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How to Retire Early and Never Have to Work Again

Your Life Laid Out

You graduate in your twenties. You work 40 years until you retire in your 60’s. Hopefully you’ve been saving enough to make retiring a possibility. Now that you’re retired, is your health and energy level high enough to enjoy your retirement?

Money is a chain that keeps us slaves to our jobs and career. To those of us who want to retire early, money is a tool to free up our time and live a life we choose.

 

The Discovery of An Alternative

When I got my first job out of college, it was eye-opening because the thought of working for another 40 years made me shiver. I wanted better control of my future.

I started looking into alternatives. How could I start a business that made me rich, side hustles, blogging, new career paths that made more money, etc… I researched everything.

Eventually, I stumbled upon articles recommending finance books to read.

One of the classic personal finance books is called Rich Dad Poor Dad and I read that first.

Then I read it again.

Books and blogs slowly started to shape my thoughts about work and money, saving and investing.

After consuming so much content for a year, I looked back and saw my spending had been slashed and my investment contributions were much higher.

The idea of retiring early was fueling this change in my habit.

 

The 4% Withdrawal Rate

Retiring early is the concept of having enough assets that you do not need to work because the growth from your investments covers your expenses. The rule of thumb is that you can withdraw 4% of your investments each year because over a long period of time the stock market has returned higher than 4% + inflation.

Basically, we have to understand how much money we’ll spend per year and than multiply that number by 25.

So, if you want to spend $40K per year in retirement, you need $1M. Want to spend $80K? You’ll need $2M in assets.

If you can spend less, you need less of a nest egg.

 

Retiring Early = Freedom

The idea of retiring early is a concept in freedom. Currently, I am a slave to my paycheck. I trade my time in order to gain money.

When I talk about retiring early, I don’t necessarily want to retire early and do nothing, but rather have the option to work on projects that provide more life satisfaction by not having to work 9-5.

Accumulating enough assets will allow me to not work again if I choose. Instead, my money is working for me by increasing in worth over time.

This was an overview of the concept, getting to that point is the hard part. However, knowing there is an alternative to working 40 years is motivating.

You need to earn more, save more, and invest the difference.

 

Charlie Munger: Why the First $100K is the Toughest

The Wise Charlie Munger:

 

At a Berkshire Hathaway shareholder meeting in the 90’s, a young guy asked Charlie Munger his advice on creating wealth. He said his net worth was not increasing as fast as he’d like.

Charlie Munger responded, “The first 100,000 is tough, but you gotta do it.”

Then he goes on to say, “I don’t care what you have to do—if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.”

 

Chasing Your First $100K:

 

I’m also chasing my first $100K and can definitely say it’s tough. I say it’s tough, but in reality it’s probably tougher because of my lack of patience rather than the actual difficulty. Especially after developing good habits around saving, earning and investing.

So why does $100K feel so far away? Why does it feel like it’ll take forever?

Because when you don’t have much money, the majority of increases in your net worth come from your savings rate, not investment returns, so your money isn’t working for you as much.

 

Here’s an example to help explain the numbers:

 

Let’s say your net worth is $10,000, and it’s all invested in the stock market. If you have a healthy return of 10% that year,  you’ve gained $1,000 increase in net worth.

Ultimately, $1,000 gain is not much.

However, if you get a roommate and your rent lowers by $300 a month, you’ll save $3,600 a year.

$3,600 savings is a 36% increase in your net worth.

And if you can get a $5K raise, that’s a 50% increase in net worth.

 

Savings Rate > Investment Returns (In the Beginning):

 

In the beginning, when you’re trying to reach $100K quickly, you need to do whatever you can to spend less and earn more, because your savings rate is much more important than investment returns.

While a lot of people focus on their investment returns, this effort usually doesn’t pay off until you’ve accumulated a good amount of wealth.

In the meantime, saving a few hundred a month on rent or buying a used car with cash, can mean huge relative increases to your net worth that will beat the market every time.

While reaching $100K seems difficult, the journey will teach you good saving habits that will propel you through the next tough challenge – taking $100K to $1M.

 

7 Financial Goals to Achieve Before Turning 27

1. You have no credit card debt.

There’s no getting around this one. You should never hold a credit card balance. EVER! If you have a balance on your credit card, paying it off should be your first and only goal in the next few months.

If that means eating rice, beans and ramen packets for the next month then so be it. With credit cards charging more than 20% interest, each month you hold a balance you will go further into debt. This is truly an emergency and should be treated as such.

If you have no credit card debt and pay off your balance each month, you’re doing well, keep it up. This is a prerequisite for becoming financially stable.

 

2. You have a plan of action for paying off student loans.

In many cases, paying off your student loans by 27 years old is not realistic. That said, you should be paying off the minimum balance each month and have no plans to change that. Set it and forget it. Most payoff plans are 10 years long, so at the end of ten years, you should be free of your student loans.

 

3. You have an emergency fund of at least 3 months expenses.

At this point you should be starting to save (and keep saved) a little bit of cash for emergencies. 3 months is good, 6 months is great.

I personally love having six months of expenses in a bank account easily accessible. If my car breaks down or I get fired from my job, I have a level of security and confidence knowing I won’t be living on the street with no food to eat. In the case of losing your job, having cash on hand allows you to take your time in choosing a new job, rather than taking the first offer you get because you’ve run out of funds. Having cash on hand allows you to live from a position of power (more on this in future articles).

 

4. You have a monthly budget.

You’ve decided how you want to spend your money and you’re intentional about spending money on things that you care about and not spending money on things that don’t bring you happiness.

