The Four-Pronged Approach To Early Retirement
This is the third chapter in the mini-series on getting yourself ready for retirement.
In the first chapter, we saw that retirement is not what most people think it is, and because it is what it is, and not what people think it is, it should not be the end goal of your career, but one of the first milestones that you set for yourself to work towards. Once you’ve set it, you should continually try to move your retirement date earlier.
In the second chapter we looked at the basic principle of saving more and investing better, and identified that this is something you should try to learn as early in your life as you can – and not way until one day when you have to do your final retirement investment.
So today we are going to pull things together by identifying the four things that you need to be doing, in order to achieve the above goals
Practice deferred gratification and frugal living
Make every effort to begin to practice the concept of deferred gratification that we learnt about last week, and turn over every cent twice before spending it. Every time you are about to spend money, ask yourself if there is any possible way you could wait another month before spending this. This brings down your average monthly expenditure – which means that you begin to need less to actually be able to retire. So you shrink the difference between your required income, and your potential income, by making the required income smaller. As Warren Buffet says, "don’t spend first and save what is left over, save first and spend what is left over."
Increase your income
Secondly, try to increase your income. That is often not easy in the short term, but possible in the medium and long term. The easiest way to increase your income is to continually build valuable and scarce skills in areas of work that you love doing and are passionate about. The more developed these skills are, the more in demand you become, the higher the salary you can expect. Of course you also need to build some career management skills, learn how to negotiate a better salary, and so on. If you are so inclined, climbing the corporate ladder can also be quite rewarding financially. Research has shown that most people underestimate the difference between their own and their boss’s salaries. And most people definitely underestimate with how much their salaries could increase if they were to move two or three rungs up the ladder. But most importantly, when your income does increase, then from the VERY FIRST MONTH, make sure that the extra money goes straight to savings, NOT to upgrading your lifestyle.
More difficult for many people, but potentially much more likely to give significant benefit, is starting your own business either on the side, or full time.
Another alternative is to take a second job, freelancing after hours, or something along those lines.
Just be careful with that. Sometimes the energy and time you put into this can distract you from growth that could you have moved you forward in your career. So think, plan, and act deliberately.
Save every extra cent IMMEDIATELY before it finds a hole to disappear into
Thirdly, take every cent that you save in this way, and put it away into some kind of savings account immediately. This pushes up your investment value, which means your potential income increases. If you have high interest debts, you may want to pay these off by putting this extra money into those – that will reduce your expenses – but always remember, you can never retire on "debtlessness". Paying off your debt is NOT a strategy to retirement. It can be a stepping stone.
Learn to invest wisely
Once you’re in the habit of living a relatively frugal live, have begun increasing your income, and are putting away every cent that you are saving, your final strategy is to begin to develop your ability to generate growth and income from investments. Trying this is easier than ever, with most banks (in South Africa, at least) offering you the ability to buy and sell shares on-line with very low brokerage fees. Trying may be easy, but getting it right is just as difficult as it has always been, and it requires some reading, studying, trying and learning. We covered the common investment options in the previous post, but you should do your own research. Start investing money, and until the day you retire, make sure that all the income you generate from your investments go straight back to those investments. As you begin to read about investments you will also begin to understand the difference between growth and income generating investments. With that knowledge you can begin to create an investment strategy to get you to retirement. But until you start and try to learn what is really possible, and what is just hot air, you will never know.
Should you save first or get out of debt first?
So let me digress for a moment and tell you my story of trying to get out of debt: Most people will tell you to start by paying off your debt, and their reasoning is very sound: Typically the interest you can make on saving money, is less than what you pay on short term debt. Maybe that can work for you. It never worked for me, because I had at the time not yet broken the pattern of my weakness for instant gratification. In fact, I still struggle with it.
So what happened when I tried to pay off debt, was that as soon as I felt comfortably back in control, I would just make debt again. Call me weak if you want.
I may be weak.
But I’m not stupid.
So I realized that this was not working for me, and I started a different approach.
I started reading about investing. I read "The Gone Fishing Portfolio" by Alex Green. I started reading the "Seven Million Seven Years" blog. I started reading William Cowies "Bite the Bullet Investing" and "Drop Dead Money" blogs.
And I started by taking a bit of my money at the BEGINNING of every month, and putting that into a savings account, regardless of how much debt I had. And every time I had a few thousand in there, I would transfer it into my stock trading account, do some research and buy some shares in a company that looked like a good investment. The result of that is that even now I still have some of the debt I had when I started, but my investments give me a higher return than the interest I pay on the debt. It has worked really well for me. I am closer to retirement than I would have been if I had kept on just trying to pay off my debt.
Doing those four things at the same time, will begin to change your life. You will begin to get a sense of moving towards a target of financial freedom – and financial freedom is often one of the most important steps to achieving a point of really building a successful career. Having financial freedom gives you a whole lot of unexpected (or maybe somewhat unexpected) benefits, such as an increased sense of confidence, the ability to take risks at work and go for promoting or driving something you REALLY believe in, and make a success – something you might have avoided if the risk could cost you your job.
As with most things that relate to building a strong career, this is not a "do this quickly and tomorrow life is better," approach. It is about taking the first steps and beginning to build something that for some people may take ten, fifteen or twenty years.
But it is possible.
If you focus on building a strong career, and at the same time focus on managing your money really well, I can assure you that early retirement is not just a dream, but a very real possibility.
To Your Balanced Wealth
About The Author
Ashton Fourie is a Management and Organisation Development consultant with a passion for life-long learning and growth as foundations for meaningful success. He started out working as an office cleaner for a small cardboard factory, worked himself up, and has since built up 15 years of management experience, obtained a degree in Business Management and is completing a Master’s Degree in Managing and Leading Innovation and Change. He is married to a beautiful Chinese lady and has a 7 year old daughter and 5 year old son, who are both fluent in English and Mandarin Chinese.