Retire Early

Retire early in your 40's

2005-10-31T17:20:00.000-08:00

Just about everyone dreams of early retirement and financial independence. With a little planning and determination, you too can retire early. This site is written to show one way to achieve early retirement, by maintaining a regular savings plan. Even with a moderate income, you can achieve financial independence.

Many people have questions on early retirement, and how to be financially independent despite challenges from taxes and health insurance.

Can I really retire early?

Most people capable of earning an income of over $50,000 (more or less) have the opportunity to retire early by saving money on a monthly basis.

How much do I need to retire?

This depends on your budget as a retiree. An early retirement budget would be about $20,000 a year in today's dollars. In order to earn $20,000 from investments, you will need roughly 25 times this amount in investments, or $500,000. This is a small retirement income, used as an example, and you may want to have more retirement income than this. (ie. $40,000 or $1,000,000) Bear in mind that whatever budget amount you come up with will have to cover healthcare, insurance, taxes and a variety of other post retirement expenses.

How much do I have to save each month?

A good goal to start with is roughly the amount that you would like to retire on each month, and to increase the amount that you save by 5% each year. As an example, to achieve the retirement income of $20,000 per year, adjusted for inflation, you could start with saving $1500 per month.

How long will it take to save?

Using our example of $1500 per month, increasing the savings amount 5% each year, it will take 15 years to save $500,000. This is assuming a 5% real return on your investments, and includes an adjustment for inflation.

Where should I invest the money?

If you are starting out and have 15 years to go, use a tax deferred savings program like a 401k, and invest in low fee index mutual funds, for example, a Vanguard S&P 500 fund. As you build up your savings and approach your retirement, you will want to reassess your investments every year or two.

How do I get the money to save?

Assuming you have maximized your income potential, learn to live well on a budget, and consider lifestyle changes that may reduce your expenses.

I don't want to sacrifice my lifestyle today!

Saving for early retirement is not for everyone. But by trying to make the right financial decisions, and learning to live well on little money, you may be able to improve the quality of your life and still reduce your household budget enough to save for early retirement.

Wouldn't it be nice to choose what you want to do with your time?

Time goes by quickly. If you start your savings plan now, you will enjoy the rewards sooner than you might think.

Wouldn't it be nice not to be tied to a job that you dislike?

For most people, the alternative to saving for retirement is to work until you turn 65 years old. There is another way!

How to do it

2005-10-30T18:05:00.000-08:00

Financial independence is the ability to live well without spending your time working for a living.

You have a unique opportunity; to live a life of your own choosing, to have a great deal of personal freedom and not be tied to a lifelong occupation. This opportunity can be achieved with hard work, concentration on goals, and control of your finances. This plan is not about getting rich quick. This plan is the slow and sure method of becoming financially independent. It is a method of making a series of decisions over time that will bring you to your desired goal.

Here's the summary:

Rearrange your life to spend less than you make. Keep investing the surplus and review your purchases to learn from mistakes. It may take a year or two to change to a lower cost lifestyle, to complete a debt elimination plan, and to find employment that pays well and doesn't add a lot of cost to your life. When you get to the point where you can start investing about $1500 per month, maintain that lifestyle and level of investment for a period of about 15 years.

Simple budget spreadsheets allow you to track your expenses and learn from mistakes. They clearly show that you must prioritize purchases rather than spending on impulse. The media pushes a consumer mentality and has brainwashed most people into thinking that debt is good and living beyond your means is the norm. You may have to break this materialist mentality in your own mind and fight the negative thoughts of those around you who strongly believe in the way they were programmed. You may need to reconsider what is really important to you in your life.

The key is to focus on achieving your goals and to rearrange your life priorities based on what you really want to do. Money is only a tool to help you live out your dreams and goals.

If you are willing to play the game of living well on little money, and accumulating surplus income into investments, the payoff is that you will be able to live a life of leisure, spending your time and energy on things that you choose to do. If you can start saving about $1500 per month, and increase the savings amount by 5% every year, after about 15 years, you will be able to withdraw a modest income from the interest on your investment for the rest of your life. This amount is really just an example in round numbers, and you should calculate your own investment goal, but for the sake of getting started, $1500 per month is a good goal.