It seems simple, but this is harder done than said. I personally try to buy less things and instead money on activities that I enjoy. For example, this month I bought an expensive ski pass for $520, but I know I’ll get a lot of enjoyment from that purchase in the upcoming season.

 

5. You understand that having fun doesn’t have to mean spending a bunch of money.

Maybe you like to go hiking, or running, or play board games with friends. Many fun, social things don’t have to cost much money.

Of course, some social things definitely do cost money, but there may be a better way to have fun and save a little money at the same time. For example, instead of going out for drinks the whole night at bars, start at a friend’s house and make your own drinks to save some cash.

 

6. You’re tracking your net worth.

Net Worth equals Assets minus Liabilities. You might currently have a negative net worth, but that’s okay. The first step is to track it. Improvement will come. The things you track are the things you improve. For me, this has had one of the biggest impact on the improvement of my finances. I use Personal Capital and a spreadsheet for backup.

 

7. You’re thinking about how you want to retire.

You don’t have to have all the details figured out, but start thinking about it. Maybe you want to retire early at 40 or semi-retire at 45 and work 15 hours a week. Maybe at 55 you want to fully retire and sit on a beach. The key is to start thinking about how you envision your life. Long term thinking will help you make better decisions in the short term.

 

3 Huge Money Mistakes to Avoid

When I got my first job out of college, making more money in one year than I had my whole life (~$55K), I felt like I had money to burn.

This is called lifestyle inflation, or lifestyle creep. When you make more money, you naturally spend more because you feel like you can (or should). In this article, I discuss three money mistakes I made after landing my first job and what I should’ve done instead.

Accompanying video at the bottom.

 

Credit Card Debt:

Before we dive into the three huge money mistakes, I’d like to take a second to call out one of the most foundational rules in personal finance: no credit card debt!

Credit card debt is a killer. If you have credit card debt, you need to get rid of it as quickly as possible and either pay off your credit card debt each month or chop up those credit cards.

I personally didn’t make this money mistake, but if I had, you bet this would’ve been #1 for worst money mistakes to make.

 

Money Mistake #1: Leasing a New Car

What I did:

Growing up, my family leased cars every three years. That was normal to me. So, I leased an entry level car throughout college.

After a month or two of working in my new job, my leased car from college had to be returned. Since I was making more money, I ended up leasing a $25K Subaru Crosstrek.

Truth is: I really loved that car. But, it was too expensive.

Now, I negotiated hard and got a decent deal, but the payment was still $230 a month. The insurance was also pricey being in Los Angeles – that was another $150 (went up to $160 later). Gas was usually around $100 per month.

On a $55K salary, after taxes, and all other expenses, paying nearly $500 per month for a car is just too much.

What I should’ve done:

I had the Crosstrek for about six months before I started really becoming serious about financial freedom. I was reading Scott Trench’s book, Set For Life, when it became clear that I needed to get out of my lease and buy an older, used car with cash.

And that’s what I did.

I look back on that moment as the true starting point in my financial independence journey. I sacrificed something I really enjoyed for a better future. #corny…

But yeah, I was able to sell the Crosstrek to CarMax for more than I owed on it because it was in such high demand. I banked $400 or so, and uber-ed back to my apartment.

I went carless for two months before finding a 2006 Toyota Corolla for $5,500 that had only 63,000 miles on it.

It wasn’t sexy, but it was cheap, reliable and had low miles.

That’s my advice: buy an older (5-10 years) car with low miles and a history of being very reliable. Buy with cash and be done with a car payment.

Not only did I get rid of a car payment, my insurance dropped dramatically because I didn’t need as much coverage. I now pay around $35 a month.

 

Money Mistake #2: Getting my Own Apartment

What I did:

Well, I went out a got a one-bedroom apartment. In the first couple months at the new job, I was living with a friend but the commute sucked and I thought I deserved my own place now that I had a career (lol).

Rent was $1525 (then raised to $1570), and after utilities and wifi, I was probably spending around $1700 for the place. That was just way too much.

On $55K salary a year, after taxes, insurance, etc., I was taking home around $3,200 a month. $1700 is more than half my take home pay!

Between just the apartment and car, I had $1K to spend on food and fun, which went quick in Los Angeles.

What I should’ve done:

The one mistake I didn’t make, was my apartment was close to work. I did this because I hate a long commute. I was only two miles from work and rode my bike most of the time.

Instead of getting my own place, I should’ve rented a room from a friend, co-worker or on Craigslist in a similar location. I would’ve paid around $1,100 and saved $600 a month ($7,200 a year). I could’ve kept riding my bike to work and enjoyed a minimal commute while also saving more money.

 

Money Mistake #3: Eating Out Too Much

What I did:

Getting my first job I thought, “I’m adulting, I can afford some fancy restaurants; and I can go out for work lunches.”

That was dumb.

I wasted so much money on fancy dinners in the beginning. In LA, $150 for a dinner is not even top-tier, especially if you’re drinking. It’s a waste.

And another waste, where you don’t even get an experience, is eating cheap work lunches for $10-15 each day. Nothing to remember, but when you look back at your expenses, work lunches might be a couple hundred alone.

What I should’ve done:

Eventually, I came to my senses and started meal prepping for the week. I brought my lunch to work almost every day and ate dinner at home much more.

I still went out with friends and enjoyed a nice dinner here and there, but lowered the frequency. Eating dinners out with friends also became more special and felt more like a treat than before.