MY STRATEGY TO SAVE AND INVEST FOR EARLY RETIREMENT
The money that you save in your youth are worth much more than the money you save near your retirement
There is nothing better than retire early and live a financially free lifestyle. The general thinking is to work your ass off for 40 years and retire to enjoy the few years left of life.
I worked for 14 years and achieved retirement like the general public in their 50s and 60s.
Yesterday while thinking the most important steps I took to make myself financially free, few stood out; I was able to save 80% of my income over the years, invest and unleash the power of compounding.
Simple formula; SAVINGS+INVESTMENTS+COMPOUNDING = FINANCIAL FREEDOM
This is my little secret which gave me freedom to do whatever I wanted instead to report at work at 10am every morning until 10pm (my job back then wasn’t the “lovely” 8-5 office job, but instead sweating in a hot kitchen. You can read my full story here).
But what is financial freedom (sound like a BIG word)?
According to Wikipedia is:
Financial independence is the state of having sufficient personal wealth to live, without having to work actively for basic necessities.
For me is:
Wake up in the morning knowing I can do whatever the hell I want; No sucking job. No boss. No alarm clock. No credit cards debts. No mortgage.
So, if you want to retire in your 30s or 40s and live life on your own terms, probably my story will help you to achieve that. If I did it, you can too.
DON’T GET DISTRACTED ALONG THE WAY
I have helped friends and coworkers over the years to save money, invest and set them on the path to financial freedom.
I notice that people struggle the most with constancy, meaning they get distracted along the way by other “priorities” for their money.
[clickToTweet tweet=”Along the path of financial freedom, I notice that people struggle the most with constancy” quote=”Along the path of financial freedom, I notice that people struggle the most with constancy”]
The usual excuses I heard from my friends ranged from:
- “This month I take my girlfriend on vacation, so I can’t save money”
- “I had a hospital emergency, so no more saving”
- “I bought a new TV, and I used all my paycheck”
These are just a few of the thousands of excuses people come up.
They had a little devil on their shoulder to make them do “BAD” financial actions.
I wanted to help my friends, and I knew it was a major undertaking (it has been), but a unique one as well.
I realized that helping others is more rewarding than helping myself, so I stick with it. I still coach my friends every month, asking about their progress and assist them to save more money.
I notice over the years, the best way to save money is to make monthly deposits to the mutual fund or ETF account automatic (or any other investment vehicles) by a bank instruction. So, whenever the paycheck get cashed in, immediately a part of it would be transferred to the investment account.
This is the smartest way in my trial and error to use technology to create a habit for people. The temptation spending the whole paycheck is the devil on your shoulder.
[clickToTweet tweet=”The temptation spending the whole paycheck is the devil on your shoulder” quote=”The temptation spending the whole paycheck is the devil on your shoulder”]
Once the cash is gone from your checking account, you would stick to your budget because you don’t have an easy access to your cash.
Another important factor for financial freedom success is to start saving at an early age. To give an illustration:
WHAT IS THE POWER OF COMPOUNDING
The greatest mathematical discovery of all time – Albert Einstein
Compounding is the process of generating earnings on an asset’s reinvested earnings.
To put it in another way, let’s assume you own a car rental business. You own ten cars which cost US$10.000 each. You are so successful that you can rent out all the cars each month for US$1.000.
To make this example simple, let’s also assume you don’t have any costs so your total profit each month is US$10.000.
You are a smart business man/woman and decide each month to reinvest your profit in buying a new car.
- 1st month – 10 cars = Profit US$ 10.000
- 2nd month – 11 cars = Profit US$ 11.000
- 3rd month – 12 cars = Profit US$ 12.000
The power of compounding is growing your business every month generating more and more PROFITS.
Another example? What happens if you double a penny of dollar every day for a month?
That’s right, you’re going to be a MILLIONAIRE. Don’t take my word for it, you can check it with a calculator.
How is that possible? Compounding.
Two things are necessary for this formula to work; re-investment of earning and time.
That said, the earlier you start to save your money the greater the power of compounding will work for you.
I start to save when I was 23 years old with a monthly US$800. After 3 years, I add another US$1500 per month to the already US$800 thanks to a job promotion. However, my lifestyle stayed the same. Yes, I didn’t run to the auto dealership to buy a new car.
Instead, I decided to contribute to my future by depositing the money in ETFs.
In average, I got a return of 6.3% for the last 10 years, not bad and not excellent but ok. Another key to remember is that I went through the 2008 recession that seemed the end of the financial world. I’m happy with 6.3%.
Now I’m sitting on an egg nest of US$ 290.000. Pretty good considering I had only to transfer some money every month from my checking account to my brokerage account.
And this money will compound nicely for the next 20 years. Let’s assume an average of 6.3% per year, and zero contributions, the total will be US$ 1.019.008. A millionaire!
But if I will carry on with my monthly contribution of US$2.300 per month on top my US$ 290.000 principal, the total value will be US$ 2.120.301.
Wow, I will be two times millionaire by the age of 53. Exciting!
The best way to ensure your future financial success is to start saving today. The amount you save and invest isn’t nearly as important as starting invest early wrote Burton Malkiel in The Random Walk to Investing.
What I liked the most from Malkiel’s book is “ten points plan to make sound financial decisions” system which is super easy to understand and implement.
The real enemy of compounding is YOU.
Let me explain…
The secure path of saving and invest monthly in a mutual fund or ETF is that is boring and unexciting. Especially in good times when you hear news about stock’s return at 20-30% yearly. You might think; “why should I be happy with a 6% return when I can get more”?
Your greed might push you to take risky bet by investing in the market stock, excited by the huge returns.
Don’t be a fool!
Warren Buffet, the most successful investor in modern history, average a 19% return per year. What makes you think that you are better?
Start to save money today and invest in your financial future SLOWLY, here an easy tool to calculate your return with regular monthly payments.
SAVING AND DISCIPLINE IS THE KEY TO WEALTH
Here is the truth; the rich are wealthy not because they earn a lot of money, but because they save a lot of money.
How many stories of rich and wealthy people driving around a vintage car, or dress like a peasant and watch out for every penny they spend. This is the reason they are financially successful.
You can still have your morning cappuccino and apple cake in Starbucks, don’t need to cut on every pleasure, but only on the necessary.
Those who become wealthy do so by spending less than they earn. There is no other source of saving, and, by extension, of building wealth.
What is holding you back to financial freedom? Why can’t you save enough? How can I help you to save more?
Let me know in the comment below and share your successful or unsuccessful story in saving money, invest and compound to wealth. We all benefit from sharing our experiences.