Okay, so this post is a bit more personal than my recent posts.
Hubby and I have decided that we really do want more out of life than working for large corporations where we are just resources in the machine of large corporate profits.
We don’t wish to run on this rat wheel of life for a normal “working life” span.
Our goal is another 6.5 years – maximum!
I will be 44 and hubby will be 56 in the year 2020 when we intend to take a rather late “gap year”. There’s a chance that I will go back to some sort of employment when we get back, but it will be because I want to, not because I have to!
How, you ask, are we going to do this? Everyone’s situation is different, so there is not a lot of point in detailing our personal finances in this post. What I will say is that the first plan is to knock off the small amount of remaining debt on our home loan. Housing is the largest expense for most people, so obviously paying this loan off will reduce our weekly expenses hugely.
The process of achieving early retirement (aka financial freedom) basically comes down to two things: reduce your expenses, or increase your income.
Mr Money Mustache has a great way of inspiring readers with his blog posts. This is where we got the kick up the ass (Mustachian language) to make our escape a priority.
We are in the process of reducing our expenses so that we can save/invest 65% of our take home pay each week. Those of you who are quick with your mathematics have already worked out that this means we’ll only be spending 35% of our income on living expenses.
We don’t earn huge salaries. Hubby earns about average (for Auckland), and I earn a bit under average. We are, however, childfree, so this will certainly help us to achieve our goal of early retirement sooner.
Reducing living expenses not only increases the funds you have available to invest, but also reduces your income requirements in “retirement”, making it easier for you to achieve the asset base needed to generate this income.
Mr Money Mustache uses a quick calculation of 25 times your annual expenses to determine the asset base you need to generate enough income passively for retirement. (Passive income means it flows in even without you working for it!)
For example if you could get your expenses down to $30,000 per annum, then you would need an asset base of $750,000 to generate enough income based on a 5% per annum interest rate, and a withdrawal rate of 4% per annum. You need your asset base to keep growing to allow for inflation.
Before you freak out and say that $750,000 is unachievable, it’s not! If you have equity in your own home, then you could look at buying an investment property or two. In New Zealand, property has doubled in value roughly every 10 years. If you are young, you might have to work for about 15 years to allow time for your newly purchased properties to gain in value and their rentals to increase. Surely 15 years is still much better than the alternative 45 years?
Having read all of Mr Money Mustache’s posts and spent quite a bit of time on the Early Retirement Extreme website, I highly recommend that you check these out. Also, if you haven’t already, do read Robert Kiyosaki’s Rich Dad, Poor Dad. It’s basically the same idea, just explained differently.
Pay yourself first and get your money working for you, so that you don’t have to work until you die!