Not sure where $1500 a month is going to come from? Look for the help and advice on how to free up income for investment in this website. There is a step by step plan with spreadsheets to help you inventory your current financial situation, and monitor your expenses. If you have online banking, you can use automatic payments to dedicated checking and savings accounts to keep your budget in line. This article also tries to give some basic advice on how to change your lifestyle to insure financial success:

Continually look at improving your income, either by finding a better job or by earning income on the side.
Find a low cost place to live that minimizes your reliance on an automobile.
Focus on selecting household goods and appliances that you absolutely need and that will last you the 15 years (more or less) that it will take to make your investments.
Go through a process of selecting strategic purchases that will benefit you the most, and save money for those purchases.
Eliminate consumer debt.
Maintain an emergency fund.
Pare down your monthly expenses.
Look for ways to live well, frugally.
Celebrate the rise in your investment account.

The real value of this using this plan is learning the process of consciously choosing what to spend your money on rather than spending on impulse.

Are you ready to start picking out your Cadillac and luxury yacht? Sorry, this site is about how to choose low cost alternatives that improve your life, not luxury items that put you into debt.

If you reconfigure your life to live well on little money, and find well paid employment so you can invest the surplus income, you will find that by the time you are able to quit your job and live on your investment income, it will be easy to continue to live well on a moderate income. Fifteen years goes by quickly, and when you complete your plan, your time will be your own!

Time flies like an arrow. Action you take today will affect the quality of your life in the future.

First steps...

2005-10-29T18:14:00.000-07:00

This article is written for someone starting out with little or no money, who may also have a good amount of debt. The good news for those of us starting with zero, is that there is an opportunity to accumulate enough wealth to be able to live off of the interest.

A large part of planning financial independence involves knowing where you spend your money, and transforming undisciplined, impulsive spending patterns into making conscious decisions on purchases. If you think that being financially independent means that you don't have to worry about money, I am sorry, that is not the case. It means that you have to be continuously aware of the purchases that you make, and consciously decide which purchases have top priority. If you follow the program outlined here, you will say no to many, many impulses to purchase an item.

The general principles of planning your financial independence:

Identify your life goals and objectives.
Maximize your income.
Build a frugal lifestyle.
Spend less than you earn.
Invest the surplus so that it increases.
Maintain the lifestyle over a period of 10 to 15 years.
Know when to break out of the working life.
Get the most out of the money you have saved.
Use money as a tool to live the way you want to.

To get started, inventory your financial condition. Collect your receipts, invoices, bills and pay stubs, and start figuring out how much you spent on what. Inventory your debt and know how much you are paying for the cost of carrying debt.

The next step is to assess your current job and where you live. Could you earn more money at a different job? Could you reduce your living expenses by moving to another city or neighborhood? If you get some education will your income potential be improved? Think with a timeline of about 15 years; that is about what it will take to accumulate enough wealth for a modest income from investments.

This article introduces a process of budgeting which is intended to make you think about your priorities when you spend your money. The goal is to bring some clarity into your household economy, and allow you to review purchases and to learn from mistakes.

If you are willing to follow the goal of becoming financially independent, of living off of the interest of your investments, you need to focus on making money available for investments. This means learning to live well on little money. You have to set goals for your life and find ways to achieve those goals by applying your energy, not by buying them. You have to continue to seize the moment and follow your dreams every day. But rather than purchasing your dreams, you have to focus on activities that are less cash intensive, such as self-improvement, creative pastimes, helping others, socializing and learning.

You have to make a list of the things which you need to live. A minimalist's list, just the household items and basic things that you absolutely NEED. Things that will hopefully have a service life of about 15 years. Once you have purchased these items, strictly limit your consumption. Let people think that you are poor, that you cannot afford to buy new, better, bigger, shinier cars, vacuum cleaners and lawn mowers each year. Conserve the things you have. Stre-e-etch that service life out as long as you can.

When you have purchased your list of necessary items, start pouring your income into investments. Within two to three years, you should be able to have purchased all the household and transportation items that you need, eliminated all consumer debt (other than a home mortgage), and have developed a low cost lifestyle. You need to think ahead and save for larger expenses that occur throughout the year, and you need to have a stash of funds for emergencies. If you can maintain that lifestyle for about 15 more years, you will get to a point where you can decide how much retirement income you really need, and you will be able to stop full time work when you feel that the interest income will support you adequately FOR THE REST OF YOUR LIFE.

The concepts presented in this article are relatively simple. The process is easily learned and applied.

Managing your debt

2005-10-28T18:18:00.000-07:00

Do you have a debt problem? Many people do. It takes a great deal of discipline and determination not to take on debt. It's just so easy to get credit and so much fun to buy things.

Credit cards are especially tempting. It's not just that the debt that has to be paid back, the finance charges keep coming in every month, as well. Credit card finance charges can easily exceed the cost of normal monthly expenses like telephone costs or even home heating, which makes you wonder where your priorities are. In many cases, people get into trouble with credit cards and consumer debt because they do not track their debt situation and they do not know what the cost of carrying that debt is. How do you get your finances back in order?

