you will able to reach financial independence.
Remember what I said about living differently? A 50% saving/investing rate is more common than you would think amongst the FIRE (financial independence early retirement) crowd. I know a lot of people that save this much each month because they get it. Saving 50%+ of your income is definitely going against the status quo, but that’s how you fast track wealth.
5. THEN TAKE IT ONE DAY AT A TIME, BUT BUILD THE BEST DAILY FINANCIAL HABITS
Recent psychology research highlights that our brains work best when we break down large goals into daily goals. Lets go back to the our original example.
Lets say you figured out that to reach $1,250,000 in 30 years (expecting a return of 6-7% return per year) using my investing strategy, you would need to save $50 per day to retire in 30 years. Every dollar you could save after $50, you would be fast-tracking to financial independence and essentially retirement by age 50.
It’s also worth noting that most people that are financially free don't start at $50 per day. They scaled up to it starting at $5 per day and then pushing it a few dollars more when they could. And so can you!
Research also highlights that we should accomplish these daily goals through better habits. The key to building wealth is really in our daily habits. The better our money habits, the more money we will make, save invest, and grow. To go deeper, here are my best money habits.
These five steps sound simple in theory, but can be very difficult once put into practice.
Like many things in life, it’s all about the effort and execution. You need to be consistent. Consistency is more important than anything else - You can’t just follow these steps for a few months. If you want it, you’ll prioritize it. You can also start as slowly or quickly as you want.
The key to building any sustainable results is to start at your own pace, start making more money where you can, and really push your investing percentage higher 1% at a time. It really adds up and every $1 you are investing today will compound as long as you keep it invested. As I’ve mentioned before, every $1 you invested in 2010 is worth almost $4 today.
I challenge you to put these 5 steps towards early retirement into ACTION. You will be amazed and the results. Building wealth is about controlling as many of the variables as you can and then letting it grow.
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