As we head back to work after the Christmas break many people are contemplating how nice it would be to stay on holiday. By taking an early retirement, you could be on permanent holiday much sooner than you think.
Here are 3 steps to follow if you want to retire early.
1. Up your savings rate
Saving is an integral component of retiring early. No matter how well your investments perform, if you only have $100 invested, you probably won’t make enough to retire on. In order to save, you need to know what you’re spending. If you don’t already keep track of this via a budget or app, try doing so for a month. Take a look at your highest expenses – there is usually the most scope for saving on big ticket items.
Our highest living expenses are usually housing and food. See if you can reduce these expenses. This could involve cooking at home more often or cutting down on gourmet foods. The rest of your savings progress may be more incremental. Look to cancel underused subscriptions, resist discretionary purchases, and avoid late fees and fines. Start a retirement fund and dedicate each dollar saved to the fund – that way you can track your progress.
2. Increase your income
Increasing your savings is important, but can only go so far. After all, it is impossible to cut your spending down to nothing. By contrast, the more you earn, the more you can afford to save and invest. Increasing your income might mean seeking a raise or promotion, or it could mean picking up a second job or starting a side hustle.
If you’ve been in the workforce for a few years, you probably have sufficient experience to start looking for a promotion. You should also be secure enough in your position to know whether a side hustle is a realistic proposition. If you’re thinking of asking for a raise or promotion, look into negotiation strategies and start laying the groundwork ahead of time. If you’re thinking about a side gig, consider your skills and interests and start investigating the market for them.
3. Make your savings work for you
Once you’ve started accumulating some savings, it’s time to get them working for you. Once your savings grow to certain point focusing your energy on growing your retirement fund will have a more material effect than trying to reduce your spending further. Investing in ASX shares can help you grow your savings to fund your early retirement.
Investing can be done directly by buying individual shares such as CSL Limited (ASX: CSL), Altium Limited (ASX: ALU) or or Appen Ltd (ASX: APX). Diversified exposure can also be gained through low cost index funds such as the Vanguard Australian Shares Index ETF (ASX: VAS) or the Betashares Australia 200 ETF (ASX: A200). Chose an investment that’s right for your risk profile and investment goals.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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.