First, inventory your debt, including consumer debt, credit card debt and long term debt such as a mortgage or student loans. Here is what you need to know for each debt:

Current Balance
Interest Rate
Minimum Payment
Finance Charge Expenses (monthly estimate)

Use a spreadsheet to inventory your debt. Mortgages and other long term debt are the easiest to deal with. You can assume that the payments will be the same each month until paid off. The only consideration is whether you wish to pay off the debt earlier, how much additional amount should you pay toward the principal each month? Because long term debt tends to have lower interest rate charges, it is often better to pay the minimum payment. Inflation helps the debtor, and the closer your interest rate is to the rate of inflation, the lower your actual finance cost for this type of debt. You may have a long term plan to pay off the house before you retire, so it may be wise to pay a little additional each month to achieve your time plan and pay off the home early on your schedule.

Other debt, such as home equity loans, car loans, and credit card debt needs to be reviewed based on the interest rate and finance charges. Low interest debt can be used responsibly. High interest debt is almost always a mistake. The other side of responsible use of credit is that you need to be sure that you are purchasing something you need and which will give you a long service life. Of course, you also have to be relatively secure about the income source that will pay off the credit.

If you have a number of high interest debts, there is the possibility of consolidating the higher interest debts into a lower interest rate loan, with the goal of reducing the finance costs and the minimum payment. Watch the loan costs when refinancing, it may be a good solution if the costs are reasonable.

Some would encourage you to use cash for most or all purchases. This is a good idea, although it is difficult when trying to repay existing debt. As you pay off your debt, you can work toward prioritizing major purchases and saving money to make strategic purchases using savings rather than credit.

An example of responsible use of debt, if you do not have adequate savings, is an emergency roof repair paid for with a low interest home equity loan. This is a responsible way to take care of a repair that must be completed. The repair preserves and adds to the value of the home and there could be a loss if the repair were not carried out immediately. Purchasing a reliable, efficient vehicle at a good price to replace an unreliable vehicle is also a responsible way to use credit, if the interest rate and other charges are reasonable. What is a reasonable interest rate for credit?

Generally, credit with an annual interest rate of about 2 to 4 percent above the rate of inflation is reasonably priced and can be used for purchasing items that will give you a long service life.

When starting out on your financial plan, you may not have the resources to pay cash for things you need. Eventually your goal should be to eliminate debt, however in reality, you may not be able to avoid debt. Just be aware that there is good debt and bad debt, and try to plan a way to get out of debt completely.

Funds from your income for paying off debt are in competition with other needs and goals, such as saving for strategic purchases, investment and building up an emergency fund. The first step in debt elimination is to set up automatic, minimum payments to all of your debt finance institutions. This guarantees that you will not pay any late fee penalties.

OK, you have automatic payments set up to pay the minimum payment for each of your debts. But minimum payments are not enough to get you out of debt quickly. You must also dedicate extra funds to pay off debts early. So how do you apportion the extra funds between the various debts that you have?

Pay off the highest interest rate debt first.

Focus all of your debt payoff funds to the debt with the highest interest rate. Pay the high interest rate debt to reduce the finance charge and be able to direct more funds toward the principal amount. When you pay off the high interest rate debt, shift your funds to the next highest interest rate debt.

If you have serious debt problems, you may have to direct most of your discretionery income to debt payment. If your debt is low or moderate, and your finance charges are relatively low, you need to balance the priority of paying off debt with the need for investment, strategic purchase, and emergency fund savings. In most cases, you should put at least nominal amounts toward these items, even if you have debt. Start making small payments each month so that when your financial house is in order, it is easy to increase the payment amount.

This strategy means that you will achieve debt payoff in the shortest possible time with the funds you have available. A recommended long term goal is to carry only debt for your home, and to save money in advance for planned strategic purchases to avoid consumer debt.

Tracking expenses

2005-10-27T18:22:00.000-07:00

The price of living well on a budget is eternal vigilance: you must be aware of where your dollars are being spent. You have to plan your expenditures and have the discipline to purchase according to your plan.

The best way to track expenses is to log them on a daily basis. Use an Expense Log spreadsheet, adding each expenditure as it happens. Try to log expenses on a daily basis for at least a month or two.

Keep track of all your bills and write down everything you spend. Create logical categories for expenses and total the spending for each category.

