Financial Freedom and early retirement sound too good to be true if you are stuck in a 9-5 job. But when you don´t know how to save and invest money the right way; It won´t be easy. However the more you learn to budget and invest your cash the better you can secure your financial future.
Paying off debt and Budgeting your Money
The first thing you should do is avoid debt at all costs; it can trap you in an endless cycle of repayment and work. But if you are already in debt?
Then you have to find a way to get out of this trap. A side hustler, renting out a spare room, or saying no to dinners out are ideas that can help with that.
Also, prioritize how you repay your loans by putting them in order from highest to lowest interest rate. Yes, paying off your smallest debt might make you feel better, but it won´t help for your financial freedom. You have to keep your finances in check and try to pay off as much of the minimum monthly debt you can without hurting your living expenses.
When you want to grow your assets, you have to pay all of your debts first. Try to stop overspending your credit card or debit card at all costs to stay financially healthy. Get rid of credit cards you don´t need; this will help you to stop falling into debt again. Another helpful tip is that you can get a lower interest rate if you try to negotiate with the credit card provider. Convince them by saying that you consider switching providers; it can get you a better rate.
Another problem of debt can be when you have a mortgage on the house. It would help if you found a good option where you have lower and fixed interest rates. You can also set up a biweekly payment plan at your bank; this will allow you to pay off your mortgage faster than you would on a monthly basis. Of course, this is only possible if you are confident to put enough money aside to pay for your house debt.
One of the most important things is to spend your money according to the budget you have, not for the lifestyle you think you should be living. Do this by checking out your financial situation on all your accounts. You can use the money budget planner to see where you need to save money that you can save either pay off debt or use for an investment portfolio.
You have to know what money is coming in and what is going out in one month so try to be as detailed as possible. Even it was just a small coffee or that bonus income you got this month you can add new rows for everything you need when you use the budget planner.
If you are done calculating, you can analyze the results. What are the things you overspent on? Where can you save money to pay off your debt or use it for investment? Look into your results to find out how your financial behavior is. It will help you plan your finances for the future.
You can apply the 50/30/20 plan to ensure your spending is under control. 50 percent of your income is for your fixed costs, like rent and utilities. The 30 percent is for lifestyle or variable cost for groceries, travel, and other experiences. And the last 20 percent should be saved.
This breakdown will be different for most people, but when you know your finances on what goes in and out, you can learn how to get more value out of your money. You should adjust your financial plan that you both can pay of your past debt and may already start saving for your future self.
Saving for your financial freedom and early retirement
Retirement doesn´t depend on how much money you earn but on how much you save. You can make and spent the same millions of bucks a year, then you entirely depend on your job and won´t be able to retire. But if you have an income of $40.000 a year and spend only $30.000, you already can save 25 percent.
To reduces your time of retirement is up to how much you are willing to save. Firstly start by cutting out your living expenses, which will get you a larger amount of cash you need to retire. You may have already done this with the money budget planner, but if not, it’s recommended to do so. Because it will help to know where you can save and put money aside.
There are many ways to save your money from things like transportation to insurances or entertainment; you just need to find out where you can reduce your costs. It will help to integrate different savings options in your life when you want financial freedom.
Consider now and then increasing the money you save because when you boost up your savings a year later for example, from ten to 15 percent, you may go five years earlier in retirement.
To know if your portfolio is self-sustaining, your annual living cost shouldn´t bigger than 4 percent of the total value. Economists call this a safe withdrawal rate. The number helps you determine the size of your targeted portfolio. Simply multiply the annual expenses by 25. So when you need to withdraw $40.000 a year, your portfolio should be $1.000.000.
It seems like a lot of cash, but you can also use alternative strategies. For example, take partial independence. It gives more free time and is archivable with a smaller portfolio. When you work at a part-time job and earn $28.000 after tax instead of $40.000 a year, you have a shortfall of $12.000 in your budget. Multiply that number by 25, and you get a new target portfolio of $300.000. If you save that amount, you can enter a part-time retirement.
