I don’t know about you, but when I was younger and used to think about money, I assumed it was just math, dollars and cents. All you had to do was understand how simple math worked, make a bunch of money, save it all and invest. You are good to go! As it turns out, this was only part of the equation. Without a doubt, having the knowledge around the math of early retirement is a must, but just as an important is understanding the physiological components of money, and your life when you no longer “earn” money. In the final article in Level 1 – The Basics, I’ll explore what your life in retirement might look like and discuss some things to ponder before you pull the plug. Prior to moving to early retirement, be sure to do some self-reflection on your emotions, relationships, and what you plan to do with your time.
On the journey to early retirement, knowing exactly how you plan to access your savings is key. It's hard to plan for the future, when access to funds is murky. Most people think that early retirement is impossible in part due to the rules governing withdrawals from retirement accounts. For instance, one of the most common questions I hear is “all my savings are in my 401K, and I want to retire at 40. How do I access my money without handing over massive amounts of money in penalty payments???”
When it comes to financial independence, you absolutely must master income, savings, spending, and debt. Mastering investing actually isn’t required to become financially independent, but boy, it sure does help! Investing, in its simplest form, is using money, to make more money. You trade your valued money today for an expected return, or greater sum of money, in the future. As you raise your income, increase your savings, take control of your spending, and pay down your debt, you’ll have extra cash on hand... You have a choice to invest, or stash under your mattress. Both will eventually get you to financial independence and early retirement, but the mattress approach will take FOREVER. You have to ensure that your money is working for you, and making more money, and to do that, we need to get comfortable with investing.
Income and savings, and associated spending, drive success towards financial independence and achieving early retirement. Debt, on the other hand, is the wildcard. It can completely cripple any chance of reaching financial or, it can be an accelerant and turbo charge the dollars coming in the door. I view debt in five separate buckets. They are mortgage, credit card, student loans, auto loans, and other. Mortgage. Mortgage is a term that that describes a loan for a piece of real estate. Most folks know a mortgage as the bill they pay each month to keep their house. There are various types of mortgages available, and each have their benefits and drawbacks. We will go into home loan options more in Level 2. The average American has mortgage loan that totals $173,995 (https://www.nerdwallet.com/blog/average-credit-card-debt-household). Or in other words, their name is on a sheet of paper, but the bank owns $173,995 worth of the house they live in. When I talk to people, most say they “own” their home, or that they are a “home owner”. In reality, they only own a fraction of the home they reside in. For most folks, the bank owns the majority of their home. Over time, if they continue to make mortgage payments, they will eventually “own” their home once the debt is fully paid off. Total mortgage debt in the US sits at a staggering $8.74 trillion.
Directly tied to the concept of savings rate is spending. How much you spend drives your savings rate. Your savings rate and income level drive how quickly you can reach financial independence. Not rocket science, but some never put all the pieces together. I view saving in three buckets: • Big Ticket and Bills • Discretionary • Experiences and Entertainment Big Ticket and Bills. This bucket is by far the largest and includes things like housing and utilities, transportation (payments, maintenance, insurance, and fuel), food, personal insurance and healthcare. According to this data Data, these items add up to approximately 81.5% of the average American’s spend!