Identify each expenditure with one of the following expense types:

Regular Expenses - Regular, monthly, predictable expenses that are for items that you cannot do without, such as house payments and utility payments. I suggest that you include a monthly payment to your investment fund as a regular payment.
Debt Service - Payments toward loans which are for items purchased prior to the current month. Home mortgage, auto loan and credit card debt falls into this category, however if you pay off your credit card the same month that the purchases are made, the expenses would fall under the appropriate category for the purchase.
Annual Expenses - Regular, predictable expenses that occur every year or several times a year. These are items which are paid once or twice a year, and which you cannot do without, such as property taxes, condominium fees and insurance.
Variable Expenses - Expenses which are somewhat unpredictable and discretionary expenses, such as food, entertainment and clothing.
Emergency Expenses - Unforeseen expenses which cannot be avoided, such as auto repairs or health care costs.
Strategic Expenses - Planned purchases, which are larger than the usual discretionary expense, such as home improvements and purchase of a vehicle.

Use a spreadsheet to organize expense categories and types, using subtotals and percentages to give you an idea of where your money goes each month. Learn to use pivot tables to get subtotals of expenditures by expense category and type.

When you buy items on a credit card, enter the expense on the same day that you buy it, not when you pay the credit card bill.

Once you start logging your expenses on a daily basis, you need to separate long term credit card debt from purchases which have been logged in on a daily basis. When you purchase an item with a credit card, log it in under the appropriate expense type (Variable Expense, Regular Expense, etc.). If you are paying long term credit card debt, show the payment on the debt as a monthly Debt Service expense. If you show the expense at the time of purchase, and then again when you pay the credit card, you would be showing double the expense! For budgeting purposes, it is much easier to use a debit card, NOT a credit card. Until you can pay off your credit card balance each month, I recommend that you do not use credit cards for purchases if at all possible.

When you withdraw money from your bank account for your wallet or purse, do not enter that as an expense. Think of your wallet or purse as a savings account that you carry with you. It is not an expense until you give the money to someone else.

You may want to add a column for the name of the person who spent the money. Some expenditures are decisions made by both partners, some are made by one partner. For example, you could use a column to log expenditure decisions by Bill, Mary or Both.

Another column that might be useful is to log in credit card purchases. That way at the end of the month you can check your credit card bill to see if it matches your actual expenditures. If you have multiple credit cards, type in the name of the credit card company in this column.

Use "Pivot Tables" to show expenses by category. Pivot tables are a spreadsheet utility that can show total expenses for each type listed in your expense type column. Use your spreadsheet help command to learn how to set up pivot tables. I use pivot tables to show expense totals for Expense Types and Budget Categories at the end of each month.

Go through your expenses each month and try to find spending mistakes, expenses that were not wise decisions, purchases that you really didn't need or that you should not have spent your money on. Identify this amount and try to learn from the mistakes to limit future mistakes.

Go through your expenses again and think through how you spend your money. Are there better ways of getting things done? Are there cheaper alternatives that will get you the same satisfaction? Can you reduce charges by changing contracts, plans or policies? If you change the way you do things, can you reduce your expenses? If so, make your decisions and take appropriate action. Identify the savings amount as available for savings and investment.

Keeping an Expense Log is a lot of work. You may not want to do it on a permanent basis. Try to do a complete job of logging expenditures daily for at least one or two months. This will give you a good idea of where your money is going and how you can find ways to save money.

Scheduling major purchases

2005-10-26T18:23:00.000-07:00

The key to financial success is to make every major purchase a strategic purchase. You need to make a list, a limited number of things that you need to live well on little money. You need to know which of these items you need first, and what is the best product to satisfy your needs. When the time comes to purchase that item, you need to know if this is a purchase you should make with cash or credit, and you need to shop around to get the best price. List and prioritize your strategic purchases, which are the things that you need to live well for the next ten to fifteen years. Use a spreadsheet to create a strategic purchase schedule and budget.

It may take you one or two years to get yourself set up to be able to make large investments from your income. What you need to do is make decisions on shelter, transportation, household goods, etc. to last you through a period of ten to fifteen years of frugal living. Your decision on which house to buy or apartment to rent, which car to buy, which refrigerator, washer, dryer, etc. all should be based on a goal that this will be your only purchase for the next ten to fifteen years. When your car is paid off, don't start thinking about a new car, plan on driving it until it is no longer reliable. With every purchase, try to maximize years of service, at least until you reach your financial goal.

If you can hold off on buying luxuries for ten to fifteen years, you will be able to afford luxuries without having to work for them. Make sure anything you put on the Strategic Purchase list passes the Needs vs. Wants test.

Estimating your expenses

2005-10-25T18:26:00.000-07:00

An Expense Estimate spreadsheet is a budget of expenses by category for an average month.

