Why is it that we were all taught the best way to retire is by going to school, getting a job, investing our money in retirement accounts, and waiting to turn 60 as you watch forty some years of your life go by? There has to be a better way right? Absolutely.
The Long Way To Retire
See, we are taught that you can retire once you have a certain amount of money in your bank/retirement accounts. People decide the amount of money they need, basically by calculating how much they can withdraw each year until they die(depressing right?). If this number is in line with their yearly expenses, they are probably safe to retire. Of course, it's a little more complicated than that once we start to factor dividends, interest rates, social security, health care, etc, but that really is the gist of it.
The Quick Way To Retire
If you've read my article about financial independence at 22, then maybe you know what I'm about to say. I truly believe there are only two main components to early retirement: passive income and frugality. Think about it! Remember how most people retire once they are able to cover their yearly expenses by the withdrawals from their bank accounts? According to this article, the average retired American spends about $3,700/month in retirement. How long would it take you to build passive income streams that would total at least $3,700/month? I bet a lot less than 40 years! Alright sure, maybe the entrepreneurial route isn't exactly "easy", but it's really not as difficult as you might think and the rewards are high.
Passive income is money earned without actively working for it(maybe a few hours a month will be needed for maintenance, etc). Most passive income strategies will require one of the following: up-front time investment or upfront monetary investment. The possibilities are endless, but here's a few off the top of my head to start:
Interest(stocks, funds, CDs, notes, etc)
Write a book
Create an app
Sell a course
Really, anything that you can create digitally once, and then sell
Start or buy a business that can operate without you in it
Things became much more clear to me once I understood the difference between putting income-producing assets vs. a liability on my balance sheet. For example, my friend's brand new $35,000 car he just financed: liability. The $37,000 rental property I just financed: asset. Many make the mistake of assuming liabilities are assets. In reality, a $35,000 brand new car will never produce any income while it depreciates at one of the quickest rates of anything you could ever purchase.
Here's the part no one wants to read! Frugality is just as powerful as passive income when it comes to this strategy for early retirement. I won't go into a lecture about how you need to spend less money, but you should aware of how frugality can help you.
First, the obvious one: when your monthly expenses are lower, your passive income goals can be reached sooner. How much would your monthly expenses decrease if you didn't have a car payment or you gave up that sweet $2,000/month studio apartment(or $2,000 mortgage payment for an oversized house)? Retirement will be achieved years sooner this way.
Second, the less obvious advantage of frugality: any more money saved can be invested in creating passive streams of income. So not only do you need to make less money to reach your goals, now you can also expedite the process of making more money! Saving $1000 in a month is money that will now be used to invest in dividend stocks, rental real estate, businesses, or whatever one chooses. Warning: doing the math with that extra $1,000 saved and invested each month will frighten you once you realize how much quicker you can retire by cutting unnecessary expenses now. This is thanks to what Albert Einstein refers to as "the 8th wonder of the world": compound interest.
What I Do
On an average salary, I've been able to buy rental properties that produce monthly income and I do so as passively as possible by paying management companies to deal with tenants and repairs. Ain't nobody got time for that, am I right? I personally believe real estate is one of the safest vehicles to provide passive income, but maybe you hate the idea of owning property or maybe you think the entire market will come crashing down. There are plenty more options! I'm building more diverse streams of income as we speak. I don't want all my eggs in one basket(more on those baskets some other time). According to my Mint account, I'm averaging $1422/month in expenses over the last year. My personal goal is to make $4,000 a month passively, as I think this amount would safely cover my expenses, emergencies, and fun. I started working towards this goal less than a year ago. Today I am netting about $1,000/month in passive cash flow. At this pace, I should be able to ditch the shackles of my cubicle within the next 3 years! But hey, I'm an optimist.
"Are you on a laptop all day? Would keeping an excel file or Google doc file help you track your expenses easier? Would it be more convenient to keep an old fashioned pen and paper type of budget? How about keeping a running tab on the fridge so that you are tracking all expenses?
"For the few that actually look at their goals again, it’s common to revisit them only at the end of the year. This is a crucial error. As our circumstances may change day to day and month to month, so will our goals. A lot can change in twelve months, which is why I propose reviewing once a month, or at the very least every three months.
Revisiting also keeps our desires relevant. It’s helps us remember that we even have them. Ideas aren’t enough, we must execute.
As the great Thomas Edison said, 'Vision without execution is hallucination.' " -Jiu-Jitsu Finance
Increasing your income
"After you have lowered your expenses, it is time to bring in more income. There are many ways to bring in more income especially during the holiday season. Maybe your full-time gig will let you work extra hours for overtime. In addition, retail stores typically hire for the holiday season. That part time holiday gig could turn into a longer gig...
