It is exciting to me that extreme early retirement is not some exclusive club that is unattainable for those of us with moderate incomes. For example, Jacob, who coined the phrase early retirement extreme, was able to save 75% of his income on a $40,000 annual salary and retire at the age of 33. As I mentioned in the previous article on early retirement extreme and frugality, Paul and I do not have a target date for when we would like to retire. Rather our lives parallel those who seek to retire early—though to a much less extreme degree—for the sake of financial independence and the ability to make the right choices for our future without money being the prime driver (such as me being able to quit my day job and write/blog full-time). The principles work whether you want the end result of retiring early or not.
If you are serious about extreme early retirement/financial independence, then you will need to drastically change your life. Let’s take a look at the steps you will need to take in order to pull off an extreme early retirement.Serious abt xtreme early retirement/financial independence? You'll need to drastically change your life. Click To Tweet
Full Disclaimer: In my blogging career I have been called stingy by some people and extravagant by others. Just so you are aware, in the realm of extreme early retirees, our lifestyle is more on the extravagant side of the spectrum.
Step One: You Have to Get Out of Debt
Your first step should be getting out of all of the debt that you carry. This is because you need to free up as much cash flow as possible. You also would not want to enter retirement with a mortgage, lease, or other large payment eating away at your modest savings.
When Paul proposed to me in 2009, we sat down and discussed our financial goals together. Our number one goal was to get out of our combined $25,000 of consumer/student loan debt, and to never go into debt again (aside from a mortgage). Roughly 14 months later, we had reached our goal. Paying down that debt increased our cash flow as well as forced us to siphon off a larger amount of money into a pot that was not being spent. Once out of debt, this chunk of money naturally translated to paying ourselves extra each month in the form of savings and investments.
Step Two: Take a Machete to Your Expenses
Aside from increases in your income as your career progresses, the only other source of additional cash flow is sourced from decreasing your expenses. This is what I specialize in. However, I don’t specialize in giving up all of your wants, because then life would be no fun. What I do specialize in is living the frugal decadent lifestyle.
- Frugal Decadent Sacrifices: These are things that we have done to decrease our expenses with very little compromise. For example, we make our own laundry detergent (an $8 batch lasts us for eight months), we periodically shop around for things like homeowner’s insurance, we play the drugstore game (same great brand name products, but at a fraction of the normal cost), we play the grocery game, I do community hot yoga for $5 instead of paying for an expensive yoga membership, etc.
- Frugal Acts that take A Bit More Sacrifice: Then there are deeper sacrifices that you will need to make to achieve this lifestyle. The best example I have here is of our first Christmas tree in our new home, the Charlie Brown Tree. We saved $30 or so by doing this, but my husband was not thrilled at all. I happen to have a fascination with beater cars, so fortunately for me, they are not much of a sacrifice. But it is nice that I have finally progressed to a car with automatic locks and automatic windows! Other sacrifices we have made include keeping the heat and A/C off for as long as possible in the winter and summer seasons. In Houston the temperatures really fluctuate, so last winter we kept the heat off until December. One morning I woke up and it was an uncomfortable 51 degrees Fahrenheit in our house; the standoff was over! We have had a mild spring this year, and so far have only turned the A/C on a handful of times during the night so that we can sleep better.
When you think that you need something or want something, write it down on a piece of paper with two columns. In one column list whatever it is that you want. In the other column list the long-term gains from living the principles of early retirement extreme (I will give you a hint: financial independence, ability to make decisions that are right for you and your family, security, time away from a 9-5 job, etc.). Then compare the two so that you can see the huge tradeoffs you will be making for that purchase. Can an extra 1,000 square feet in your home add half as much happiness as financial security? Does purchasing one more comic book get you closer to freedom from the cubicle?
Step Three: Automate 30-50%+ of Your Annual Income to Savings
The reason why you need to pay down your debts and pare down expenses is so that you can allocate as high of a percentage of your annual income as possible towards savings and low-fee investments. While the annual national savings rate is under 5%, you will need to allocate 30-50%+ towards savings each year. It may take you a few years to work up to this, especially if you are in the debt payoff mode. As an example, in 2012 Paul and I were able to put 40% of our take-home pay into long-term savings. In 2011, we saved 38%, and in 2010, we saved 29%.
Not only that, but you need to keep these percentages or increase them as your income naturally increases. When you get a raise or cost of living increase, celebrate using a small amount of it and then capture the rest of it to add to the pot. This way you will not allow lifestyle inflation to take away from your ultimate goal.
Step Four: Plan for a Frugal and Alternative Retirement
Saving and investing a sizable chunk of money is only part of the equation. Another part of the equation is to continue living a frugal lifestyle once you are retired. And then there is the third part to the equation. We discussed how most of us will need to redefine the word “retirement” if we want to retire extremely early. This could mean taking a part-time/hobby/passion career to buffer your savings, living extremely frugally (like for under $7,000 per year), moving to a cheap country with free healthcare, taking in roommates, living on cruise ships, etc.
However you choose to bolster the amount of savings and investments you can accrue by your retirement age is not important. What is important is to make it part of your overall plan. Start conducting research on early retirement ideas and ways to live more cheaply.
Step Five: Live the Plan
As you progress down this path you will periodically need to tweak your plan. The idea is to keep your passion and hunger alive, and to keep your ultimate goal at the top of your mind. If something is not working, figure out what is broken in the system, do some research, and implement new ideas and learning.
Remember that what you are attempting to do is extra-ordinary. Most of us would never deign to retire at 35, 40, or even 55 either because we do not believe it is possible, or because we do not wish to pursue this type of lifestyle. You will need to think outside of the box, keep your eye on the prize, as well as maintain an overall frugal existence. Remember, the rewards can be great.
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