The best way to make an Expense Estimate is to clear off the kitchen table and take your bills, receipts and invoices for an entire year, separate them by company, and put them in order by date. Look through your checkbook and bank statements to find expenses that did not show up in your bills and invoices. Try to guess how much you spend in cash on snacks, knick knacks, and miscellaneous fluff. Honesty is the best policy here, your goal is to learn from mistakes, so don't hide from the truth.

Split up expenses into budget categories as best you can. You can create your own categories. Try to estimate an average expense per month. Sometimes this is not possible. For example, heating bills are higher in the winter, while electric bills are higher in the summer. Make notes of expenses that vary by time of year. Some expenses occur once or twice a year, such as insurance or property taxes. Use a spreadsheet to log expenses that occur once or twice a year.

As you go through your expenses, try to categorize them into the following Expense types:

Regular Expenses - Regular, monthly, predictable expenses that are for items that you cannot do without, such as house payments and utility payments. I suggest that you include a monthly payment to your investment fund as a regular payment.
Debt Service - Payments toward loans which are for items purchased prior to the current month. Home mortgage, auto loan and credit card debt falls into this category, however if you pay off your credit card the same month that the purchases are made, the expenses would fall under the appropriate category for the purchase.
Annual Expenses - Regular, predictable expenses that occur every year or several times a year. These are items which are paid once or twice a year, and which you cannot do without, such as property taxes, condominium fees and insurance.
Variable Expenses - Expenses which are somewhat unpredictable, and discretionary expenses, such as food, entertainment and clothing.
Emergency Expenses - Unforeseen expenses which cannot be avoided, such as auto repairs or health care costs.
Strategic Expenses - Planned purchases, which are larger than the usual discretionary expense, such as home improvements and purchase of a vehicle.

So there are a few different things going on here, first you are looking at your receipts and invoices, and estimating an average monthly expense for each company that sends you a bill. Then you are identifying which budget category the expense belongs to, such as House Payment, Telephone, etc. Finally you are listing each category as one of the six expense types above.

The reason you are going through this difficult exercise is that you are going to be setting up a cash flow sheet that is going to regulate how much money you will spend on each of the expense types. If your estimates are accurate, you will find it far easier to follow the cash flow plan.

Managing your cash flow

2005-10-24T18:28:00.000-07:00

Once you have prepared an Expense Estimate, and have a month or two of Expense Log info, take the next step and create a cash flow plan that estimates your income and identifies specific dollar amounts for each expense type. Use a Cash Flow sheet to split up your income between savings and checking accounts for each of the expense types, and to guide your decision making when spending money.

The Cash Flow sheet is pretty much the same spreadsheet that you used for the Expense Estimate. The difference is that you write a new Cash Flow spreadsheet for each month, and adjust your income and expense projection to fit that month.

If your income varies by season, adjust each month in the Monthly Cash Flow worksheet. List your income sources and estimate your take home pay for each month over the next year. I generally use net income, after tax take home pay in cash flow sheets.

Some expenses vary by the season. You may want to increase the gas expense estimate during winter and reduce it in the summer. The electric bill will likely be higher during air conditioning season. Go through the Monthly Cash Flow sheet and adjust expenses that vary throughout the year.

Now you enter your income in and get the bad news: you want to spend more than you make. So adjust the expenses types, balancing your priorities, and find a break even solution that balances your need for each expense type. Remember that the Cash Flow sheet is just a representation of your spending patterns. You can massage it all day to make it fit a goal, but its only useful if you can actually make your spending pattern fit the budget. You will be more successful if you are realistic.

OK, you have split up your budget between the following expense types:

Regular Expenses
Debt Service
Variable Expenses
Annual Expenses
Strategic Expenses
Emergency Expenses
Investment

Now set up your banking account, preferably an online banking account with an automatic bill payment plan. The accounts should look like this:

Debit Checking - Variable Expenses
Main Checking - Regular Expenses, Debt Service and Investment
Annual Savings
Strategic Savings
Emergency Savings

Deposit all income into the Main Checking account.

Establish an amount for Variable Expenses. Set up a checking account with a debit card for variable expenses. Each month, transfer the budgeted amount from Main Checking to the variable expenses checking account. Separating variable expenses into their own checking account, and transferring only the budgeted amount for those expenses in the account is a good way to make sure your discretionary spending does not get out of control.

The Main Checking account is used to pay most other expenses, preferably using an online bill payer feature. Payments for Regular Expenses, Debt Service and Investment can be set up as automatic payments. Other expenses, such as annual expenses or additional payments to debt service and investment can be entered manually each month.

