The process necessary for quitting your job and retiring early is simple. Anyone trying to tell you otherwise is either misinformed or trying to swindle you. Unfortunately, simple is not the same as easy. Knowing what is necessary to reach Financial Independence and Retire Early is much easier than actually implementing those tactics. As it turns out, GI Joe was full of $hit and knowing is not half the battle.
There Are Only Two Simple Steps Required to Retire Early
- Save money by spending less than you make
- Invest those savings
It really is that simple to retire early. Similarly, these steps will also help if you just want the financial flexibility to quit your job if it ever becomes unbearable – like I did when I quit my job. Along the way, there are obviously a lot of potential strategies and nuances that can help you more effectively execute these steps. However, just following these basic steps will get you where you want to go. Typically, this site is dedicated to optimizing these nuances, but this particular post is about the basics.
Save Money By Spending Less Than you Make
If you’re unable to do this, you will never retire. There’s no blog post or financial wizard that can help you overcome this basic truth. It seems like common sense, but many people fail to accept it and think that making more money will solve all their problems. It’s this cognitive dissonance that causes lottery winners to routinely go bankrupt.
There are three key things you must do to save money
You will not become wealthy if you’re borrowing money. Period. There’s no such thing as “good debt”. That term is a fallacy likely invented by some schmuck who just wanted to justify buying something they couldn’t afford.
- Since it is enough content for it’s own post we can argue at a future date whether it is a good “investment” to borrow money for a home. Sometimes it is a very good idea for non-financial reasons, but homes are typically pretty lousy “investments.”
Think of this as self-insuring against unwelcome surprises. Few things are more expensive than needing cash and not having it on hand. Borrowing money (or even tapping into your own invested assets) in an emergency can be very expensive. As I described in my post about optimizing our asset allocation, it’s important to think about how much money you may need in the event of an unexpected job loss or other emergency.
Be purposeful when spending your money
You can afford anything1, but you cannot afford everything. Do you think it’s critical to hire out your house cleaning or eat out 7 nights a week? Do you want a new Mercedes? Cool with me if you’ve got the cash and that is what’s important to you. But what I believe is critically important is to understand how much of your freedom you are trading for those luxuries. Only when you look at the true cost of purchasing goods and services are you really making rational decisions. Those trade-offs are illustrated below.
- How much does a recurring monthly expense really cost? It’s important to remember that you are not only incurring the monthly cost that prevents you from saving during your working years (the opportunity cost)2, but it also requires that you save additional money to be able to continue to fund that expense in retirement3. Finally, how does this cost compare to your annual income4 (and thus how much longer do you need to work to fund it)?
- How much does a one-time expense really cost? You may think if you already have the cash, what’s the big deal? The issue is that instead of deploying your cash in compounding investments you’re most likely spending on it on services or depreciating items that will provide no future value.
Invest Your Savings
Finally, what do you need to know about investing your money? Well, I have great news for you…this is much easier than the financial industry would lead you to believe. First, you don’t need a financial advisor. Second, make sure you take full advantage of the free money Uncle Sam will give you if you save money in the right kind of accounts. Finally, invest in the overall market by buying a low cost (or zero cost) total stock market index fund.
It really is that simple to retire early (although it may not be easy). And please remember, if someone tries to tell you it’s complicated, they are either ignorant or trying to sell you something you don’t need.
Miscellaneous explanations and caveats
1 “Anything” within reason. If you’ve always really wanted your own island or private jet, I can’t help you.
2 For this example I’ve assumed that you invest these funds and received an average 7% return.
3 I’m using the Rule of 300. Based on assumption that S&P will rise on average 6-7% over time (historically much higher) and inflation will rise on average 2-3%. The difference between earnings and inflation of 4% is what you can expect to truly earn from investments without reducing inflation adjusted principal. (For each $1 you have saved, you can expect a $0.04 return and $1.00/$0.04 = $25. But that’s annual so you have to multiply by 12 to get monthly: 12 * $25 = $300.)
4 For this example I’ve assumed an annual salary of $100k and that “retirement” is 15 years away.