This is a guest post from Steven McMeechan from Capstone Financial Planning in Australia.
Retirement is the dream of almost everyone in the developed world. No one wants to keep working longer than necessary. Even people who love their jobs or work for themselves want the financial freedom to sustain themselves without a consistent paycheck – to decide when, where, and how they’re going to work. Here are some tips to achieve that level of freedom, and to help you retire earlier if you so choose
Right-size your budget immediately. If early retirement is your primary aim, then you need to treat it like your first priority. Cut back or eliminate meals out, drinks with friends, concerts and entertainment. Every dollar that you spend could be saved towards your retirement, so treat it as such. You need to take advantage of every cost-cutting measure that you can. This may mean finding a cheaper apartment, taking a roommate, or selling a car in favor of public transportation.
Pay off debt as quickly as possible. It’s infinitely more difficult to retire when you still have the obligation of monthly debt payments. Whether it’s student loans, home mortgages, or car loans, commit yourself to quickly paying down your debts. Eliminate all discretionary spending until you’ve achieved this goal – every extra dollar you have each month should go towards paying off loans. Once you make the minimum monthly payment on a loan each month, every additional dollar that you pay counts straight against the balance of your loan, so debts can actually be paid off surprisingly quickly if you’re diligent. Make sure you start first with loans that charge you the highest interest, such as any credit card debt; then work your way down to lower-interest debts.
Once debt-free, don’t change your modest spending habits. After you’ve paid off the last of any debts, it’s important to maintain your low spending. Modest spending should become a lifelong habit, rather than a tool for paying down debt. Instead of making monthly debt payments, direct those funds into a separate savings account. Once you have built a small balance, start investing, even if it’s just accounts that yield low monthly interest. If you want to retire you need to put your money to work for you. This will be the key to supporting yourself through retirement. Developing passive income streams, coupled with a low monthly budget are what allow people to retire at all, let alone early.
Don’t add to your debts. Whether you’re starting this journey debt-free or paid off sizeable loans as part of Step #2, avoid the mistake of taking on new debts. Avoid big purchases that require financing. Make sure you pay off all your credit cards in full at the end of each month. If early retirement is you #1 goal, you shouldn’t worry about having a nice new car or new flat-screen TV. Financing purchases or taking on debt will only put more distance between you and your goal of retiring. There is, however, an exception to this tip which is worth noting: Financing to invest. If you have the opportunity to make an investment which (1) you can control and (2) has a very high probability of earning you a strong return, then this may be worth considering. However, make sure that the return you should make on your investment is far higher than the interest you’ll pay for financing. Make sure also that, even after your investment, you’ll have sufficient cash flow or reserves to make regular debt payments.
Saving for retirement isn’t rocket science. Quite often, we make finance more complex than it is. Make no mistake, it’s a daunting challenge; and it’s a scary proposition to walk away from full-time employment – especially ahead of schedule. Nevertheless, it’s a very achievable goal, but one that requires diligence, consistency, persistence, and sacrifice. There are new stories coming out every month about everyday people who put their heads down and committed themselves early to goal of retiring. After years of hard work and sacrifice, many were able to retire by 55, 45, or even 40 years of age.
If retiring early is your goal, too, then go after it. Commit the tips above to memory. Determine what things you can sacrifice to maximize your savings. Compile lists of all your debts and assets. Use the tips above to create your own roadmap. Identify what spending you’ll eliminate, what debts you’ll pay down first; but also start thinking about investments. Determine your risk tolerance; think about what in-depth knowledge you have that might give you an advantage. Work hard, stay committed, and you can do it.
Steven McMeechan is a strategic marketing and communications specialist with over twenty years’ experience in senior marketing management roles across a range of industries including Information Technology and Financial Services. He works for Capstone Financial Planning and lives in Melbourne Australia.