Using your Annual Expenses spreadsheet, set up an automatic monthly transfer from Main Checking to the Annual Savings account in the amount of the monthly average Annual Expense. When you pay an Annual Expense, pay it from the Main Checking and transfer that amount from Annual Savings to Main Checking.

Based on your past experience, your Expense Estimate and Expense Log, estimate a monthly average budget for Emergency Expenses. Set up an automatic monthly transfer from Main Checking to the Emergency Savings account designated for emergency expenditures only. This amount should be used only if emergency expenditures occur. When your emergency fund reaches two or three times your monthly income, you can shift the monthly transfers to investment. If an emergency expense occurs, try to use discretionary expense money. If that does not cover it, take only as much as you have to from the emergency fund, and then start replacing the emergency fund again with monthly payments.

Estimate an amount to set aside each month for Strategic Purchases and set up an automatic monthly transfer from Main Checking to Strategic Savings. If you add up all the strategic purchases that you intend to make, your monthly payment to the strategic purchases savings account should allow you to purchase the items on schedule (only if you are lucky!)

Set up your Investment budget amount as an automatic payment to your investment brokerage account. In additional to the regular, budgeted investment payments, you may be able to transfer additional funds, for example if you do not spend all of your discretionary expense budget, at the end of the month, sweep the remainder to your investment account. As you pay off debt, redirect funds to investment.

This system requires a certain amount of maintenance. If you are able to set up automatic payments and transfers, and you have a predictable income, this method requires less work than writing paper checks for all your bills. However, every bank is different. For example, I have to deposit checks in my debit checking and transfer them manually. Also, my transfers from the main checking to the other accounts are all done by hand. A checklist and schedule posted above my pc are very helpful.

Growing your wealth

2005-10-22T21:28:00.000-07:00

Once you have made your major purchases, paid off the short term debt (if any) for those purchases, and built up your emergency savings, then you can shift your income towards investment. You may not be able to start tomorrow with investing $1500 per month, but you can start with one or two hundred, and as you pay off debt, shift the flow of cash toward investment. Your goal should be to have purchased all of the household and transportation items in the first 18 to 36 months, and all items except housing should be paid off in 48 months. Then you need to stretch the service life of these items to ten to fifteen years.

If you want to be able to direct a large part of your income to investment, you will have to find ways to live well on less money. During this entire period, you need to be frugal with the small expenses and day to day purchases. While I recommend that paying more for quality food is a good idea, you really have to be tight with your money with other daily expenses. Avoid shopping for entertainment and purchasing convenience items. Make your own meals and spend your time on self-improvement rather than paying for entertainment. Focus on building and maintaining relationships with others.

Continually review necessary expenses to make sure you are spending your money wisely. If your regular expenses fall, shift the funds to investment. As your income increases due to raises or overtime, review the actual dollar amounts being deposited in each expense type, and when possible, increase investment.

Review your expenses by budget category and expense type every month and adjust the budgeted amounts to fit reality. Also, always keep thinking about how you could reduce expenditures or be more satisfied with the same dollars spent.

If you continue with this process over a period of one to two years, you will find that you will be able to allocate more and more of your income to investments which will allow you to live well in the future.

At the end of each month, send a check in the amount of the balance in your investment savings account to your investment brokerage account. If you are new to investment, your first investment should probably be a large-cap growth mutual fund with low expenses. Large-Cap means that the fund is made up of stock from larger companies, which should mean more security and less volatility than smaller company stock. Growth means that the fund is intended for those with an investment strategy of more than 5 years and that the goal is to take moderate risk to increase the investment. Low fees and expenses are very important for the long-term investor, always compare fees when considering a mutual fund. Take a look at the Vanguard Group, they are known for keeping the fees and expenses of investment low. You can either start an account with Vanguard directly or work through a discount broker such as Scottrade. Typically you will need a minimum of $3,000 to buy into a fund, and once in, you may make minimum additional payments of $100. As you research and learn more about investments, you may find more potential in individual stocks.

The purpose of this article is to help you get started building up your investment. For information on how to invest and how to know when you can afford to retire, see the Retire Early Page.

Choosing a career

2005-10-21T21:29:00.000-07:00

Assuming that one is starting out with nothing or with debt, you can expect to work and accumulate income for ten to twenty years before you can really expect to be free of the working world.

This means that you need to find career employment which you will be able to perform for a significant part of your life.

In order to be able to maintain your sanity, you need to do some self-assessment as to what kind of work you are most suited for. However don't obsess with job selection because you may not really know what type of jobs are out there and what type of effort and skills they actually require.

You may have to try a number of jobs before finding the right vocation. If you are moving from job to job, just keep trying to move in the right direction. Job selection is a highly personal choice, just be assured that somewhere there is a niche that you as an individual can fill.

