The traditional American Dream focused around working hard in a decent job and providing a good life for your family. Now, the modernized American Dream is all about leaving that decent job behind as quickly as possible! Retiring early is something many people hope for, but not always the reality for those who desire it. The average age of retirement in the U.S. is 63 – two years earlier than the official age of 65. However, when people talk about early retirement they aren’t shooting for a difference of a few years; they’re aiming for a much more premature departure from the workforce.
If this sounds like you, then read on; these are the ways to save money now, so you can retire early.
1) Track Your Spending
Cutting back on spending is a logical starting place in terms of saving money. It’s easy to say that all your money is spoken for and there’s no room for pinching pennies.
Your perspective will change once you actually start tracking your spending. Use a simple excel spreadsheet or online app to help map out your spending habits. Doing this clearly illustrates monthly expenses and highlights the areas in where you could cut back. Contrary to some people’s beliefs, it’s important to start with small savings. Trying to cut back too fast and too soon could feel like major deprivations! Start small and build up. Bring your lunch from home instead of buying it. Skip daily coffee shop purchases and brew your own at home instead. Take public transportation whenever possible instead of driving or hopping in a cab. These little life hacks will help hone your saving skills.
2) Sign up for a 401K
This may sound obvious, but you’d be surprised how many people put off signing up for their employer’s 401K plan, especially young millennials. Saving money isn’t something most young people do well, and planning for
an early retirement is the last thing on many young professionals’ minds. BUT, if you start saving for retirement as soon as you enter the work force, you may not have to wait until the golden age of 65 to retire. The 401K system is an easy way to save money for early retirement without feeling the hit in your paycheck. The beauty of a 401K is it takes however much money you want from your gross income, not your net. Some employers will even match the amount you decide to part with as well. This adds up quickly, especially if you’re willing to be generous with yourself! Hopefully your employer will follow suit!
3) Invest in Real Estate
A good real estate purchase can make retiring early a reality. You don’t have to be rich to buy an investment property. You just need to know when and where to buy.
There are certain areas and states that offer cheap property with almost-guaranteed high returns (Florida, for example). The main benefit of investing in real estate is generating a passive income. This is money you can depend on without having to really do anything to generate it. If you can rent your property long-term, you’ve got an extra monthly income in addition to your salary. Another way real estate investments work is by ‘flipping’ – buying property and reselling it for a profit. Whatever you choose to do, the key to retiring early is saving this extra money. If you put it away and don’t touch it, you’ll build a nice little nest egg for yourself.
4) The “Starve and Stack” Challenge
If you’re newly married or living with your partner, this is a temporary method you can use to quickly stockpile cash. It doesn’t literally mean starving yourself.
It just means living below your means and pinching major pennies for a few years. If you’re successful in doing so, your reward could be a savings of $50,000 in just two years. The details are quite simple; you and your partner agree to limit your total monthly spending to the amount of one person’s income. The goal is to save as close to 100% of the second person’s income as possible. The average person in their early twenties is making around $32,500. Therefore, if you can successfully save most of this income you’ll have $50,000 in less than two years. This money should be invested in a retirement fund or another venture that will generate income (i.e.: real estate).
5) Weigh Your Wants Vs. Needs
This goes hand in hand with the “starve and stack” method. The focus of ‘want vs. need’ is just a way to manage your spending. When you’ve got two salaries at your disposal, it’s easy to spend more than your life actually requires.
Socializing, dining out, and entertainment drains the extra money after monthly expenses are paid. That leftover is seen as “fun money” and is spent because “you deserve it.” While this may be true, this mentality won’t help you reach early retirement. Instead of spending everything, calculate the things you really need to be happy and apply a thrifty mindset. Instead of dining out, invite your friends over for a healthy, home-cooked meal. Host a happy hour in the backyard instead of hitting the bars. Get outside and enjoy free entertainment like hiking or sports games with your friends. This can fulfill your “needs” in a more budget-friendly way.
