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17 Practical Money Skills that Will Set You Up for Early Retirement

17 Practical Money Skills that Will Set You Up for Early Retirement
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One might get excited about the idea of an early retirement, but to actually make it happen requires careful financial planning and some practical money skills.

In this article, I will list down 17 practical money skills that will set you up on path for early retirement and financial independence.

1. Make a written plan

Making a plan only in mind is not the best way to go about retirement planning.

Whether you believe it or not, you cannot simply tread on an unplanned road and expect to reach the right destination. It would just be akin to playing your luck rather than “planning”.

You must remember that financial success is a choice. Each financial decision that you make every single day will determine closer or farther you are going from your goal.

Invest time in writing down your financial goals so that they can materialize over time.

Remember that you are not simply aiming to jot down some words of motivation through this plan. Instead, the aim is to define each and every aspect of your financial goals and give them a shape with exact written words and figures. This includes defining the timeline and quantum of money management to meet the financial goals.

2. Ask yourself: Did you invest in financial literacy?

We slog hours to earn a living but when it comes to managing that money, we fair rather poorly. And it does happen because we are not financial literate.

Therefore the first and foremost thing one needs to do is to invest enough time and resources to become financially educated.

Becoming financially educated doesn’t mean getting a degree but becoming aware of the first principles of money like compounding, ROI, NPV, inflation.

3. Income over lifestyle

In the contemporary era, most people are running after showing off the illusion of being wealthy, instead of actually being wealthy.

Being wealthy is a long term goal, something which materializes only at the later stage of life. This clearly implies that you will have to forego your present day luxuries if you wish to realise financial success in the long run.

Spending money never made anyone rich. This is as simple as anything can ever get. This is also where the importance of written financial goals manifests itself.

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Choose your expenses wisely so that you are able to meet your lifestyle needs but limit your wants which are discretionary expenses in nature.

4. Start right away

Compounding is that Eight wonder of the wonder that stands at the base of the first step that you can possibly take towards financial success. Added to the principal and rate of interest, the element of time can significantly impact how your investment grows.

The earlier you start with your savings, the earlier you are going to be able to meet financial success and plan your early retirement.

Don’t wait out to become a financial genius or seek the advice of a financial guru. Start as quickly as you can. Starting early will also allow you to ample time to grow your savings rate.

5. Wealth building on auto-pilot mode

You cannot possibly expect yourself to be able to manage each and every thing on a daily basis, can you? You can only divert some part of your attention and resources towards your retirement goals but what about the present?

This is where your auto pilot mode should be enabled.

You need to take certain financial decisions which will not only accrue a number of assets in your hand but also make sure that they grow over a period of time; so that your life can sail on smoothly.

The idea here is to allocate monthly income towards paying off money which builds equity assets for you in the long run.

Saving plans and investment clubs ensure that you are forced to invest and save your funds, whether you like it or not. So even if out of compulsion, you still manage to save your funds and build wealth in the process. Remember 401(k), IRAs?

6. Make your money hard to reach

Quite literally, just put your money somewhere so that you have to think twice before you reach out to get it back.

Imagine how different it’d be if you had cash lying in your wallet and if the same cash was stacked and shut closed behind the door of a locker. Which one would be the easiest to reach out to?

Similarly, once your money is invested in some retirement plan or investment scheme, you will have to go through some policies and possibly some penalties as well, before you can lay your hands on that money.

Therefore, define your financial plans to make it hard for you to reach your own money, so that you can resist the temptation to spend it.

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7. Don’t touch your social security

It is called social security for a reason. Stated simply, it is always easy to wash your hands in a running stream but not as easy when the water is stagnant.

The same applies to your earnings as well. No matter how large or important your need is, touching your social security should always be a last resort option.

Social security is meant to be used after your retirement, meaning that you may at the least, meet your daily expenses with the amount of your social security.

Hence, the longer you wait out to claim your social security, the better for your retirement.

