7 Frugal Strategies for Building Your Retirement Savings
Retiring early isn’t easy — but it is possible, even on a mid-range income.
Check Out: I Retired Early — Here’s My Monthly Budget
Read Next: 5 Genius Things All Wealthy People Do With Their Money
It does require you to take more action than your friends and neighbors however. Retiring early requires you to funnel more money into investments, which means spending less on, well, everything else.
Not spooked off yet? Use these strategies to build wealth and passive income faster than your friends.
Map Your Path to Early Retirement
You can’t reach a destination without knowing where you want to go, and knowing how to get there from where you are today.
Start with a simple exercise. Come up with a target annual spending goal in retirement. While you can (and should) spend less in retirement than you do today, start with your current budget if you don’t know where else to start.
Now multiply that annual spending figure by 25. If you were to follow the 4% Rule, designed to make your nest egg last at least 30 years, that’s how much you’d need to save up as a nest egg.
As an early retiree, you likely want your nest egg to last longer. Multiply your annual spending by 28.6 (to reflect a 3.5% withdrawal rate) for a longer retirement.
These are loose numbers to help give you a broad sense of the scale of your goal. Talk to an actual financial advisor before doing anything drastic like quitting your career in a blaze of glory.
You now have an intimidatingly large number that you want to reach. How do you start making progress toward it?
Learn More: These 8 Expenses Can Kill Your Retirement — Should You Ditch Them ASAP?
Carve Out a High Savings Rate
Saving 5-10% of your paycheck is unlikely to be sufficient if you want to retire young.
The sooner you want to retire, the more of your salary you need to save and invest. To retire within 10-20 years, you might have to save a third of every paycheck. Or half. Or more.
It sounds daunting, and it is. But the good news is that lower spending actually helps you hit your goal in two ways. It sets aside more money to compound and grow on your behalf of course, but it also potentially moves the goalposts closer.
You came up with a target for retirement based on your current spending. But if you cut your spending in half, and you get comfortable living at that budget, you can keep that spending in retirement. Which means you need half as much money as you originally planned.
Automate Your Savings
If you depend on your own discipline to avoid spending much throughout the month and plan to just set aside your savings at the end of it, you set yourself up for failure.
Your discipline may fail you sooner or later.
Instead, automate your savings to happen without you having to do anything. Ask your employer to split your direct deposit for your paycheck — or set up automated recurring transfers on each payday.
Then, only live on the money available in your checking account each month.
Max Out Matched Contributions
If your employer offers to match contributions to a 401(k) or other retirement plan, take them up on it.
It’s effectively free money. Or more accurately, it’s part of your pay package — but it requires something extra of you to tap into it.
Pay Off Your Debts
Starting with your smallest debt, funnel all your savings into it. Pay it off, then move on to the next smallest debt. Rinse and repeat until you have no more high-interest debts.
After all, it makes little sense to invest for an 8-10% return if you’re paying 24% on credit card balances.
When you get to lower-interest secured debts, such as car loans and your home mortgage, you can make a judgment call about whether to pay them off early. But definitely knock out all unsecured debts using the debt snowball strategy.
Invest in Real Estate
Real estate investments offer plenty of perks.
They generate ongoing cash flow while simultaneously appreciating over time. They come with tax advantages, and provide a hedge against inflation. And they offer diversification away from the stock market, so that a stock market crash won’t cause your portfolio to collapse entirely.
You could buy rental properties of course. But rental properties are actually one of the hardest ways to invest in real estate, and they require far more work on your part than the average person expects. Instead, consider starting with passive real estate investments such as crowdfunding platforms, real estate syndications, and other fractional ownership in properties.
Downsize or House Hack
You can’t cut your spending in half just by ditching the daily latte. You need to start with the heart of your spending: your housing costs.
One option is downsizing or otherwise moving into a cheaper home. It’s the conventional wisdom for adults approaching retirement.
But that’s not much fun. Instead, consider knocking out your housing payment entirely by house hacking.
You have plenty of options. You could move into a small multifamily property and rent out the other units — and use the future rents to help you qualify for a larger loan. Or you could rent out a room to a housemate, or rent some (or all) of your home on Airbnb part of the time, or add an accessory dwelling unit, or any number of creative options.
If you want to save 33-66% of your income, find a way to knock out your housing payment.
Final Thoughts
Your large structural expenses, such as housing and transportation, are where most of the opportunity for savings lie.
Look for ways to drop from a two-car to a one-car household. It costs over $12,000 per year on average to own and maintain a new car nowadays, per AAA.
If it were easy to retire early, everyone would do it. Roll up your sleeves and get ready to make real lifestyle changes. And reap the rewards when you retire in 10-20 years while your BMW-driving friends are still punching the clock at their high-stress job.
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This article originally appeared on GOBankingRates.com: 7 Frugal Strategies for Building Your Retirement Savings
