Aah retirement; what a nebulous concept. You work from the age of 16 all the way up to 60 until you magically receive permission to retire and live the rest of your life on the beach in the south of France. Wait a second, what about those 44 years right in the middle of your life? Are those years designed to just be wasted away at your day job? For most people, the answer to that question is sadly, "Yes." But not us! We're a different breed at The Minimal Minute. We're savvy with our lifestyle and make decisions to live effectively and efficiently.
First, we must define what retirement actually is. To be retired, you must have the means to continue living a comfortable life without having to work for it anymore. Another term for this is financial independence. This means you have built a big enough nest egg or income stream to support you for the rest of your life. Thankfully, your nest egg (the sum of all your money) will become your income stream.
The way this works is quite simple once you understand it. You basically just need to invest enough money in order to live off the interest. This doesn't happen overnight, of course, but there are two fundamental principles that you will follow to reduce your retirement age by decades: spend less and invest more. Spending less doubly reduces your retirement age by freeing up more money to invest while making the actual amount you need for retirement less. This is because every time you make a decision to spend less, you're reducing the amount you need to live off. Let's say you cancel your cable subscription; not only are you able to invest $800 more per year, you also require $800 less per year to live. Even better, with all the time you're saving not sitting on your ass every evening watching television (the average 25-34 year old watches 1,430 hours of tv every year - source), you could be learning valuable life skills that will only make you even more valuable as a human! So let's get started with actionable items that you can get started on today! A lot of these things I have talked about before on this blog, but I wanted to get a lot of it together to form a comprehensive guide.
Invest a High Percent of Your Income
The first and most important step of reaching financial independence is making your money work for you. To do this, you need to invest in something that gives you the most in return. There are many ways to do this, but investing in an index fund tends to give you the highest returns on average. There will be a high level of volatility, but as long as you stick with it, you'll see your money growing in the long run. I wrote an in-depth article here explaining how to get started with an index fund.
The secret is investing a high percent of your total take-home pay. The higher percentage you invest, the sooner you'll retire. The brilliant financial blogger Mr Money Mustache brilliantly breaks this down here. If you invest just 5% of your annual salary every year, you'll have to work for 66 years in order to retire. If you invest 50%, you'll be off the hook in just 17 years! If you can somehow put away 80% every year, you just need to work for 5.5 years! As you can see, the numbers make investing very attractive.
Eventually, the interest you gain from your investments will be enough for you to quit your job and live with complete freedom! The stock market, on average, goes up around 7% every year. With the rate of inflation sitting around 3%, you're left with 4% to play with. So if you need $30,000 to live off every year, you'll need $750,000 in investments. This sounds like a megaton, but thanks to compound interest, the money that you earn will begin to grow money. And that money will grow more money! So hurry up and set up an investment account already! I highly recommend using Betterment. It's ridiculously easy and lets you adjust your deposits anytime you need. But make sure to set up automatic deposits! We can't go on trusting ourselves to make timely deposits every month.
Minimize the Bills
Like I mentioned above, canceling services and minimizing your bills have a twofold benefit. You should take a look through your bank statements and write down every recurring payment you're making. Spotify. Health insurance. Vimeo Plus. Rent. Car insurance. Internet. Anything that you pay on a schedule needs to be on this list. Next to each item, put the cost per month. If something is an annual charge, divide it by 12 to get the monthly cost. Your list might look something like this:
- Adobe - $50
- Allstate - $13
- Amazon Prime - $4
- Car payment $350
- Car insurance - $125
- DirectTV - $50
- GoDaddy - $4
- Google - $16
- HBO - $15
- Health insurance - $250
- Hulu - $8
- Internet - $80
- Netflix - $8
- Northwestern Mutual - $34
- Rent - $1,000
- Spotify - $11
- Squarespace - $24
- T-Mobile - $95
- Utilities - $80
- Vimeo - $5
Now consider each item and decide if you really need to pay that every month for the foreseeable future. Some of them are unavoidable, like rent, health insurance, and utilities, but others we can either cancel or minimize. Let's take another look at this list and reduce where we can.
- Adobe - $50 - sign up as a student and only pay $30/month
- Allstate - $13 - renter's insurance; might be able to reduce it if you itemize your belongings
- Amazon Prime - $4 - mandatory for anyone who uses Amazon more than a couple times a year
- Car payment $350 - sell your car if possible (we'll talk about this below)
- Car insurance - $125 - reduce your bill using my guide here!
- DirectTV - $50 - cancel your cable entirely
- GoDaddy - $4 - unless you cancel your domains, you're stuck here
- Google - $16 - this is for my Google Drive storage and Google Apps
- HBO - $15 - cancel and find a friend who you could borrow a password from
- Health insurance - $250 - shop around for a cheaper plan, but do the math! Good health insurance can save you a lot in the long run. I wrote a guide about it here!
- Hulu - $8 - cancel
- Internet - $80 - talk with your providers and get on some promotional deals or downgrade if you don't need the speed. I recently reduced my monthly internet bill from $80 to $50 with an email and a Yelp review, check out the details here!
- Netflix - $8 - cancel. Really, you'll now have so many more hours of life to live
- Northwestern Mutual - $34 - disability insurance, still not sure I need this. Need to do more research on it
- Rent - $1,000 - possibly offer a trade of services for a reduced rent. I may be shooting a short promotional video for my apartment in exchange for a rent credit
- Spotify - $11 - get on a family plan to pay as little as $6/mo
- Squarespace - $24 - can't cancel these unless I shut down my websites
- T-Mobile - $95 - learn to use less data to reduce this to $55/mo
- Utilities - $80 - in general, be more efficient with your showers, laundry, and climate control
- Vimeo - $5 - need this for creative video hosting
As you can easily see, this hypothetical Eddy could save a lot of money in a lot of places with just a little bit of work. In this scenario, he could save $650 every month from the spending cutbacks! Most of these include getting rid of your car and canceling entertainment services. Coincidentally, this will make you healthier both physically and mentally. And financially.
Restaurants Aren't a Source of Food
Let me explain. Restaurants obviously serve food, but you shouldn't see them as a place to fill your stomach. You should never rely on restaurants for your daily meals. You can cook your own, healthier meals for cheaper at home while learning valuable cooking skills. It's win win. In this article, I calculated that if you ate out a few times per week and bought lunch every day at work, you could have invested that money to have over $400,000 in 20 years. I was definitely generous with my calculations, but it's still something to think about. Especially if you're like me and really can't resist a shot of tequila or two with my carne asada. Mmm.
Sell the Car, Buy a Bike
This is going to be the hardest to stomach for most of you. You rely on your car every day to get to work, get groceries, and go on weekend trips. Maybe if you live further from an urban center, it's literally the only way you can get to town. But how much is that really costing you? Not only are you paying a ton for this 'privilege,' but you're wasting time sitting in traffic when you could otherwise be learning skills and working on projects. AAA calculated that the average person spends close to $10,000 every year to own a vehicle (source). This includes tires, insurance, depreciation, maintenance, gas, financing, licensing, registration, and taxes. This doesn't even include parking, parking tickets, break ins, and fixing dings and dents, which adds up quickly in a city.
Coming in Part 2
- Live in a Cheaper Place, Close to Work
- Buy Used
- Adjust to the Climate
- Stay Healthy
- Use Toilet Paper Efficiently