Plan your expenses so that you may not need to meet your daily expenses out of your social security at present.

8. Focus on savings

While this may sound a very basic and obvious money skill, it is very hard to implement in reality.

The safest way to achieve this goal is to list down your average expenses for the month. You will be surprised at the quantum of your expenses when you undertake this exercise.

Having written them on paper, you will suddenly find the vision to analyse which expenses are wasteful and can be avoided.

9. Develop sources of passive income

It is always a good idea to develop multiple sources of income so that in case one dries up, others are still running and taking care of your financial upkeep.

Do you like to write? Then get yourself freelancing content projects or if you have a spare space, put it on AirBnB.

The idea is to create as many possible avenues to generate income. And once this extra income is generated, care must be taken to save it and invest it rather than spend it.

10. Plan your risks

As the saying goes, the higher the risk the higher are the returns. This however, does not mean that you blatantly enter the rat race and seek higher risk investments without giving them a second thought.

Based on your financial health, the risk that any person can afford to take is different. Hence, you need to evaluate your financial health and your ability to bear a loss, more importantly than the idea of earning a profit. This will perhaps give you a clear image of the risk that you can afford to take in the long run.

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Do remember when you are planning to retire early, capital preservation should be the top goal. Do access your risk profile first before investing in any financial instrument.

For example, cryptocurrency might be a suitable instrument to invest for those who have high risk appetite; whereas for those who are extremely risk averse, even equity seem to be a risky proposition.

11. Plan your taxes

While you juggle between your earnings, expenses and savings, there is one factor which is completely out of your hand but also stands as a compulsion, which is taxes.

As a resident of the country, you must be well aware about the taxation laws and how your earnings are taxed in one way or the other. This is where you need to use the scope of tax planning and try to save as many funds as you can.

Tax planning will also become relevant after retirement, when you will have to be very careful about your investments, which are also liable to be taxed.

12. Stay healthy

You might be wondering how health can take a centre stage when we are discussing about money skills. However, one needs to be healthy to enjoy the benefits of early retirement.

Besides, being healthy also ensures that out of pocket expenses (not covered by health insurance) on health care are at the minimum. Needless to say that you must have a decent health insurance.

13. Always prefer used cars

It’s a well known fact that cars usually lose around 20-30% of the value (depending on the make and the model) within first couple of years due to depreciation. It is a wise decision to always hunt for a used car since it has already taken the depreciation hit.

Besides, car is a liability that requires money for its annual maintenance and loses value with time.

If you are planning to retire early, you would want to invest in building assets rather than buying a liability.

14. Plan your mortgage

While the jury is still out on whether to rent a house or buy one, if at all you decide to buy one, make sure that you plan your mortgages carefully.

Taking a 30 year mortgage on your house will tie you up for the entire life. And with so many vagaries in professional life, chances are that you would find it difficult to maintain the financial discipline that is required for early retirement.

If you are planning to buy a house, try to repay the entire mortgage in 10-15 years. Start by taking a 30 years mortgage and try to increase your monthly payments every year.

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For example, if you are paying $2000 per month this year, try to do $2200 next year. And since this payment will be on auto-pilot, you will adjust to the new normal with time.

15. Vacation in off season

If you are one of those who like to travel, then this one is for you. You could save quite a fortune by vacationing in the off season.

Not only air tickets will be cheaper but also the hotels. And if you are looking for a short sojourn, then try to do it during weekdays rather than weekends.

These savings, over a period of time, would accumulate to become a sizeable portion of your entire savings bank.

16. Apply the 5% rule

This is not a proverbial rule but is practical and very effective. Stated simply, this means cutting down your expenses (by 5%) from top 3 expense categories every year.

To implement this skill, first of all list down your 3 top expense categories. Then break down expenses within those categories. This will show areas of improvement where money can be saved. Now to actually put savings into action, try to develop good habits that automatically do that for you.

