One might get excited about the idea of an early retirement, but to actually make it happen requires careful financial planning and some practical money skills.
In this article, I will list down 17 practical money skills that will set you up on path for early retirement and financial independence.
1. Make a written plan
Making a plan only in mind is not the best way to go about retirement planning.
Whether you believe it or not, you cannot simply tread on an unplanned road and expect to reach the right destination. It would just be akin to playing your luck rather than “planning”.
You must remember that financial success is a choice. Each financial decision that you make every single day will determine closer or farther you are going from your goal.
Invest time in writing down your financial goals so that they can materialize over time.
Remember that you are not simply aiming to jot down some words of motivation through this plan. Instead, the aim is to define each and every aspect of your financial goals and give them a shape with exact written words and figures. This includes defining the timeline and quantum of money management to meet the financial goals.
2. Ask yourself: Did you invest in financial literacy?
We slog hours to earn a living but when it comes to managing that money, we fair rather poorly. And it does happen because we are not financial literate.
Therefore the first and foremost thing one needs to do is to invest enough time and resources to become financially educated.
Becoming financially educated doesn’t mean getting a degree but becoming aware of the first principles of money like compounding, ROI, NPV, inflation.
3. Income over lifestyle
In the contemporary era, most people are running after showing off the illusion of being wealthy, instead of actually being wealthy.
Being wealthy is a long term goal, something which materializes only at the later stage of life. This clearly implies that you will have to forego your present day luxuries if you wish to realise financial success in the long run.
Spending money never made anyone rich. This is as simple as anything can ever get. This is also where the importance of written financial goals manifests itself.
Choose your expenses wisely so that you are able to meet your lifestyle needs but limit your wants which are discretionary expenses in nature.
4. Start right away
Compounding is that Eight wonder of the wonder that stands at the base of the first step that you can possibly take towards financial success. Added to the principal and rate of interest, the element of time can significantly impact how your investment grows.
The earlier you start with your savings, the earlier you are going to be able to meet financial success and plan your early retirement.
Don’t wait out to become a financial genius or seek the advice of a financial guru. Start as quickly as you can. Starting early will also allow you to ample time to grow your savings rate.
5. Wealth building on auto-pilot mode
You cannot possibly expect yourself to be able to manage each and every thing on a daily basis, can you? You can only divert some part of your attention and resources towards your retirement goals but what about the present?
This is where your auto pilot mode should be enabled.
You need to take certain financial decisions which will not only accrue a number of assets in your hand but also make sure that they grow over a period of time; so that your life can sail on smoothly.
The idea here is to allocate monthly income towards paying off money which builds equity assets for you in the long run.
Saving plans and investment clubs ensure that you are forced to invest and save your funds, whether you like it or not. So even if out of compulsion, you still manage to save your funds and build wealth in the process. Remember 401(k), IRAs?
6. Make your money hard to reach
Quite literally, just put your money somewhere so that you have to think twice before you reach out to get it back.
Imagine how different it’d be if you had cash lying in your wallet and if the same cash was stacked and shut closed behind the door of a locker. Which one would be the easiest to reach out to?
Similarly, once your money is invested in some retirement plan or investment scheme, you will have to go through some policies and possibly some penalties as well, before you can lay your hands on that money.
Therefore, define your financial plans to make it hard for you to reach your own money, so that you can resist the temptation to spend it.
7. Don’t touch your social security
It is called social security for a reason. Stated simply, it is always easy to wash your hands in a running stream but not as easy when the water is stagnant.
The same applies to your earnings as well. No matter how large or important your need is, touching your social security should always be a last resort option.
Social security is meant to be used after your retirement, meaning that you may at the least, meet your daily expenses with the amount of your social security.
Hence, the longer you wait out to claim your social security, the better for your retirement.
Plan your expenses so that you may not need to meet your daily expenses out of your social security at present.
8. Focus on savings
While this may sound a very basic and obvious money skill, it is very hard to implement in reality.
The safest way to achieve this goal is to list down your average expenses for the month. You will be surprised at the quantum of your expenses when you undertake this exercise.
Having written them on paper, you will suddenly find the vision to analyse which expenses are wasteful and can be avoided.
9. Develop sources of passive income
It is always a good idea to develop multiple sources of income so that in case one dries up, others are still running and taking care of your financial upkeep.
Do you like to write? Then get yourself freelancing content projects or if you have a spare space, put it on AirBnB.
The idea is to create as many possible avenues to generate income. And once this extra income is generated, care must be taken to save it and invest it rather than spend it.
10. Plan your risks
As the saying goes, the higher the risk the higher are the returns. This however, does not mean that you blatantly enter the rat race and seek higher risk investments without giving them a second thought.
Based on your financial health, the risk that any person can afford to take is different. Hence, you need to evaluate your financial health and your ability to bear a loss, more importantly than the idea of earning a profit. This will perhaps give you a clear image of the risk that you can afford to take in the long run.
Do remember when you are planning to retire early, capital preservation should be the top goal. Do access your risk profile first before investing in any financial instrument.
For example, cryptocurrency might be a suitable instrument to invest for those who have high risk appetite; whereas for those who are extremely risk averse, even equity seem to be a risky proposition.
