Wouldn’t it be nice to kick back by the beach on an exotic island, sipping Pina Coladas as you watch the sunset? Wouldn’t it be nicer if you were doing this in your 50’s or perhaps even sooner? There’s a certain level of peace that comes with knowing all your bills can be covered by the retirement nest egg you’ve built up over time. When you’ve established this type of lifestyle for yourself, why wouldn’t you take a boat cruise to the Galapagos Islands? Especially when you can “really” afford it. Well, if you want to live this life, you are going to have to set yourself up for success and as such I want to share with you how to save 50% of your income and retire early!
Simply put, nothing beats early retirement. This special time gives you the chance to really enjoy the remaining days of your life. But how does one retire early when there are tons of things to do, and an equal amount of bills to pay, while still struggling to make ends meet? One of the surest ways to retire early is to build wealth in your youth. Unless you win the lottery, then you’ve got to plan and work your way up! Building up wealth doesn’t happen by accident, there are proven strategies with which you can do so. One vital part of that strategy is saving money! Money spent on non-tangible things like electronics or a night out at the club will be gone forever, but money saved will be right there waiting for you to invest. Either way, it remains at your disposal.
Now, it does take quite a bit of discipline to save money, considering all the pleasurable things out there for you to spend it on. But how about saving 50% of it? That’s harder right? Well if it wasn’t hard the rewards wouldn’t be so pleasant. Luckily, boss I am now going to share with you my favorite ways to save more money so that you can have the cash you need to invest and ultimately rely upon to retire early!
Number 1: Assess Your Current Savings Percentage
This is by far the most common and most effective way to save money and build wealth. Note that the amount you save has to be substantial enough. Most people go for 10% while others push for 20%, and the more courageous ones save half, yes 50%! Don’t be a “lazy” saver and put just 5% aside. Not that there’s a problem with saving 5% except that if you do, it means you’ll build up wealth slower. By the way, the extra 5% you didn’t save would still be spent on something intangible, so you might as well have rounded it up to 10%. Knowing how much you put aside for savings on a monthly basis can give you a clear estimate of how much you would have saved at the end of the year.
Number 2: Keep The Change For Yourself
Call it what you want to call it, but what you call “change” could pile up to a decent sum of money. Not to buy a mansion of course, but for small scale expenses like buying groceries or fixing a broken TV. When you get home from work or shopping, dip your hands into your pockets and pull out all the change you can find. Get a piggy bank and stash it in there (and yes piggy bank is the technical term for this device). It doesn’t matter where you “hide” your change, what matters is this — keeping up this habit will pile up the money in the months and years to come. Remember, little drops of water make up the ocean!
Number 3: Participate In A Savings Challenge
This involves joining a group of people where you all motivate each other to save. There are different types of savings challenges, and some examples include:
Saving any old bills
Saving $10 per week
Saving $10 in week one, $20 in week two, and so forth
Those who do well or win the challenge get some kind of reward. This is great for those who are not capable of motivating themselves and need a little bit of a push. Personally, this is my least favorite means of saving money. Reason is — I think everyone should motivate themselves to save, after all, the rewards will be all yours in the future right? But if you need a push then maybe this is it!
Number 4: Use The Stranger Test
If you’re someone who struggles to save due to your love for shopping, then learning and employing the Stranger Test is for you. Let’s say you walk into a store and see a shirt that you think would look great on you. While you now know that you should assess how much time you are exchanging for that $50 t-shirt, you still feel inclined to buy it. Well, before pulling out your wallet and completing the transaction you should be running yourself through the Stranger test. If you’ve never heard of the Stranger test before, let me explain.
Imagine a stranger standing in front of you; in one hand, they have the t-shirt, and in the other hand, they have $50. Which would you rather have? In most cases, the cash is probably more appealing. When taking this approach on a regular basis, you will start to see yourself continuously picking the money over the item which solidifies your position in not splurging and instead keeping that money in hand.
Now, even with all of these saving tips in action, there is still a good chance that you won’t be capable of saving 50% of your income. This is because your routine expenses are still more than half of what you earn which means that in order to save a larger percentage of your income, you must make more money.