For example, if your monthly expense on dining out is substantial and makes to the list, then try to find out reasons not to go outside; probably pack your lunch to office, or make a strict rule to eat only 2 times (say) a month.

A goal is pretty easy to achieve if it can be broken down into habits. Therefore cultivate good savings habits.

17. Track the progress

Last but not the least, track the progress:

Progress of savings, progress of investments and progress of how close you have reached to your goal.

Tracking the progress provides positive feedback to the tough financial discipline life you have been living. And that in turns provides more motivation to stay the course.

It also helps to benchmark the situation and take corrective measures if required.

The bottom line

Planning for early retirement is not that hard. All it requires is financial discipline (over long period of time); discipline to save as much as possible and invest wisely.

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The path to (successful) early retirement lies not in the maths behind it (maths is easy) but cultivating good habits and the right mindset. So start now!

Featured photo credit: Unsplash via unsplash.com

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Ankit Garg

Serial entrepreneur and working towards Early Retirement

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Last Updated on July 20, 2021

Financial Freedom is Not a Fantasy: 9 Secrets to Get You There

Financial Freedom is Not a Fantasy: 9 Secrets to Get You There
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Have you ever considered your life now, and how it would be if you had more time to spend with your family and less worries about money?

Nowadays, financial stress is one of the most troublesome weights in life. If you’ve ever encountered financial stress, you know the difficulty of not having enough income to pay your obligations or bills.

Many people say that money is not the ultimate goal of life. While that’s true, money certainly plays a very significant role. The meaning of financial freedom changes with the different phases of our life, but ultimately, it is something that many people strive for.

In this article, we’ll explain how to capture that financial freedom you’ve been looking for. Read on to learn the secrets to financial freedom.

Break Free of Your Finances

Financial freedom is about having a constant flow of cash from your assets to cover all your regular needs.

When you are not worried about your income, or living paycheck to paycheck, you gain a great sense of freedom. It’s the freedom to be obtain and do what you truly need to make your way through everyday life.

Gaining financial freedom, though, is a process of growth, making small improvements and gaining emotional strength.

Though it seems hard to believe, it is really very simple to get financial freedom.

To do so, you simply need to make sure that your assets exceed your liabilities. In other words, you’ll need to find the sweet-spot where your residuals meet or surpass your expenses. This is something that you can achieve with the proper plan.

While not every person will accomplish financial freedom, the potential for anyone to do so is certainly there. Anyone can achieve this success, regardless of their income level.

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Outlined below are 9 secrets that will help you in your goals of achieving financial freedom.

1. Stop Unnecessary Spending

We often spend money inwardly, instead of objectively.

For example, you may spend when you’re anxious, depressed, restless, exhausted, from fear of missing out, or to please others. This is a very unhealthy way to handle your finances.

To stop this habitual spending, log down all your spending over the course of a month.

Just as some people keep a food diary, keep an expense diary. Remember not to just write down how much and what you spent the money on, also include the circumstances of why you spent the money. Was it an impulse buy at the checkout line or was it something you planned to purchase?

This increased self-awareness could enable you to avoid triggering situations in the future when you are considering an impulse buy.

2. Plan a Monthly Budget

This is a great opportunity to get serious.

Take a seat with your spouse or partner and make a monthly budget based on your income, not your expenses. You are never again going to spend more cash then you have on hand.

Overspending is the thing that led you to more financial obligations. Make sure you decide every month what is coming in and what will be going out and stick to that budget… no matter what.

3. Cut-up Credit Cards

Perhaps you are the type of person who always pays your credit card balance in full before the end of your billing cycle, and enjoys the reward points you gain. If this is the case, then you’re already way ahead of the game.

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If not, you may want to consider ridding your life of the burden that credit cards bring.

Many cards have strategies set up so that if you make a certain number of late payments, they will raise your interest rate much higher. This can really add up in the long run and you won’t be doing your financial situation any favors. If you’re prone to late payments or have a large balance due on your cards, cut them up!

