If you dream of financial freedom and early retirement, you’ll need a plan to make that happen. Financial security is key to retiring early because you must make sure you can stop working and live on the money you have.
Staying out of debt and building up your net worth are two actions that can help you gain financial independence and help increase your chance of successfully retiring early. Gaining financial stability requires patience — you need to learn how to effectively manage your money and create passive income streams. Here’s what to do if you want to retire early and put yourself on the path to financial independence.
The Secret to Retiring Early
If you don’t see yourself working for a company until you retire, you should explore some other ways to generate income. Building passive income streams — that is, recurring revenue from a business or other endeavors like owning rental properties — keeps money coming in so that you don’t have to rely solely on your savings or Social Security benefits. Consider these six ways to take control of your finances and plan for an early retirement.
1. Calculate Your Retirement Needs
The first step to retiring early is figuring out how much money you need to do it. You might need to consult a financial planner to discuss retirement goals or use a financial planning app or other resource with a basic formula that takes into account your current annual spending, income and year you want to retire.
Financial independence blogger Mr. Money Mustache recommends multiplying your annual spending figure by between 20 and 50 to figure out your retirement needs. You could also use an online retirement planning calculator to create a forecast. Having a defined number in mind can help you visualize your goal.
2. Reduce Living Expenses
“To get rich on an average income, you need to have lower-than-average spending,” wrote Mr. Money Mustache, a personal finance expert. Changing your spending habits and getting a handle on your budget are essential steps toward reaching your financial goals, so you’ll need to give up bad habits that result in your spending more than necessary.
Convenience and comfort-seeking and unnecessary shopping are habits that are widespread in U.S. society, and most of these stand between the average person and the truly wealthy life, according to Mr. Money Mustache. Do what you must to break habits that are costing you, and optimize your budget and spending to reduce living expenses.
3. Increase Your Income
If you’re still living paycheck to paycheck — even after cutting expenses — you’ll need to find ways to increase your income so you have money to invest. Whether your goal is to play the stock market or invest in a business venture, there are several ways to generate more income.
You could take on a part-time job or find freelance or contract work. You could also focus on building a side business that will become your main source of income.
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4. Start Investing Early
You’ll have a better chance of reaching your retirement goals if you start investing when you’re young. Even if you think you’ll have more money to invest when you’re older, don’t miss out on the benefits of compound interest on those initial savings contributions now.
Make room in your budget for retirement savings contributions so you can start earning compound interest sooner rather than later. You’ll likely be surprised at how fast that money will add up.
5. Decrease Debt
Paying off your mortgage, clearing credit card account balances and paying off loans can help increase your net worth. If your goal is financial freedom, you don’t want to be making monthly payments or paying interest on old debts.
You should do whatever you can to reduce your debt load and avoid acquiring new debt to keep yourself on track, according to Mr. Money Mustache. You might want to consider using a tool like the Pay Off Debt app to organize your debt repayment plan.
6. Create Passive Income
“You need to start living a lifestyle in which you’re no longer trading time for money — you can create something valuable one time that people will continue to purchase,” said Pat Flynn, creator of the Smart Passive Income blog. But generating passive income requires patience as well as work.
If you start making money from an online business, generating passive income won’t happen overnight, but it will put you on the path to earning revenue from something you created, said Flynn. In addition to starting your own businesse, other passive income ideas to consider include investing in a lending club, earning cash back rewards on credit cards and getting paid for promoting digital products on sites like ClickBank.