Everybody dreams of financial independence where they can pretty much live the way that they want. The problem is that many think it’s just a dream and you have to win the lottery to make it happen. The reality is that this is a dream that is well within reach of many people.
You don’t have to be born into money or work in a high paying job to achieve it either. There is a movement these days called FI/RE which means financial independence/retire early. And it is a mindset that can help you achieve everything you’re dreaming of.
Of course, it isn’t a get rich quick scheme or anything that will happen overnight but with the right foundation then you can find yourself able to retire early. In this article, I will go over the basics of the idea so you can get started on your own path towards FI/RE.
Table of Contents
1 – ETF investing
When you are trying to retire early one of the fundamental things you have to have is an income. So, you don’t just save as much as possible and then not have any money coming in. That may be fine when you’re in your 60s depending on how much you’ve saved, but if you are in your 40s you need an income.
Which is why ETF investing is essential. EFT means exchange traded funds Canada or in the USA. These are investments that can give you a higher return than index funds, for example. So, when you have a good amount of money in your ETF fund, then you can withdraw from it and have it be a somewhat regular income.
If you have a million dollars in your fund, then you can withdraw 4% of it and have an income of $40,000 per year. If you are getting a return of around 8% then your fund is still growing while you withdraw from it so you are not in danger of running out of money.
However, this is in theory as you never know what kind of a return you will get. And these types of funds are riskier than index funds. What does help is that they are managed by an algorithm so you don’t have to be an expert to be able to have some success with this type of trading.
2 – Reduce your expenses
One of the crucial things to get right when you are looking to retire early is to have your spending well under control. You need to adapt a minimalist mindset. And also a bit of frugality but not in an extreme way.
There are two reasons that your spending has to be curbed and trimmed to its essentials and not much more. The first is so that you have more money to invest. The more money you can invest in things like index funds, ETFs, real estate or even a business then the more likely that you’ll hit your targets on time.
The other reason is that you want to have less to pay for and maintain when you do hit your target. You can’t be spending money like crazy when you retire early so your lifestyle has to be on the frugal side. You should still have some money to spend on things that you want without worrying about every dollar spent, but you can’t have a money is no object mentality.
When you start withdrawing from your investment funds, you want to have your expenses down to a minimum. Cut out things like car payments by driving a used car. Downsize your house to cut down on living expenses. And stop shopping without a purpose and be more mindful about your consumption.
3 – Know your numbers
To properly retire early, you have to know exactly what you are dealing with when it comes to numbers. Make sure that you are using an app or at least a running spreadsheet to keep track of things and consult them often.
For instance, you have to know exactly what your expenses are going to be when you do retire. Keep in mind that you may be paying for things that you are not paying right now. Health insurance will be paid out of pocket when you don’t have a job that pays a portion of it. This is something you have to research to understand how much it is going to cost.
You also need to consider how much you’re paying in taxes, mortgage, student loan debt (though you should have paid this off to retire early) or any other long term expenses that you will likely have when you hit your goal age to retire. If you’ve done things right then you will have minimal expenses and you may even enjoy a part time job to continue getting some health care benefits to curb your expenses further.
4 – Move to a low cost of living area
There are some areas of the country where the cost of living is so high that you do essentially need to be rich to be able to live there while retired. Places like NYC, Boston, and San Francisco come to mind.
If you want to retire early and are not blessed with a trust fund from an inheritance from a rich relative then you need to go where it costs less to live. Research areas of the country that offer the type of lifestyle you want to live at a reduced cost.
There are states that have no income tax, for instance, which can cut down on your expenses quite a bit. And outside of those major metro areas mentioned above, real estate prices are a fraction of what you would pay so you can live much more cheaply.
Now that you see some of the basic ideas on retiring early you can see that it should be doable if you plan ahead and are smart with your money. Then, it doesn;t matter how much money you make a year. Anybody can retire early it just may mean retiring 10 years early for some, while others can pull it off in their 30s.