The simple personal finance secret to an early retirement

Early retirement isn't just for the mega-rich or the top 1% of society – and this simple secret can unlock your potential to FIRE.

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For some, the idea of early retirement seems so foreign and out of reach that it isn't worth trying. Despite all the articles you might read on early retirement and financial independence, it's probably because it's some surgeon, banker or Silicon Valley IT guy who earned $200,000 per year and retired at the age of 30.

But early retirement isn't just for the mega-rich or the privileged and is very achievable for the average worker in the Aussie economy.

Assets less Liabilities = Equity

The same basic accounting equation holds as true for individual investors as it does for the ASX companies.

While there are many avenues of investing and a lot of complexity in the world of finance, early retirement really does boil down to spending less than you earn.

While you might have the IT professional earning $250,000 per year, that same professional might have experienced the lifestyle inflation in their circle of peers and have the massive mortgage on that $2 million home, be financing a shiny new BMW and be sending the kids to private schools.

Consider now a primary school teacher who earns $60,000 per year, but lives frugally and is able to save 40% of their wage per year. That teacher could be significantly outpacing the IT professional on the road to early retirement simply because they have better control over their spending and actually save a higher net amount (after expenses).

Financial independence and early retirement, or "FIRE", is achievable as long as you keep your expenses low and manage to save (and invest) additional income as your wage increases over time.

The FIRE movement doesn't require you to get lucky on the next hot ASX stock or leveraging up on commercial property. Simply by cutting expenses, having higher residual income and letting that money compound over time.

By investing that residual income in income-producing assets, such as a well-diversified share portfolio, you can build let your money work harder for you and retire early on a passive income that satisfies your (hopefully frugal) spending needs.

Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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