Even before starting My Money Design over two years ago, I was on what seems to be a never ending quest to find the secret to achieving true financial freedom or great key to early retirement planning. How is it that people my age, perhaps younger or older, are able to quit their jobs if they want and still maintain thriving lifestyles?
I’d love to tell you that after all this time that I have all the answers. That there was some kind of easy solution or magic bullet. However, I’m still a long ways out and seem to have a lot further to go. The path to get there has been more of a puzzle than I originally thought. Each piece containing it’s own unique challenges and scarifies.
Here are my observations on the various paths that I’ve found thus far:
Option 1 – Live Ridiculously Cheap:
One of the first things you notice when you hit the personal finance blog scene is that there is a huge number of people that devote themselves to this illusion that early retirement can be achieved by living way, way below their means. Think like $1,000 per month, give or take. These kinds of people draw inspiration from a lot of the mainstream extremists like the guy from Early Retirement Extreme or Mr Money Mustache.
On paper this may seem to make sense. If you require less money to live on, that means you require less money to save for your early retirement. Thus squirreling your money away for 5 to 10 years in theory could achieve a fortune big enough to produce the $1,000 or whatever you need to “retire”.
Don’t get me wrong. I believe that being frugal and mindful of your spending is necessary on all levels of income. But I also know myself and my family enough to know that this type of lifestyle would never work. Therefore I have little support for this type of strategy.
We’re not prepared to live in a smaller house. Not drive cars. Live in a foreign country. Hell – we spend about $1,000 per month on just groceries and household products alone. I’m not sure how people make this work as their cap to their total overall budget for housing, taxes, gas, food, etc.
The other thing that bugs me about this is the fact of the unknown. Say you ARE able to pull off this lifestyle for 5 years and make it work. But then suddenly you find out you have cancer. Or maybe the neighborhood you live takes a turn for the worst, and you feel its time to move. Or maybe you have diabetes, want to secure your family’s financial future and have to buy life insurance as a diabetic, resulting in premiums you no longer can afford. Or after a while your kids want to go to college and you don’t want to see them saddled with tens of thousands of dollars of debt. These are all very real things that DO happen. I should know – each of them happened to people in my life.
Option 2 – Save and Invest Like There’s No Tomorrow!
What do you do with your income? Save 2% like most Americans? Why not save something closer to 75% and invest it intelligently?
Okay – maybe that’s a little extreme. But there are tons of people out there where this is their plan. They live normal regular frugal lives like you and I. But the difference is that they take a significant portion of the money they make and stash it away. Simple compound interest is proven that the more you are able to save at a younger age puts you in the best position possible to have the biggest nest egg you could possibly have as you get older. Sam from Financial Samurai is one example of a guy who has really made this type of system work. Integrator from Get Financially Integrated is another blogger who’s progress I’ve been watching and really cheering for as he gets closer and closer to his goals.
Notice the key here is “intelligent” investments. They max out their 401k’s, IRA’s, buy real estate, focus heavily on safe large cap dividend stocks. Notice every one of these are stable income generating assets. No one is buying hot-tip penny stocks or something they read about on Mad Money. The wisest investors realize that on average you can never beat the return of the stock market indexes, and that this is probably the best place to invest.
In addition to that: The wise investor also is mindful of 1) when they will be able to access their money and 2) what taxes will be owed. A smart way to go about this is to invest some money in a taxable brokerage account that you can access anytime before you reach age 59-1/2 (the age when you can start taking withdrawals from your normal retirement account), and then put the rest in your regular retirement accounts for access later. Understanding the tax implications to both sides of the fence could end up saving you thousands of dollars in mishandling if you do it the wrong way.
When it comes to how you handle your money, NO ONE cares about it quite the way you do. That’s why you really need to use your brain and make cautious decisions about where it goes and what you put it towards.
This strategy has been a part of my own early retirement planning for a long time and is a topic I explore quite regularly here on my blog. You can see my full plan here. Though I don’t save anything close to the ridiculous 75% figure I mentioned earlier, I do regularly make sure that my taxable and tax-deferred retirement accounts are heading in the direction I want them to go. I max out my 401k, our IRA’s, and only invest in what I understand or feel comfortable with.
The only setback I see with this strategy is that you become limited by the confines of 1) how much you are able to invest or save (which is usually closely related to how much money you make at your job) and 2) what the returns are on what you invest. I wrote about this topic a little while back about how at times when you follow the conventional financial advice of putting aside 10% of your paycheck, the whole retirement scheme feels rigged because it ropes you into having to work 30 to 40 years to finally get to a nest egg that will sustain your current income level. That’s NOT financial freedom.
Unfortunately since there is no magic bullet to make more money than they often quoted 8% return that a stock market index fund will produce, I guess you are only left to focus on the first challenge: How to make more money that you can stash away and get yourself closer to that financial freedom goal?
Option 3 – Go Beyond Your Paycheck and Create Passive Income Streams:
So you live modestly, save a decent amount of money, and invest wisely. But you still aren’t ready to declare early retirement? What gives?
This is where my current dilemma lies. And as I see it, there is only one solution: Increase my income level.
Because your job or industry is somewhat limited as to how much money you will ever be able to achieve (and it is in case you haven’t figured that out yet), your only recourse is to make money using other resources. Namely by using passive income methods. This could be from owning rental properties, selling something like an eBook online, or even by owning a blog such as this one. Another way to really kick this into high gear would be to own your own business where you have employees working for you that multiple your own physical efforts and make you even richer.
Passive income is an area that I have been particularly focused on this year. My ambitions to start a series of niche websites have proven to be a growing venture that I plan to continue to flourish. Though the income is small now, I see the potential and it gives me great hope that I will be able to keep the momentum going.
My plan: To take that income and accelerate my early retirement planning efforts beyond what I was doing before. Even if I am able to save a few extra hundred or thousand dollars per month, that is much more beneficial than trying to sacrifice necessary expenses or slave away more hours at a job.
Early Retirement Planning Is Still Work:
It doesn’t matter which of my strategies you agree with. All of them are not easy. Each one requires ambition, discipline, sacrifice, and patience. They are all hard work. But it’s a kind of work that could be more beneficial than the path you’re on now. It’s all a matter of priorities. It’s asking yourself what you want for your life and what are you willing to do now to get there.
What are you willing to do?
Image courtesy of FreeDigitalPhotos.net