Retiring early requires discipline, sacrifice, and a solid financial plan. Following key money rules can lead you to financial independence and early retirement. This post will outline 10 essential money rules to follow to retire early.
Rule 1: Live Well Below Your Means
Frugality is key – you must live on less than you make to save a high percentage of your income. Keep your fixed expenses like housing, cars, and recurring bills as low as possible. Avoid increasing your spending as your income rises over time.
Embrace cost-cutting measures in your daily life. Cook meals at home rather than dining out. Get rid of unnecessary subscription services. Buy used items when possible rather than constantly buying new ones. Make it your goal to save at least 50% of your income.
Rule 2: Create and Stick to a Budget
Budgeting helps control spending and boost your savings rate. Track your income and expenses to see where your money is going. Categorize your spending to identify problem areas.
Set spending limits in each budget category. Pay yourself first by allocating money to savings and investments before allowing for discretionary spending. Review and adjust your budget regularly.
Rule 3: Eliminate and Avoid Debt
Interest paid on debt erodes your ability to save and invest. Make paying off any high-interest consumer debt a top priority. Once you become debt-free, stay that way.
Live within your means and avoid borrowing money for consumer purchases. A low-interest mortgage may be an exception, but you should still aim to pay it off early if possible. Consider becoming completely debt-free, including your mortgage, on the path to early retirement.
Rule 4: Maximize Retirement Savings
Take full advantage of tax-advantaged retirement accounts like 401(k)s and IRAs. Always contribute enough to your 401(k) to receive the full employer match – that’s free money. Aim to max out your retirement account contributions each year.
Automate your contributions to pay yourself first. If you’re 50+ and behind on retirement savings, make catch-up contributions. Consider contributing to a Roth IRA for tax diversification and flexibility in retirement. Don’t forget about HSAs as another investment vehicle. But remember that retirement accounts alone likely aren’t enough to retire early.
Rule 5: Invest Early, Often, and Consistently
Regarding long-term investing, time in the market beats timing the market. Start investing as early as possible to harness the power of compound growth. Use dollar-cost averaging by investing regularly regardless of market conditions.
Develop a diversified, low-cost portfolio across multiple asset classes. To keep things simple, consider using index funds or target-date retirement funds. Stay the course, and don’t panic sell during market downturns. Rebalance your portfolio periodically to maintain your target asset allocation.
Rule 6: Develop Multiple Income Streams
Having only a day job is risky – you need a backup plan. Cultivate additional active income streams through freelancing, consulting, or side hustles. Build passive income streams like rental properties, dividend stocks, or bonds.
Creating multiple income sources provides a safety net and can help accelerate your savings. But avoid relying on uncertain or speculative income like windfalls or inheritances in your early retirement plans.
Rule 7: Educate Yourself Financially
Continually aim to increase your financial literacy. Read books, blogs, and forums on personal finance and investing. Learn how different investment vehicles work.
Study tax strategies to keep more of your hard-earned money. Educate yourself on safe withdrawal strategies and tax planning for early retirees.
Rule 8: Maximize Your Income
Earning more income provides more money to save and invest. Continually improve your marketable skills through education and training. Ask for raises or seek promotions at your current job. Target higher-paying jobs or change careers if needed.
Consider developing a side hustle that can grow into a full-time income stream. If other conditions are met, you can always change jobs for better pay.
Rule 9: Have a Plan for Health Care Costs
Health care is expensive, especially when an employer’s insurance plan does not cover you—research health insurance options for early retirees, such as private insurance or healthcare-sharing ministries.
Consider choosing high-deductible plans paired with an HSA when younger and healthier—Earmark savings specifically for medical expenses in retirement. Control costs by taking care of your health with proper diet, exercise, and preventive care
Rule 10: Define Your Early Retirement Goals and Plans
Know exactly how much income you’ll need to afford your desired lifestyle in retirement. Determine a detailed retirement budget. Calculate the required size of your nest egg and how long it needs to last.
Develop a comprehensive early retirement investing plan and timeline. Consider if you might “retire” to a less stressful part-time career rather than not working. Make plans for how you’ll spend your free time in retirement. Prepare mentally and emotionally for the transition to early retirement life.
Case Study: Patrice’s Path to Early Retirement By 45
Patrice knew she wanted to retire early. Starting in her 20s, she religiously followed the 10-money rules. She kept her living expenses low, always living on 50% of her income. She avoided debt, lived on a budget, and consistently invested 50% of her salary in low-cost index funds.
Patrice viewed her full-time job as her “day job,” as she called it. On the side, she worked diligently to develop several income streams. She freelanced as a graphic designer and started a profitable blog. She took some of her excess savings and bought a rental property that generated passive income. Eventually, her investments and side hustle income exceeded her living expenses.
After just 20 years of working and implementing these 10 money rules, Patrice had a net worth of over $1 million and more than enough passive income to fund her lifestyle. At age 45, she left the corporate world and “retired” to run her freelance business part-time and travel the world. By following a few simple but powerful money rules, Patrice achieved the early retirement of her dreams.
Key Takeaways
- Live well below your means and save at least 50% of your income.
- Create and stick to a budget to control spending.
- Eliminate current debt and stay debt-free.
- Maximize all available retirement accounts.
- Invest early, often, and consistently in low-cost, diversified assets.
- Develop multiple streams of income.
- Continuously educate yourself financially.
- Grow your income through better jobs and side hustles.
- Plan for health care costs in early retirement.
- Define your early retirement goals, timeline, and required savings.
Conclusion
Retiring early is challenging but achievable for those who follow these money rules. It requires making smart financial choices consistently over many years. The sacrifices required aren’t easy, but the payoff of early financial independence is well worth the effort.
If you dream of retiring early, start implementing these 10 money rules as an integral part of your life today. With enough hard work, discipline, and time, early retirement can become your reality. Start implementing these rules to put yourself on the path to financial freedom. The earlier you begin, the sooner you will reach early retirement.