Retail jobs aren't the only part-time jobs available. There are plenty of other side hustles you can pick up right at home to make extra money like: Freelance Writing, Virtual Assistant, Social Media Management." -Financially Fit & Fab
Turn on your automatic savings
"Another no-hassle way to save is by setting up an automatic transfer to your savings account. By automating your transfer, you're making sure that you don't forget or pay your savings last–and as a bonus–automating your savings means you never "see" that money and subsequently makes it sting a little less.
Two new apps that I am loving lately are Digit (which has a cult following). It automatically transfers money from your checking account you won't miss. I also love Qapital, which has rules you can set to "save the change" from your purchases. I saved over $75 my first month of Qapital, which was really astonishing to me. Click here to give it a try." -Financial Best Life
Develop the habit to spend with cash than card
"To spend with cash is also an actionable way to get out of debt. According to the research on peoples spending with credit cards; it was revealed that those who shop with credit card are impelled to spend more on luxury items because they feel they are paying with “play or fun money”. In other words, people who shop with credit card spends more than required.
Evidently, finance advisors hold a strong stand on this. They strongly advise that people who are working on eliminating their debt should cultivate the habit of spending cash, to avoid being tempted to spend on irrelevant items." -MoneyMiniBlog
Leave your wallet in the car when shopping
"This trick is simple but impactful. When doing any kind of shopping, use cash, and only take the amount of money you want to spend in the store with you. Leave all other cash, credit cards, and debit cards in the car.
This is very powerful, especially when grocery shopping. In addition to the amount you plan to spend, you can consider bringing in a small cushion of a few dollars (in case there are hiccups at the register). You will shop (and spend) completely differently when you only have a hundred dollar bill with you versus a hundred dollar bill and your debit and credit cards.
Don’t give yourself a way to spend more money than you want to — and you won’t." -Hope + Cents
Start and maintain an emergency fund
"There is no fixed formula for how much you should have in an emergency fund. Some school of thoughts say 6 months’ worth is sufficient, some say a year’s worth. Everyone’s situation is different and as such, each strategy should differ. To start however, I would suggest understanding your spending habits, and then implementing a 3-6-9 guideline.
3 Months: If you are single without kids, renting, no car, partially dependent on parents for income or any combination of these factors, start off with a target of 3 months’ worth of expenses for a rainy-day fund.
6 Months: Married, kids under 18, own a house or condo, own at least one car, or any of these combined, the base target should be 6 months’ worth of expenses (if married, base it off the income of the highest earner).
9 months: Self-employed, freelancers, anyone with a volatile job or unpredictable paycheck, 9 months’ worth should be the benchmark." -Investment Conversations
How students should avoid the debt trap
"The easiest way to prevent yourself from falling into the debt-trap is by living within or below your means (that is, not overspending). In addition, it is necessary to do research before getting credit cards (or signing any contract to take on loan/ debt) so that you really understand how it works. As a student, you must learn to treat your credit card with respect." -Investment Conversations
Build a budget and stick to it
"There are many free apps available to help you track expenses, but I always prefer using my own spreadsheets. That enables me to have the most control over what I’m doing. I understand that being able to access your spreadsheet on your phone makes tracking significantly easier, which is why I prefer Google Sheets over Excel. You can download the Google Sheets app and pull up your expense tracker wherever you are to input a transaction or monitor your spending. By combining the expense tracker as separate tabs within the same spreadsheet as the bill tracker, you can have all your finances in one easy-to-access location." -The Budget Boy
Create an automatic savings account for travel.
"Here's how this automated system specifically works for you and your travel fund. Once it's set up, it goes like this:
-Your checking account receives income.
-The next day, your checking account automatically transfers money to a separate (different bank) savings account—aka your travel fund.
Know Your Interest Rates
If you have anything that you are making payments on every month, you need to know how much interest you're paying. Make sure you know these numbers, too. Ideally, you'll want to pay debts down that have a higher interest rate first. However, there is another school of thought out there that suggests paying the bill with the lowest balance first. I'd say either way is fine as long as you're making progress and as long as the higher interest rate stuff isn't astronomical.
Action: Look at your statements or call the companies to get your current interest rates on all monthly obligations.
Negotiate Lower Interest Rates
If, by chance, you ARE paying astronomical interest rates on any of your liabilities, call and try to negotiate a lower rate. Oftentimes, if you've demonstrated a history of paying on time, the company will work with you to reduce your rate. The only trick is, you have to ask.
Action: Know your numbers and call the companies to negotiate if you're paying high interest rates.