One of the most important trait that people who want to retire early need to practise is minimalism. If you keep buying more stuff, you will take longer to retire. I made this mistake early in my life, but I was not too late to correct course. Especially because some of the things come with a burden of lifetime maintenance; for example owning a car. The constant repairs, upkeep and insurance keep adding to your expenses. Not just vehicles but every single thing that you own, ends up owning you. So if you would rather have freedom, you have to give up stuff. This is in continuation of step 2 of How to Retire Early in 5 Steps — Rid Yourself of Debt and Save Aggressively.
When you are young, there is a lot of peer pressure to own the latest smartphone, wear fashionable brands and drive the latest cars, but that is also the time when you should be saving a lot if you want to retire early. How soon you can retire is simply based on your expenses and your savings. If we follow the 4% rule for retirement, with expenses at 20% of your take home salary, and you manage to save 50%, then you can retire in 11.28 years (assume 6% inflation and 10% return on investment). It is a conservative number. You can retire sooner if you use 6% rule and 12% rate of return. It is that simple. I will write another post on how I arrived at the number. You can play with those two numbers (expenses and savings as a percent of take home salary) to get the number of years to retirement.
Now you might ask, what happened to the 30% of the take home salary that went unaccounted? That is the EMI part. As an example, if your take home salary (net of taxes) is Rs. 1,00,000 then, if your expenses are Rs. 20,000 and your EMIs are Rs. 30,000 then your savings will be Rs. 50,000. In that case your expenses are 20%, EMIs are 30% and savings are 50%. The bigger the saving percent, and smaller the expenses percent, the faster you can retire. I separated EMIs out of the equation because I assume you will not have any loans to service by the time you retire and your expenses in retirement are just the 20% expenses.
Assuming you have already worked on cutting down your EMIs to the bare minimum, the next step is to tackle expenses and save aggressively. Get rid of that gym membership and start running outside. Instead of eating out, cook at home (it is much healthier anyway). Cut down on expensive internet and cell phone bills, the expensive maintenance on those vehicles which you barely use. Whatever you can think of, cut it down. But of course if you have your heart set on that BMW, then you will need to set your expectations right on when you can retire (it will not be early ;), I assure you).
Finally, increase your savings as your salary increases. At least try to keep the saving at the same percent of your salary every year. So, as your salary increases, the savings also increase. But this may not always be possible. Perhaps now you have kids and their school fees increased, etc. Which is why starting early is very important.
Before ending the post, I want you to read this interesting article and figure out what type of person you are. You don’t need to become a millionaire, but I want you to be the ‘saver-investor’ type. To summarize, these kind of people
- Have zero debt
- Have low living expenses
- Make a modest income
- Save more than 20% of their income
- Save and invest consistently
In my case I have been fortunate enough to be both a ‘saver-investor’ and a ‘virtuosos’ type (worked for large, publicly-held corporation, in which a significant portion of the compensation was stock-based) which helped me speed up my retirement.