Here’s a practical example of this concept in action. Let’s say your salary is $5,000 per month and you are currently saving 30% or $1,500. Obviously, this isn’t quite the 50% you are aiming to save as a percentage of your income, so you decide to pick up a side hustle to increase your earnings. You now take up a side hustle that pays you $2,000 per month. This income comes with no expenses meaning that every dollar you earn from your side hustle is more disposable income you have to save. Now, you are earning a total of $7,000 a month and are saving $3,500 which is half of your income. Simply put, while saving money is good, earning more is the key to rapid wealth accumulation.
So now that you know that you must earn more money to increase your savings percentage, how do you go about doing just that? Well, here are 3 easy and effective ways I’ve relied upon in the past to increase my own monthly income!
Number #1: Get A Raise or A Higher Paying Job
Asking your employers for a raise is a great way to earn more money and eventually save more. The problem with asking for a raise is that timeliness will play into whether you are successful in this endeavor. You likely can’t ask for a raise when you’re a month into the job but if you’ve spent at least a year serving your employers and you’ve proven to be a valuable member of the team then they will surely consider your request, and chances are they will grant it. If they don’t, then you have the option of finding a job that pays better.
Number 2: Start A Business or Freelance
Starting your own business could also help you generate some extra income. The business may not be a success overnight, but as long as you’ve got some inflow, then you will have more to save. Combining your current job with running a new business could be tough, but you can plan your way through it.
Set up a work schedule and determine how many hours you need to be at work, and how many hours you need to spend with your new business. If the nature of your new business doesn’t require you to be there all the time, then that’s a plus for you!
However, I urge you not to quit your day job when you’re just getting started with a new business or freelance career. Remember, you’re trying to earn more, not less. So, give your business time to blossom before you make any hasty job decisions.
Number 3: Get A Second Job
The third way you can earn more is by getting a second job. Earning a second salary will mean more income and more money you’ll have to save. As with achieving anything good, this will also require a sacrifice, and that sacrifice is the time you spend on your private life. The more you work, the less time you will have for your book club, or family visits, or hangouts with friends. But that’s a sacrifice you should be willing to make if you want to save more and retire early!
Now, you may be wondering why I am harping on having such a high savings rate and it’s because of the correlation between saving and early retirement. You see, financial models exist that can project your expected retirement date based on how much you have. These models operate on the assumption that you are starting with zero dollars saved, that you can earn between 5–9% annually and will be withdrawing 4% of your savings nest egg every year while in retirement.
Someone who wants to retire in 20 years will need to save about 35% of their income every year. However, someone who saves 50% of their annual salary can retire in just 15 years and for every additional 15 percentage points that are saved, you will reduce your years until retirement by roughly 5 years. Keep in mind that this model doesn’t take into consideration any increases in income you may have while working towards early retirement meaning that if you can earn more (and of course save that money) you can further shorten your time until retirement.
If you’re 25 years old right now, saving 50% of your income every month sets you up to retire at 40 as long as you don’t increase your current standard of living and if you ask me, retiring at 40 sounds pretty sweet!
Now, as I just mentioned, early retirement wouldn’t be possible without receiving a return on your saved funds. For you to retire, you must have reached a point where you have stopped working for money and money is now working for you. So, what investments can help you achieve your goal of an early retirement? Let’s take a look at some of them!
Number 1: Pensions
Some employers offer pensions that start paying out as soon as you leave the job, or when you get to 59 ½ . An extra bonus is the continuation of insurance coverage to retirees who are eligible. This is ideal for those who work for employers that offer defined benefit pension plans. Such employers include the police, military and fire service. This kind of pension can fund your retirement plan, partly or in whole.
Number 2: U.S Treasury Bonds
This is a great investment for early retirees. The bonds are among the safest you can find, and they offer tax advantages on the state level. U.S treasury bonds usually offer low yields, but when mixed with higher-risk securities in your portfolio, you can achieve that 5–9% you need with these bonds offering a guaranteed return.
Number 3: Real Estate
This is one of the most popular means by which early retirement can be reached. U.S tax codes allow real estate investors and homeowners to write off a large portion of rental income. It also permits most homeowners to be exempt from capital gains tax if they sell their primary residence. Besides that, real estate investment can ensure a modest income via rent that’s a good way to earn extra income that will increase your monthly savings percentage.
And there you have it, exactly how you can save 50% of your income and retire early!