Imagine a life free from the daily grind, where you are in control of your time, and financial worries are a thing of the past. Sounds appealing, doesn’t it? Early retirement can offer this kind of freedom, and achieving it may not be as difficult as you think. It all starts with developing effective financial habits.
The prospect of early retirement is a compelling one. The freedom to live life on your terms, the ability to pursue your passions, and the opportunity to break away from the traditional 9-5 rat race. It is a dream that many keep, but few know how to make it a reality. To retire early, you need to cultivate good, consistent financial habits. I’ve curated six powerful habits that can put you on the path to early retirement based on research and studies. These habits can put you on a fast track to financial freedom, allowing you to break free from the traditional 9-5 sooner than you think. In the following sections, we will explore six important practices to focus on for early retirement.
What six habits should you do now to retire early?
- Living Below Your Means
- Automatic Savings and Investments
- Constantly Increasing Your Income
- Paying Off High Interest Debt First
- Investing in Assets (Not Liabilities)
- Continuing Financial Education and Planning
1. Live Below Your Means
The foundation of early retirement is living below your means. In fact, it is a conscious decision to spend less than you earn. But this does not mean that you have to live a straight life. Instead, it’s about intentional spending — making sure your money goes to what really matters.
First, it’s important to identify and differentiate between your needs and wants. Focus on satisfying your needs and be reasonable about what you want. For example, consider preparing meals at home more often instead of splurging on high-end restaurants. Also, instead of buying the latest smartphone every year, use your current one for a few years.
Second, consider adopting minimalism. It’s a lifestyle choice that encourages the reduction of unnecessary possessions and focuses more on experiences than material goods. This not only helps save money but also leads to a less stressful and more fulfilling life. A frugal lifestyle allows you to save money quickly and reach your financial goals faster. Overspending and high debt will keep you trapped in the rat race and working for decades.
2. Automatic Savings and Investments
Automating your savings and investments is the key to creating wealth without thinking about it. This includes automatic transfers from your checking account to your savings and investment accounts.
Make sure you have a healthy emergency fund before you start investing. This fund is a safety net that covers 3-6 months of living expenses in unforeseen circumstances.
After getting an emergency fund, start investing regularly. The beauty of automatic investing is that it uses the principle of dollar cost averaging, which reduces the risk of market volatility. This system also removes human error in trying to time the market for casual investors who have no interest in learning basic investing or technical trading. The key is to pay yourself first through your investment retirement fund before paying any bills. You have to work for yourself, not just your debt collectors.
3. Constantly Increasing Your Income
While controlling expenses and investing is important, improving your income can speed up your journey to early retirement.
The first and most obvious way to increase your income is to ask for a raise at your current job or move to a higher paying job. But, don’t rely on your 9-5 job for income. Consider creating multiple streams of income. This could be a part-time job, a freelance gig, or a small business.
Invest in yourself to acquire new skills or improve existing ones. This can lead to higher paying job opportunities. Alternatively, these skills can be used to start a side hustle or a small business. The fastest way to retire early is to build a successful business or acquire enough cash-flowing assets to pay your monthly bills. This is the fast lane.
4. Prioritize Paying Off High Interest Debt
High interest debt can be a huge drain on your financial resources. This will hinder your savings rate and limit the amount of money you can invest.
The first step to getting out of debt is to stop accumulating more. This means limiting your credit card spending and avoiding high interest loans. Then, focus on paying off your debts. Methods such as the ‘Debt Snowball’ or the ‘Debt Avalanche’ can be instrumental in managing and eliminating debt.
Paying off high-interest debt should be a priority because the longer it takes, the more you’ll pay in interest. Once you’re out of debt, you’ll have more money to save and invest, speeding up your journey to early retirement. It is very difficult to retire early with large car payments, credit card debts, or large debts, because it takes a lot of cash flow to pay the bills. Retiring early is easier if you’re out of debt and only need to cover essential utilities, insurance, and food.
5. Investment in Assets (Not Liabilities)
Robert Kiyosaki’s book “Rich Dad, Poor Dad” defines an asset as something that puts money in your pocket and a liability as something that takes money away. To reach early retirement, your focus should be on accumulating assets.
Assets include rental properties, dividend-paying stocks, bonds, businesses, and other income-generating investments. Investing in these types of assets creates multiple streams of income and speeds up your wealth creation process.
When distinguishing between an asset and a liability, always ask, “Does this item generate income?” If the answer is yes, it’s probably an asset. If not, it is likely a liability.
6. Continuing Financial Education and Planning
Continuing financial education is essential on your journey to early retirement.
Stay informed about the latest personal finance trends, investment strategies, and market conditions. Reading books, listening to podcasts, and attending seminars or courses can all be beneficial. Knowledge is power, especially when it comes to finances.
Financial planning is an ongoing process. As life events occur, changes may become necessary. For example, changes in marital status, children, or income levels may require a review and adjustment of your financial plans. Regularly checking in on your financial plan will ensure you stay on track toward your early retirement goal.
The math of early retirement is having your after-tax income that isn’t from a job pay all of your monthly bills. If the combination of your growth in passive income exceeds your monthly bills, then you have achieved virtual financial freedom from employment. Early retirement combines the offense of increasing income outside of work and the defense of reducing the cost of living.
Key Takeaways
- Embrace a lifestyle that focuses on necessary expenses while maintaining a healthy gap between income and expenditure.
- set automatic transfer in your savings and investment accounts to ensure steady accumulation of wealth.
- Increase your income regularly by negotiation, promotion, side businessor increase your skills.
- Concentrate on paying high interest loans to reduce interest costs and free up additional capital for investments.
- Direct your investments towards income-generating assets rather than liabilities to increase your wealth.
- Stay abreast of financial trends, strategiesand continuously evaluate your financial plan to adapt to life changes.
Conclusion
Navigating the path to early retirement involves a strategic combination of frugality, automatic wealth growth, income enhancement, strategic debt repayment, smart investing, and continued financial literacy. These principles can turn your retirement dreams into a tangible reality if diligently practiced. These habits require discipline and commitment, but the payoff is the freedom to live life on your terms, without financial constraints.
By diligently following these six habits, early retirement is not just a distant dream; this is a realistic goal. The road may be long and sometimes difficult, but the reward in the end is well worth the effort. Remember, the journey to early retirement is a marathon, not a sprint. It requires consistent steps in the right direction, and every step is important. So get started today, and watch your retirement dreams come to life.