You will often be paid the most for a job that requires you to sit for most of the day. Office work is comfortable, relatively safe, and many people aspire to an office job.

However, a number of years at a sedentary job can have negative effects on your health. In order to avoid the typical pear shaped body and heart disease, you need to do some activity that fills your lungs with air and gets your blood flowing every day. In addition you may need to do more strenuous training several times a week.

When working at a sedentary job, you must carefully choose your diet and quantity of food you intake. Walking or riding a bicycle to work is an excellent way to maintain your health when working at a sedentary job.

When you look at a career, check out how prone the occupation is to accidents. Do an honest self-assessment as to whether you have the balance, coordination and awareness to safely do the work and avoid injuring yourself. No need to cower in a corner in fear of moderately risky work, but just be sure that you know the risks going in. You are going to have to find a career that will support you for about 15 years, will you be able to stick it out on a truly dangerous job?

Pursuing full time education at a college or university usually means that you have to take a vow of poverty until you graduate.

Some people will tell you that a liberal arts education will produce a well rounded individual. As you move through most programs you will slowly begin to realize that they are set up to keep you studying as long as possible, and many courses have little or no benefit to you as a person.

It is important to recognize that universities are businesses. Their focus is to run you through the mill, collect your tuition, drop a sheepskin in your hands and show you the door. The longer they can keep you studying, the more valuable you are to them. As a graduate student, they can even get you to work hard for them for very little money.

Don't be fooled by the prestige or the awe of academia. Is there some knowledge that you need? Whether it is computer programming or welding, you need to research the ways that you can most quickly learn what you need to know. Quite often you can learn what you need to know on your own, through books or by talking to people who actually do what you are trying to learn.

There are benefits to a diploma, it is society's badge of "achievement" and is a necessary qualification for many careers. Many people feel unfulfilled and inadequate in their careers without a degree. But when you choose a diploma and course of study, you need to focus on an education that will benefit you after you graduate and will allow you to pursue a well-paid career. Carefully self-assess what professions that you think you could perform, and find the degree that is most valuable in those professions.

One of the most important parts of university life is that the people you meet will often become lifelong friends. In your first years at the university, try to socialize and meet as many people as you can, and spend time with those people that you like being with. As you get older, these people can be an excellent support group and are a lot of fun to be with as well.

Many students can only afford to study by taking out student loans. These loans make it extremely difficult to get started accumulating wealth as you begin work after graduation. Beware of student loans, although you may not be able to avoid them. Housing in student areas is notoriously expensive, and tuition is crushing to someone trying to live while working part time. If you are taking out student loans, at least try to take as many courses as possible, and spend enough time studying to get passing grades.

As always, consider your health; exercise and try to prepare nourishing foods. University towns are notorious for drug use and binge drinking. Have fun but don't fall into addiction, remember that your goal is to gain a degree quickly. Avoid people that are falling into drug use or alcoholism, except as a supporting friend trying to help them recover.

When planning your education, try to select a valuable degree, reduce the amount of student loans you use, get through your degree program quickly, meet lots of people, live healthy, avoid addiction, and have fun!

Health insurance

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Heath care costs have risen dramatically, and the cost of health insurance is a major concern to those who plan to retire early. It goes without saying that lack of health insurance in the United States is potentially a personal financial disaster. At the same time, the cost of a low-deductible, blanket health insurance policy is becoming cost prohibitive.

A number of points to consider:

If you or a member of your family has an existing health problem, you may not be able to get a new insurance coverage, and should stay with your existing coverage.
Hospitals and health care facilities have two prices lists: a high priced list for those who do not have insurance, and a lower priced list for those who have insurance, so it is important to have some kind of insurance.
There is a pre-tax medical care cost deduction from your income that can cover some of your health care costs.
Medicare kicks in when you reach a certain age.

There is another option.

High Deductible Health Insurance

If you select a health insurance plan with a high deductible, your insurance costs will likely go down.

There are different types of deductibles: per occurance, per person, per family, per year. You need to work out which plan will benefit you the most, and you need to know the insurance plan and schedule your health care visits to make sure you get the most benefit from your plan.

Health care facilities are notoriously bad at billing health care costs. Expect your bills to be in error, months late, and watch for double billing. You need to take charge by carefully accounting for your visits to health care providers. Consider paying up front to keep yourself out of the billing system (this is not always possible).