Without proper self control on credit card spending and payments, you are basically throwing your money away. To ensure that you have better control over your spending, use only cash or debit for all future purchases (and don’t forget to pay at least your minimum payment on your cut-up cards each month!).

4. Increase Savings

There is no doubt that for a comfortable retirement you must accumulate satisfactory savings throughout your working life.

It’s good practice to save up to 15% of your income.

Start with your workplace 401(k), if you have one. If not, a Roth IRA (if you are eligible) or a traditional IRA (if you are not eligible for the Roth) are the next logical steps.

Increase in longevity means you might be able to look forward to 25 to 30 years in retirement, or possibly even significantly more. Investing now in good retirement plans will ensure that you have a guaranteed a stable monthly income when the time comes to stop working. [1]

5. Invest Wisely

Consider investing in funds.

Specifically, you will gain higher returns if you invest in different types of mutual funds such as Debt funds, Equity funds and Hybrid funds with a proper balance, although it absolutely relies on your personal preferences and sense of risk taking.

To get the most of these benefits, make sure you are investing in a variety of assets. Another resource of investing in mutual funds is SIP (Systematic Investment Plan) where you invest some money every month in funds. SIP works by averaging the per unit price of the stock.

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Mutual fund investors are aware of the benefits of an SIP (Systematic Investment Plan). For one, it is the most secure way to invest in equity mutual plans so that wealth is created over a long period of time. This plan also helps you to gain a better sense of financial discipline, which will come in handy in all your financial endeavors.

6. Invest in Gold

There isn’t really a better way to invest in gold than to have the physical gold itself in your possession.

You can purchase gold coins and bars from mints as well as from coin dealers and other private sellers.

Another way to invest in gold is through ETFs (Exchange Traded Funds).

These are is similar to mutual funds but they are exclusively investments of gold. ETFs are great because they offer more liquidity; the ETF owns the actual physical gold, stores it, and retains the value of the shares. These shares can then be bought and sold in the stock market, and one big benefit is that the transaction costs of gold ETFs are much lower than the that of physical gold.

With its consistently-increasing demand, investment in gold can be very wise long-term investment to make.

7. Stash Emergency Funds

Whether it’s a cash gift or a work bonus, always try to save any extra money that comes your way rather than making unneeded purchases.

If you get paid every other week, you’ll get an “extra” paycheck (three rather than the usual two) twice a year. Either save those paychecks towards your emergency funds or utilize the money to pay down other obligations, such as loans, credit cards or other debts.

Make it hard to get your cash.

Put your savings in an alternate bank, maybe an online bank that forces you to delay for several business days before transferred money hits your regular bank account.

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8. Find Fabulous Mentors

Find a mentor, such as a friend or family member, who has exceptional control over their finances and pay attention to everything they do.

If you do not have any friends or family that are enjoying financial freedom, then find a mentor online! There are numerous blogs and guru websites featuring the advice of many people who have reached financial freedom, and they exist primarily to let you in on how to achieve it for yourself.

There are also plentiful forums available that share tips and tricks on how to best achieve financial freedom. Read as much as you can and start changing your habits for the better.

9. Be Extra Patient

Patience is the key of financial success.

Being patient can be quite tough, especially when you’re struggling with your finances, but having faith is worth it. You’ll continuously be on the right track if you are taking the proper steps above.

So don’t be discouraged, even if you are only saving a few dollars a month; it all adds up. Within just a few years you’ll look back proudly at your accomplishments and be glad that you had the patience to get there.

Financial Freedom for All

Anyone can achieve financial freedom, regardless of their financial circumstance.

Use the tips provided above to get yourself on the track to financial freedom and toss your monetary concerns out the window. If you wish to achieve a life with financial freedom for yourself and your family then you must adopt a disciplined approach towards your finances.

Following the simple secrets above is a great start to making your money work for you, so you can work less and live more!

Featured photo credit: rawpixel via unsplash.com

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Reference

[1] Hartford Gold Group: IRA Retirement Accounts

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