My goal is to retire by the time I’m 39 years old which is just 9 years away. In a world of expensive new cars, giant houses, and Starbucks lattes, this sounds insane to most people. But it’s completely possible to have enough money to retire 10-15 years from today if you get your spending habits under control and increase your savings rate. Here’s how.
1. Calculate how much money you’ll need in retirement
How much are you willing to live on each year in retirement? Multiply this number by 25, and that’s how much money you’ll need to accumulate before calling it quits. This is also known as the 4% safe withdrawal rate. If your money is invested in index funds (I recommend Betterment), you will be able to pull out 4% of your initial portfolio value without outliving your money. This figure also adjusts for inflation. For example, if you want to live on $40k a year, you’ll need at least $1 million before retiring. $1 million in 10 to 15 years?? I promise it’s possible, so stay with me.
2. Make a budget and track your spending
The most important thing to do to get to this amount is to save, but first you’ll need to create a budget and track your spending to better understand where your money is going. Open a spreadsheet and list your monthly expenses such as mortgage, groceries, phone bills, car payments, insurance, household supplies, utilities, subscriptions, etc. Look at your spending from last month to find out where your extra money went (if you use cash, you may have to just track of your spending for a month starting today). Did you buy more stuff at Target than you actually needed? Or did you eat out 20 times last month? Tracking your spending will give you an idea of your current discretionary spending rate. It’s probably more than you think.
3. Determine where you can cut your spending
Looking at your new budget and your previous spending habits will give you a good idea of how you can begin to cut down your spending. Can you switch to a less expensive cell phone provider, cancel your cable bill, or start eating meals at home more? These will make a HUGE difference in the long run.
My biggest discretionary expense was eating out. I sometimes ate out twice a day, and this added up to hundreds each month. Taking a hard look at my spending motivated me to put a stop to that habit. I still eat occasionally, but I’m actually enjoying making meals with my husband now. Instead of $8-15 per meal, we are spending $2 per meal on delicious home cooked food. This change makes a big difference over time. Putting this $200 a month in our savings at 5% interest will give us an extra $31,185 over ten years!! Compounded over time, even small changes really add up. Ideally your savings rate should be above 30%, so you may have quite a bit of fat to trim. The higher your savings rate, the sooner you’ll be financially independent and able to retire early.
4. Increase your savings rate and invest your savings in low cost index funds
When your goal is financial independence and early retirement, your savings rate is key. And I’m talking 30-70%, not 10%. If your income is too low to make these savings rates feasible (like mine is!), pick up a side hustle. You might be able to double your income by pursuing a side hustle that you’re passionate about.
Keep your emergency fund in an account that makes at least 1% (I love Allyand use them for my savings). Savings account rates don’t get much better than that, but to make that million you’ll need something with much a better return. One of the most effective ways build wealth is to invest in low fee index funds. I recommend Betterment because they invest your money into index funds with the best returns, and they automatically reallocate your accounts so that you never have to worry about it.
Where to keep your savings:
- Keep your emergency fund in a high interest savings account. I recommend keeping at least a few thousand dollars there.
- Contribute to your 401k, 403b, or 457b retirement plan. This goes double if your employer gives you a match. That’s free money! Contributing to your pre-tax retirement plan will also help you come tax time because you won’t owe taxes on your contributions until you withdraw them later in life.
- Max out your IRA each year.
- Contribute to your HSA account if you’re eligible. (You must have a high deductible health insurance plan to be eligible).
- If you have any money left over, put it into your Betterment account and remember to stick with index funds!
5. Avoid lifestyle creep
Generally, as people’s incomes go up so does their spending. Upgrading cars, homes, clothes, and vacations to keep up with the Jones won’t get you to early retirement. A good rule of thumb is to not purchase more house or vehicle than you need. Always buy used cars. When you say, “I deserve this because I worked hard,” you’re actually chaining yourself to your job for longer because your money is going towards these luxuries instead of into your savings where they can grow and eventually purchase your freedom.
Remember, financial freedom is the ultimate luxury.