6) Save Smarter
This one is a no brainer, but it will help you make some hard and fast rules when it comes to saving. Aiming to save a small portion of your paycheck isn’t going to cut it, either.
While tightening your belt and living below your means (see above) is critical, so are your saving habits. For example, it’s tempting to spend tax returns or work bonuses on spontaneous vacations or some frivolous item you’ve always wanted. After all, it feels like you’re getting “free money” since it isn’t part of your normal income. Resist the temptation to do this! Make it an unbendable rule that any money like this goes straight into your retirement fund. You can live without this money (because you’ve been doing so all along). Bottom Line: A big chunk of money like this will make a bigger difference in your early retirement scheme than regular monthly savings.
7) Stay in Your Starter Home
The cost of buying a home is typically the most money folks spend on any one thing, which is why many people buy what’s known as a “starter home.”
Young couples and newly married folks tend to follow this trend. The plan is to upgrade the house later in life when the couple is more financially stable and can afford something bigger. However, trading in your starter home for something bigger is one of the costliest upgrades. Don’t do it! As long as your starter home is big enough for your family, stay put. Investing in a bigger, better, newer house might seem like the best thing to do, but it will majorly cut into your saving abilities. Moving into a bigger home increases taxes, utility and maintenance fees, insurance, and of course, a new (and more expensive) mortgage.
8) Resist Lifestyle Creep
The term “lifestyle creep” refers to increased spending due to an increased income. It’s natural to improve one’s lifestyle if you get a raise or promotion, and you should – to an extent.
But if you were able to live off your old salary, you shouldn’t need to spend the additional money. Of course, it’s appealing to do so and there’s the additional temptation of “keeping up with the Jones’s”. However, the best thing to do is stash the extra cash in your retirement account and forget about it. It’s okay if it’s not the whole chunk of extra money – half will do. This is also a good time to increase the amount of money being deducted from your paycheck for your 401K. Request that 50% of your raise be directed to your retirement account and you won’t feel the loss as much since it’ll be deducted pre-taxes.
9) Do the Math
Many people underestimate the amount of money they’ll spend during retirement. Remember that you’ll have more free time once you retire. This means more time to travel, indulge in your hobbies, or pursue new
interests – all of which cost money. Also, the younger you are when you retire usually means a higher energy level, therefore you’ll want to and be able to do even more than you would if you retired later. It’s important to figure out exactly how much you need to retire and not run out of money. There are plenty of do-it-yourself online calculators that can give you a target number. The number may be staggering, but don’t be deterred! Break down this large number into a daily goal and make a daily contribution to your retirement savings. This will give you a sense of accomplishment which will further motivate you to keep doing it.
10) Build a Strong Portfolio
A portfolio is basically just your personal collection of investments including stock, bonds, and cash, all of which is managed by a financial professional.
This person’s duty is to suggest investments you can afford, while simultaneously helping you earn money. In short, they will weigh the risk vs. reward aspect of each investment and help you decide how and where to invest. Setting up a portfolio early on could help you plan for an early retirement. Of course, investments aren’t without risks, which prevents some folks from venturing down this path at all. However, it’s usually a savvy way to build your nest egg. Even though you’ve got a pro on your side, it’s a good idea to have a little background knowledge of what you’re getting into. Check out tax exempt bonds and U.S. Treasury bonds – both of which are typically greats ways to make a passive income with little risk.
11) Open a Health Savings Account
Otherwise known as a HSA, this is an account that’s known in inner circles as the most tax-friendly investment. How does it work? A Health Savings Account can be opened when an employer offers high-deductible health care coverage.
Contributions to an HSA are tax deductible and the interest earned on the money isn’t subject to federal tax. This account can be used to pay for qualifying medical expenses (including dental and vision) or insurance deductibles. This is especially important for retirees because the average couple of 65 years old needs several thousand dollars in medical expenses. In short, HSA are a great tax-free way to save money for your health care needs during retirement (which you’ll more than likely have). Keep in mind, if you withdraw the money for non-qualifying medical expenses the money is subject to your income rate tax.