11. Plan your taxes
While you juggle between your earnings, expenses and savings, there is one factor which is completely out of your hand but also stands as a compulsion, which is taxes.
As a resident of the country, you must be well aware about the taxation laws and how your earnings are taxed in one way or the other. This is where you need to use the scope of tax planning and try to save as many funds as you can.
Tax planning will also become relevant after retirement, when you will have to be very careful about your investments, which are also liable to be taxed.
12. Stay healthy
You might be wondering how health can take a centre stage when we are discussing about money skills. However, one needs to be healthy to enjoy the benefits of early retirement.
Besides, being healthy also ensures that out of pocket expenses (not covered by health insurance) on health care are at the minimum. Needless to say that you must have a decent health insurance.
13. Always prefer used cars
It’s a well known fact that cars usually lose around 20-30% of the value (depending on the make and the model) within first couple of years due to depreciation. It is a wise decision to always hunt for a used car since it has already taken the depreciation hit.
Besides, car is a liability that requires money for its annual maintenance and loses value with time.
If you are planning to retire early, you would want to invest in building assets rather than buying a liability.
14. Plan your mortgage
While the jury is still out on whether to rent a house or buy one, if at all you decide to buy one, make sure that you plan your mortgages carefully.
Taking a 30 year mortgage on your house will tie you up for the entire life. And with so many vagaries in professional life, chances are that you would find it difficult to maintain the financial discipline that is required for early retirement.
If you are planning to buy a house, try to repay the entire mortgage in 10-15 years. Start by taking a 30 years mortgage and try to increase your monthly payments every year.
For example, if you are paying $2000 per month this year, try to do $2200 next year. And since this payment will be on auto-pilot, you will adjust to the new normal with time.
15. Vacation in off season
If you are one of those who like to travel, then this one is for you. You could save quite a fortune by vacationing in the off season.
Not only air tickets will be cheaper but also the hotels. And if you are looking for a short sojourn, then try to do it during weekdays rather than weekends.
These savings, over a period of time, would accumulate to become a sizeable portion of your entire savings bank.
16. Apply the 5% rule
This is not a proverbial rule but is practical and very effective. Stated simply, this means cutting down your expenses (by 5%) from top 3 expense categories every year.
To implement this skill, first of all list down your 3 top expense categories. Then break down expenses within those categories. This will show areas of improvement where money can be saved. Now to actually put savings into action, try to develop good habits that automatically do that for you.
For example, if your monthly expense on dining out is substantial and makes to the list, then try to find out reasons not to go outside; probably pack your lunch to office, or make a strict rule to eat only 2 times (say) a month.
A goal is pretty easy to achieve if it can be broken down into habits. Therefore cultivate good savings habits.
17. Track the progress
Last but not the least, track the progress:
Progress of savings, progress of investments and progress of how close you have reached to your goal.
Tracking the progress provides positive feedback to the tough financial discipline life you have been living. And that in turns provides more motivation to stay the course.
It also helps to benchmark the situation and take corrective measures if required.
The bottom line
Planning for early retirement is not that hard. All it requires is financial discipline (over long period of time); discipline to save as much as possible and invest wisely.
The path to (successful) early retirement lies not in the maths behind it (maths is easy) but cultivating good habits and the right mindset. So start now!
Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?
In this article, we will explore ways to set financial goals and actually meet them with ease.
Table of Contents
4 Steps to Setting Financial Goals
Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.
1. Be Clear About the Objectives
Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.
It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.
Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.
2. Keep Goals Realistic
It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.
It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.
3. Account for Inflation
Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.
Therefore, account for inflation whenever you are putting a monetary value to a financial objective that is far into the future.
For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.
4. Short Term Vs Long Term
As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.
By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.
How to Achieve Your Financial Goals
Whenever we talk about chasing any financial goal, it is usually a two-step process:
- Ensuring healthy savings
- Making smart investments
You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.
Ensuring Healthy Savings
Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.
This is the focal point from where you start your journey of achieving financial goals.
1. Track Expenses
The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.
Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.
If you’re not sure where to start when tracking expenses, this article may be able to help.
2. Pay Yourself First
Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!
Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.
The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.
Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.
3. Make a Plan and Vow to Stick With It
Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized
Nowadays, several money management apps can help you do this automatically.
At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.
Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.
You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.
4. Make Savings a Habit and Not a Goal
In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.
Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:
- Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
- If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
- If you go shopping, always look out for coupons and see where can you get the best deal.
The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.
5. Talk About It
Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.
Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.
6. Maintain a Journal
For some people, writing helps a great deal in making sure that they achieve what they plan.
If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.
When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.
Making Smart Investments
Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.
1. Consult a Financial Advisor
Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.
Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.
2. Choose Your Investment Instrument Wisely
Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.
Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference.
As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.
3. Compounding Is the Eighth Wonder
Einstein once remarked about compounding:
“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”
Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.
Start saving early so that time is on your side to help you bear the fruits of compounding.
4. Measure, Measure, Measure
All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.
If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.
Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!
The Bottom Line
Managing your extra money to achieve your short and long-term financial goals
and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.