It’s not so much how much you make; it’s what you do with what you make that can help you create wealth. Case in point, a friend of mine just retired at age 53. In today’s economy, retiring early is tough to do – virtually impossible—yet she did it and her husband has never had a “regular job.” She worked as an administrative assistant at the University of California in Davis, California. Without a college degree, she never earned six figures but what she did earn, she and her husband saved. They were very frugal and what they saved they invested in rental property, which he managed, as well as in her 401(k). I love reading her recent Facebook posts sharing things like “It’s a rainy day and I don’t have to go into work!” She and her husband achieved financial freedom and so can you.
Last week I started 24 ways to boost your retirement savings and build wealth – here is the link. Here are a few more tips on how to budget, save, and stay out of debt so you can achieve financial freedom, too.
1. Save more. This seems like a no-brainer, of course, because you can’t build wealth without saving but what I am talking about here is your savings trend. Save more today than yesterday. (Think – old school song by Spiral Staircase – “I love you more today than yesterday.”) If you are saving 10% of your income in an emergency fund or an investment fund, save 11%. If you have been able to save only 3% of your income, challenge yourself to save 4%.
2. Go extreme in your savings. There is a movement called “early retirement extreme,” which combines high rates of savings and a frugal lifestyle in order to save 75% of income instead of the traditional 10 – 15%. Goal – financial freedom. These guys have something interesting going on here – very much worth a look.
3. Save half of your quarterly and annual bonuses. Don’t spend your tax refund or your bonuses before they hit your bank account. Plan on saving or investing at least half of your bonus to invest for your future. Investing a $1,000 annual bonus each year at 6% over 30 years would grow to about $84k for retirement. Withdrawing 4% on this investment could bring you about $3,350 a year in additional income for the rest of your life.
4. Set up your savings on auto-pilot with automatic transfers from your checking account to a savings account. Reduce the number of decisions you have to make by making one and setting it on autopilot rather than making a savings decision each month.
5. Invest outside your 401(k) by opening a brokerage account and setting up an auto-investment to purchase securities.
6. Attack your debt. This one comes from my fellow blogger Michael Smith (who, as you may know, has a refreshingly odd sense of humor.) Michael suggested, “Work like a blind dog in a meat house to attack your debt.” Debt is like an anchor around your neck dragging down your ability to save and invest and move forward with your goals. Get out of and stay out of debt. Here is a great calculator to help – Debt Blaster.
7. Use your Roth as your emergency fund. The Roth IRA has an unusual feature – the ability to withdraw your principal without a penalty from the IRS. Since this is the case, the Roth can work double duty for you as a retirement funding vehicle for tax-exempt income in retirement and your contribution can be a back up emergency fund (the earnings may be subject to taxes and penalties if withdrawn before age 59 ½ or within 5 years of opening the account.)
8. Run your vehicle into the ground until it is literally falling apart. The new car smell is nice but the old car payment is sweet. No car payment is even better. In his blog aptly named, “Car Buying: A Way to Save a Fortune” Michael Smith shares his experience of buying late model cars and driving them forever and saving a fortune doing it.
Seems like a recurring theme here — save and then save some more. It is amazing how much money literally slips through our fingers on a daily basis. If you can capture as much of your income as possible and invest it to make it work for you, you have a fighting chance of retiring on time or maybe in your early fifties like my friend from Davis, California who we are living vicariously through with her many Facebook posts of her adventures in retirement.