3567: Want to Retire Early? - Focus on This Rate by Christina Browning of Our Rich Journey on Early Retirement Strategy

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[00:00:51] This is Optimal Finance Daily. Want to Retire Early? Focus on This Rate by Christina Browning of Our Rich Journey

[00:01:01] Do you remember when you thought that retirement involved grinding away for 30 to 40 years in the workplace before you could even think about retiring? Don't be shy. Raise your hand. Most people think like this. I once thought like this. But people don't have to think like this. It all begins by slowly changing the retirement mindset. By thinking about financial independence and retiring early.

[00:01:27] That's right. That's right. Aman and I retired before 40 and more and more people are retiring early these days. Think about all the things you could do if you could retire in your 50s, your 40s, or even your 30s. With the FIRE movement, gone are the days where you have to wait until 65 before you can sit back and enjoy the fruits of your labor without worrying about working that grinding 9 to 5.

[00:01:51] It just takes some pretty simple math to figure out how to make early retirement feasible for you. And I'm here to guide you through it. Let's start with your savings rate. Your savings rate is the key to reaching financial independence and retiring early. Calculating your savings rate is simple. You just need to take the amount that you save and divide it by how much you make. Let's say you earn $100 and save 50. Your savings rate would be 50%.

[00:02:19] If you want to work towards early retirement, you need to increase your savings rate. There are two ways to do this. First, you can make more money without increasing your expenses. I know this seems obvious, but think about what you did when you got your first pay raise, or any pay raise. Did you set up your investment accounts to automatically invest more money? Or did you go out and buy that new purse, that new watch, those new shoes? Did you go celebrate at a fancy restaurant?

[00:02:48] Do you get where I'm going with this? Most people tend to spend more as they make more. Step one, to raise your savings rate. Make sure your expenses don't increase along with your increased income. There's also a second step or another way to increase your savings rate. Decrease your expenses. And there are so many great reasons for decreasing your expenses. For one, it conditions you to be more mindful of your money.

[00:03:15] It makes you analyze your expenses and forces you to focus on buying only those things that matter the most to you. Two, it also helps you grow your wealth. By saving more money, you're able to invest more money. So, you've got one of two options to increase your savings rate. Aman and I actually did a combination of the two. We saved more and we reduced our expenses. But of course, you can't just save your way to early retirement. You need to go one step further.

[00:03:44] What to do with your savings? Saving money is great, but investing is an essential part of reaching early retirement. The idea is that if you're pursuing financial independence to retire early, you want an investment portfolio worth at least 25 times your anticipated annual expenses in retirement. This is based on the 4% rule. The idea that you could live comfortably in retirement by only withdrawing 4% from your investments every year and never run out of money.

[00:04:14] So, if you're pursuing financial independence and retiring early, you need to go beyond the typical savings rate and investing mentality that most Americans have. Here's an example of what I mean. Let's compare two American families. First, we have an average family saving money with more traditional retirement goals in mind. Let's look at their annual expenditures. Annual income, $60,000. Housing costs, 30% of income.

[00:04:41] Food, 20% of income. Clothing, 10% of income. Transportation, 15% of income. Medical, 12% of income. Entertainment, 3% of income. And savings, 10% of income. By saving 10% of their income per year, the average family can expect to retire in about 51 years. But consider a family who focuses on an early retirement savings and investment plan.

[00:05:11] Let's assume that this family house hacked, like we did, and was able to live rent and mortgage free, like us. Let's also assume that this family figured out how to cut their food bill by 20% and they purchased used cars in cash so they didn't have car payments. Let's assume medical and entertainment costs were the same as the previously mentioned family. By cutting housing, food, and transportation costs,

[00:05:37] the early retirement-focused family can contribute an incredible 67% of their income to savings and investing, compared to the average American family. This means that this early retirement family could safely and comfortably retire in just 10 years, without running out of money. Saving more than 60% of your salary may seem hard, but I can tell you from experience it is possible. By focusing on our larger expenses, like housing, transportation, food, and travel,

[00:06:07] we managed to set up a super high savings rate. Finding ways to cut down on all major expenses across the board was our guiding light towards early retirement. There are a lot of ways to reduce your expenses and to save more. Focus on those large expenses. Create a budget and stick to it. Don't let your expenses increase with your income. And also focus on those reoccurring costs that might be chipping away at your budget. The goal is to save more so that you can invest more,

[00:06:37] so that you can, you already know where I'm going with this, reach financial independence and retire early. You just listened to the post titled, Want to retire early? Focus on this rate. By Christina Browning of Our Rich Journey. I don't know about you, but even with regular cleaning, it seems like dust is never ending. That's why so many listeners have discovered Air Doctor, the air purifier that's changing how people breathe.

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[00:08:00] A-I-R-D-O-C-T-O-R-P-R-O dot com, using promo code OFD. Dell PCs with Intel inside are built for the moments that matter. For the moments you plan and the ones you don't. Built for the busy days that turn into all-night study sessions. The moment you're working from a cafe and realize every outlet's taken.

[00:08:24] The times you're deep in your flow and the absolute last thing you need is an auto-update throwing off your momentum. That's why Dell builds tech that adapts to the way you actually work. Built with long-lasting batteries so you're not scrambling for the closest outlet. And built-in intelligence that makes updates around your schedule, not in the middle of it. They don't build tech for tech's sake. They build it for you.

[00:08:50] Find technology built for the way you work at dell.com slash dellpcs. Built for you. When it comes to our savings rate, we're really referring to the gap between our income and expenses. Our wealth is built in the gap. I'm glad Christina pointed out that we really need to be investing our available dollars. But many of us use the word saving and investing interchangeably.

[00:09:18] Many people will say that they're saving for retirement when they're actually investing through a 401k. We can dismiss it as semantics, but I do think the distinction is important. Saving for big-ticket items is a valuable skill set that will allow you to buy things you want while avoiding debt. But it won't make you wealthy. The key to building wealth is to buy assets and let your money work harder than you ever could by growing through the power of compound interest.

[00:09:48] Cash sitting in a bank account can provide security. In the form of an emergency fund, for example. But money growing in an investment account is where your financial freedom lives. And that's a wrap for another Thursday show. Have a great rest of your day, and I'll be back tomorrow where your optimal life awaits. I'll be back tomorrow. I'm glad to see you next time. So, let's begin. See you next time. Thank you.