I like to say that retiring early isn’t rocket science. It’s not that it’s easy by any means. Retiring in your 40s takes a certain level of determination and persistence.
But the tactics and strategies to successfully retire early are relatively easy to understand and implement. Once you know what they are, you should (in theory at least) be able to put them into practice.
I write a lot about what my wife, Allison, and I did to retire in our early 40s. At a high level, we continuously managed and improved these four areas of our finances: Debt, Income, Investments, and Expenses.
Improving those four areas involved lots of little tweaks, maneuvers, strategies, and counter-strategies over the years. Fortunately, I can boil it down to the 5 most important tactics we used.
These are the five most important strategies we used to help us retire early:
1- Paying Off All Debt (including our Mortgage)
The first thing we did in our late 20s when we wanted to start getting serious about our finances was wipe out our debt. At the time, I had over $10k in student loan debt, as well as a few thousand dollars in credit card balances. Allison was the smart one - she was always debt free!
It took a few years of belt tightening, but I managed to pay off all that debt before I turned 30. That was important, because there’s no sense in investing your money if you’re paying more in debt interest than you’d be making on your investments.
We did start taking on debt again when we purchased our first home in 1999. We bought and sold about eight properties over the next 15 years (including some rental properties). But once we decided to sell all our Real Estate and buy a less expensive condo in cash that catapulted our ability to retire.
Here's more on how we paid off our mortgage.
2- Minimizing Expenses (specifically our Car)
After housing, the two biggest household expenses are for food and transportation. We’ve always been pretty frugal when it comes to everyday living expenses (transportation, food, conserving electricity, etc).
We’ve kept our transportation costs down by driving the same car for the past 14 years. Since we don’t have to drive much, our 2003 VW Jetta only has 105k miles on it.
We paid for it in full brand new (I would actually advise getting a slightly used car), and we keep costs down by having minimal insurance and fueling up with cheap gas from Costco.
We keep our food costs down by cooking most meals at home, buying in bulk, and getting very inexpensive produce at our local Chinatown markets.
And we keep our utility bills down by powering down all electricity when not in use, streaming only the TV options we need, drying our clothes on a rack, and rarely ever using A/C or heat.
You can learn more about how we reduce our expenses in this blog post.
3- Dollar Cost Averaging
When it comes to investing your money, you can get lost in all the fancy investment strategies and trends. While it’s important to educate yourself as much as possible on the various options, we found one strategy that rises to the top.
Dollar Cost Averaging will help you invest passively and eliminate the risks of trying to time the markets. If you’re not familiar with how it works, it’s simply an strategy of investing the same amount of money on a regular schedule (i.e. weekly, bi-weekly, or monthly).
So why is this so great? Well, when the markets are down, you’re buying more shares of your investments (essentially buying them at a bargain discount). And when the markets are up, you’re still buying, but you’re buying fewer shares.
It takes the guesswork out of investing, and helps you avoid the biggest mistake of the average investor: buying when the markets are high (because of all the excitement) and selling when the markets are low (because of all the fear).
Our Investment Hacking 101 online course explains Dollar Cost Averaging and other important investing concepts in more detail.
4- Increasing Income with a Side Business
Of course, in order to have money to invest, you need to make sure you’re bringing in enough income to cover all your bills and then some.
For us, one of the biggest factors in helping us retire early was setting up successful side businesses in addition to our regular salaries. Obviously, this is going to take a bit of extra work and dedication. But if you can pull it off for a few years, it’ll help tremendously.
Our most successful side business was an affiliate business where I bought Google ads for online dating sites. I made a total of about $500k in profit over the course of about seven years. Investing that extra $500k really helped accelerate building up our nest egg.
Here’s more about the lessons I learned from four different side businesses over the years.
5- Automating our Investments & Bills
The final strategy is simply automating everything. This includes not only automating your investments so you can take care of Dollar Cost Averaging, but also automating as many of your expenses as possible.
We try to pay for everything with credit cards (that offer cash back rebates), and then we set our online banks to pay the credit card balances in full automatically each month. This way we never pay any interest on this debt, and we never have to worry about missing a payment.
Just Do It!
Like I said at the beginning, none of this is rocket science. But you have to have the desire and work ethic to set these things up and follow through with them.
I can tell you sitting here at my desk in my pajamas sipping my coffee with my cat and my view, that this work is well worth your effort. If you follow these tips you’ll be well ahead of the game for retiring early and becoming financially independent!