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Retiring early is not easy. It requires self descipline, time, to earn, save and invest as much as possible can.
If you are not already rich, most people follow: go to school, get a high-paying job, get married, have kids, retire at age 65, then die.
However, today people especially Millennials want to break society expectations and retire early so they can enjoy their life to the fullest.
The truth of the matter, early retirement comes in various shapes and sizes. What you want yours to be like will depend on what you need to do to get there.
The following are the steps you can take in order to retire early:
How to retire early?
Why Retire Early?
Many people retire early for various reasons like sickness, to enjoy life, travel the world or pursue their passions.
In a nutshell, make up your mind about retiring early, and start planning towards it.
How to retire early?
1. Understand Money
The truth of the matter, no one will retire early or late if you don’t understand how money works.
You need to know how money works and how to multiply it.
As a matter of fact, even building wealth, you must understand how money works for you.
No one becomes wealthy without understanding first how money works.
Then, you will automatically develop a money mindset.
Also, will pursue more ways to earn money or invest the money you already have smartly.
Good to know:You must constantly learn about finance in order to earn and invest your money. Thus, become financially free.
In the long run, It will definitely help you a lot.
2. Estimate Your Monthly Spending
First thing first, estimate your monthly spending if your planning to retire early.
Then, decide on your retirement figure.
You can do this by adding all your expenses on a monthly basis.
Don’t forget to include expenses like clothing, food, insurance payments, utilities, house rent or mortgage,health insurance and transportation.
Good to know:Make your monthly expenses as accurate as possible because you will be depending on this monthly figure to calculate your retirement figure. So, try to make it as accurate as possible.
Example: Your monthly expenses can be $5,000
3. Calculate Your Retirement Figure
When you are calculating your retirement remember to have 25 to 30 times your expected annual expenses or invested,plus a year’s worth of expenses in cash.
Once you figure out your monthly expense amount, you have to calculate your retirement figure using two methods:
- i) Multiply your Annual Expense By 25
- ii) 4% Rule
For example :
Suppose, your monthly expense is $5,000 which brings your yearly expense to: $5,000 * 12 = $60,000
- Now, multiply your yearly expenses by 25
$60,000* 25 = $1, 500,000 million
- ii) The second method is the 4% Rule in which you divide your annual expense by 4%.
$1,500,000 / 4% = $375,000
Both methods return the same estimate for your retirement figure. You can try any one of these methods to calculate your retirement figure.
4.Write Down Your Goals
Writing down your goals will help you to have a clear map on what you need to do to achieve.
Because, you can’t achieve financial freedom if you don’t have clear financial goals in your mind.
First, decide at:
- What age you want to retire?
- Why you want to retire early?
- What are you going to do after you retire?
Example:
Your goals can be the following :
- To travel the world
- Follow your passion
- Buy your dream car
- Buy a beautiful house
Second, once you have decided on your goals. Then, you can calculate how much money is required to fulfill your goals.
It becomes easy to follow through!
5. Increase Your Savings Rate
People are known to buy some unnecessary things that we don’t need, the money used (buy unnecessary stuff) can be saved or buy important things for you or family to avoid waste of money.
Examples of unnecessary stuff can be buying coffe drinks, going out to dine either lunch or dinner, subscriptions you dont need like some magazine subscription, club membership, etc.
You have to cut down wastage on your expenses especially if you barely make ends meet.
I know this sounds hard but its necessary to help achieve overall goal of early retirement.
Good to know: When you cut down your expenses (spending). You will be able to save more every month. Thus help you retire early.
6. Increase Your Income
To retire early, you must increase your income.
This is possible if you start a side hustle to earn extra money.
When you have an extra income every month from your side hustle, then you can definitely retire early since you’re not only depending on cutting your spending and saving money.
For example, an extra $1,000 per month on your income can make a positive huge difference in your retirement package. It will push to achieve your goals earlier than you expect.
Example of side hustles are:
- Blogging
- Email Marketing
- Drop Shipping
- Affiliate Marketing
- Copywriting etc
Read more:
How to Make Money Blogging :Free guide 2021
Good to know :The extra cash you get from your side hustles, you can invest this money and help in your early retirement plan.
Example :If your earning $800 every month, that would be equal to
$800*12=$9,600.
Then invest the cash to get interest and help you in your overall goal (early retirement).
7. Pay Off Debt
Pay off outstanding debt you have before you retire.
Good to know :Financial freedom means living a debt-free life.
Whether it’s a credit card debt or consumer debt, you should definitely pay it off as soon as possible.
Because credit cards can have an interest of upto 30%.(Good to decision, to clear it off immediately).
How to pay off your debt?
There are 2 methods you can follow to pay off your debt:
i) Snowball Method
In the Snowball method, you start to pay off the smallest debt first. Then, move on to clearing (paying) the bigger debt.
ii)Avalanche Method
In the Avalanche method, you pay off the biggest debt with a higher interest payment. Then followed with clearing off lastly, the debt with least interest rate.
8. Put Your Money to Work
Saving your money in a bank account will not help you achieve early retirement.
Rather, you must put your money work for you.
How to do it?
Create a investment plan for your money because it will give you a clear and concise plan on where to invest your money.As a result, you will actually achieve your goal.
For example :You can invest in multiple asset like bonds, stocks, real estate, crypto (too risky), etc
Good to know :How much to invest in stocks?
Minus your current age out of 100.
For example : if you are 30 years old
- 100 – 30 = 70%
Therefore, you should invest 70% of your money in equities.
This equities includes the following :
- Stocks,
- ETFs
- Index funds, etc.
The remaining 30% of investment funds can be invested in real estate, bonds etc.
However, if you’re young and want better returns on your money, then invest mostly in equities.
Good to know :Remember to diversify your investment.
The most preferred asset classes are stocks and bonds.
How to Live Off Your Retirement Fund?
It’s recommended to use 4% rule once you achieve your retirement goal.
What does 4% Rule means?
The 4% Rules means that you can safely spend 4% of your retirement fund every year without worrying about the fund running out.
According to William Began who wrote a paper on 4% Rule, suggested that a 30 year retirement period, using 4% Rule is sustainable.
Using the 4% RULE, you can achieve constant inflation-adjusted spending.
How to Track Your Finance?
You must keep trace of your finances. It will help you to know how your spending your money and whether your on the right track.
You can use the following to track your finances
- Excel sheet
- Budgeting software ware app
- Mobile application
Bottomline
Early retirement is good. However, to properly enjoy it, ensure your money is working for you, clear of debts, and keep track of all your finances.