Make sure to put enough money aside for any emergencies like a health issue or tax payday, job change, or other expenses you don´t expect. It is recommended to have around six to 18 months’ worth of salary saved where you have immediate access if you need it.
Another idea is to create an income in a country with a stronger currency like the US or Germany and retire in a country with lesser living costs like Mexico or Thailand. You can live a more luxurious life for around $1.130 a month. You need a target portfolio of $339.000 for retirement if your living cost is $13.560 per year. Of course, this option only works if you are willing and can move into a new country.
How to start investing with little money?
When you only work for your money, you most likely want to get financial independence. But if you make your money work for you by investing it will help to increase your wealth. The earlier you start putting money aside, the more time your cash has to multiply.
A good idea is to make a bank account that you use to save and for investing. Make sure to set up an automatic transfer for a percentage from 5-20% of your salary every month to this account. With the Investing Budget calculator, you can see how much you can save for your investing.
To know how long it takes to double your money, you have to understand rule 72. You need to divide the number 72 by the annual interest rate of return you´ll get at any investment.
As an example, if you invest $1.000 in a fund with a 7% return in a year, you need 10.29 years to get $2.000 without working for it. (72 / 7 = 10,29)
Make sure to realize a dollar saved and invested is not the same as you spent one.
Where to invest your money?
When you saved money that you can put aside, you need to learn where you can invest even if you have only a little money to invest. You can find many ways to make your money work for you.
Start by making a retirement account if you don´t already have one. In the US, for example, you can use a 401 (k) retirement plan where up to a certain point, your employer matches the contributions you make, which is free money. If you live in another country, do your research on what retirement options you have. You can also consider an individual retirement plan as an investment but the best is to ask a financial advisor to help you.
Be sure to look for different retirement accounts and choose the one with the best conditions and no or small fees and one that help you the most.
Another option is Index Investing, which is a list of top companies that are ranked by market capitalization or the overall value of their public shares. You effectively bet on every company on this list. A single failure won´t hurt because these are multiple high-performing companies.
In the index, there is a build-in barometer when a business is worth more the index buys more shares and vice versa. And if a company value drops, it can be kicked off the index entirely. There are many major indexes like the S&P 500 list of shares from the 500 biggest businesses.
The good thing is it’s a simple concept you don´t need to pay for a hands-on fund manager. For example, index funds often charge fees of just 0.04 percent, which is about 25 times lower than what you pay for an actively managed fund. And even better sales commissions are also $0 for index funds.
It is also helpful if you invest in courses to learn something new no matter if it is for your job or personal development. Because learning how to make more money and improving yourself will help you a lot to become financially independent faster.
Many people are now investing money in websites and selling products online. It can be quite profitable if you build an online business. The initial budget isn´t as high as for other businesses, and a website can run without you if you have the right people.
So you still earn money when you are retired if you created a valuable content website or sell quality products. You can also buy already running online businesses on flippa. That way, you can earn money right from the start.
A recommendation is to diversify your investment portfolio when you have a good amount of money saved. You can choose between a lot of other ideas you can invest in like stock and bonds, real estate, cryptocurrencies, and many others.
But investing is not the only way to get more money. You can negotiate your salary; yes, it may seem a little scary. However, it is one of the most powerful ways to improve your financial health.
Check out a benchmark salary for any job by searching on websites like PayScale and Glassdoor. You got a clear view of what your worth is, which can use in your conversation with your manager, where you should negotiate without accepting an opening offer right away. Negotiation is an indicator of confident professionalism, so stay positive and never act overly impressed with what´s on the table. Always ask for time to consider an offer and don´t agree right away.
The most important thing you should do for financial freedom is to become and stay debt-free. You need to know how to save your money the right way. Be sure to transfer a percentage of your salary automatically to a saving or/and investing account. The earlier you begin with saving and investing, the better.
It will help you a lot to build a diversified investment portfolio where you can start to invest in a retirement plan and an index fund.
Make sure you understand how to manage your money properly and let it work for you. It will improve your financial situation a lot, which ultimately helps you to reach your goals and dreams and to get financial freedom, and retire early.