A suggested strategy:

Switch to a high deductible health insurance plan, either as an individual or as part of a group, and do this while you and your family are still healthy.
Save the annual deductible amount in a pre-tax medical account by having it deducted from your paycheck. This account is a "use it or lose it" account, so you have to make a guess as to how much you will spend on health care in the next year.
Save an additional amount for medical emergency costs in a savings account for emergency expenses.
Plan your health care visits to meet your insurance plan requirements.
Carefully account for health care visits, services performed and payments made.
Review when your Medicare coverage begins, and what type of health services it covers. Plan accordingly.

Things to avoid

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There are many traps and pitfalls in the path of life. Everybody would like to get their hands on your hard earned dollar. But there are also ways of thinking that you can fall into that will take you off the path and lead you in the wrong direction.

You need to make an effort to determine your goals in life, put them on paper, then every morning when you look in the mirror, ask yourself if you are still on the path to achieving those goals and decide what you can do today to bring you closer to those goals.

This section covers a number of pitfalls and will help you recognize when you or someone else is leading you astray from your goals.

Media brainwashing

Madmen admen are using extremely effective psychological manipulation to convince, coerce and cajole you to think that their product is needed to bring satisfaction in your life.

In addition, many television programs (sitcoms in particular) are intended to teach you what life should be like, and to give you an uneasy feeling about why your life is not as portrayed on TV. It's not only the TV media, but also print and radio as well. Everyone is pushing you to adopt a certain lifestyle, "because its what everybody is doing. Don't you want to be one of us? Everybody is doing it".

As if life were a series of financial purchases and transactions, and there were no more to it than that!

Resist, resist, resist! Media wants to push you into a snap decision. Sometimes its better to just turn the idiot box off.

Decide what you need based on your financial strategy and personal needs, then make sure you are getting the best deal you can. Be very conscious of what you give out and why.

Materialism

Nice car!
Designer clothing
Money pit house
Jewelry
Fine dining
The bar scene

If you can avoid expensive luxuries for ten to twenty years, you will be able to afford real luxury and freedom for the rest of your life.

Be cool and calculating, think first before buying into status products.

Obsessions

Knick knack syndrome
Recreational vehicle syndrome
Home improvement syndrome
Antique vehicle syndrome
Event ticketholder syndrome
Collector syndrome

It is very easy to pick up a hobby that costs you big bucks. It is easy to justify spending money on a hobby that you identify yourself with.

If a hobby or activity brings you closer to your life goals and objectives, then yes, do it if it fits into your financial plan. If you feel the activity will bring you a financial return someday, then compare the return against other investments and if the numbers work, go ahead.

If you don't justify the activity first, you may spend years of focusing your effort and funds on the activity and one day wake up wondering why you ever started.

Focus on money

Don't be a Miser!

Money is a tool. Do you want to collect tools or use the tools to build something?

In your day to day purchases, remember that your goal is to live well. Don't cheat yourself to save a few pennies.

Focus on attaining and accumulating wealth until you are able to live well from it. Then focus on maintaining wealth and living well.

Know why you are saving money by constantly reminding yourself of your life goals.

Focus on accumulation

For some, life's purpose becomes the game of making a profit and increasing the account. While it is important to play this game, it is also important to know why.

If you are one of the few lucky ones whose work is also your avocation, then being succussful is a reward for doing something you love. If you are working just because you have an inner need to win the game and gain more money/power/prestige, spend some time with your loved ones and think about what life is all about.

Temporary goals becoming life goals

Bearded skateboarders
Career students
Working retirees

Recognize the stage of life you are in and change your life to fit it. Sometimes this means moving on.

Influences by others

It is a good idea to avoid joining groups or subcultures that involve self mutilation, tattoos, devil worship, drug use, dressing up like a circus sideshow act, self-loathing, shocking haircuts, or large, involuntary financial contributions to religious organizations. Generally when members of these groups realize how ridiculous their behavior is and what a mistake they are making, they will leave the group in shame and sever all ties with others in the group.

You need long term friends and relationships, and relationships based on membership in these subcultures are often the type that no one wants to remember. Most of the members of these groups are acting out a part rather than being real anyway.

Even normal people can try to hold you back. People will be extremely jealous if they find out you are on the way to early retirement. Imagine galley slaves chained to their oars, when one slave discovers the key that unlocks his own chains. He'd better move fast and get out before the others realize they are still locked in chains. It is best if you are low-key about your strategy. Even better if others think that you just don't have a lot of money.

Spouses need to be in agreement with the strategy. You are financially tied to your spouse by law. If you make sacrifices to save money and your spouse uses the money, you are just spinning your wheels. It takes teamwork to make a financial plan a success.

Your employer wants you to be dependent on your paycheck. Avoid letting anyone know you are plotting your escape!