Learning to Live on One Income so You Can Enjoy an Early Retirement

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The discipline of managing your finances can be a challenge for people of all income brackets. If you plan on having an enjoyable retirement, however, you will need to do just that.

Early retirement can provide a world of opportunities for the second half of one’s life. If done properly, you’ll have both a surplus of free time and money. More time to spend with loved ones and perhaps enough disposable income to test out a business idea you’ve always had.

However, an early retirement will not just fall into your lap without some serious effort and planning on your part.

The first step is calculating exactly how much you and your partner earn and spend each month. If you spend more than you earn on two incomes, you will obviously need to ruthlessly cut back on your monthly expenses. Careful documentation of income and spending habits will help you see where your weak spots are. You may need to work some extra hours or find a part-time job temporarily in order to bring in extra money.

Hypothetical Scenario

You and your husband/wife each earn $4,000/month or $8,000 total. Of this incoming $8k every month you guys spend $6,500 on mortgage payments, auto payments, kids, credit cards, going out, cell phone, cable etc. In this given scenario you’re still able to stack away $1,500 each month which is good, but still $2,500 shy of your goal. This brings us to the second step of the process.

The second step to realizing this goal is to not only cut as many expenses as you can but to first separate your needs from your wants so that you are applying the cuts to the correct places. This should be a two column list where you go through every item you allocate money to each month. Slash the items in the “want” column as aggressively as possible before you move to the “need” column. The “need” column wont be able to be slashed with as much vigor, but perhaps you can find hidden area’s of excess spending on these necessities.

For example, in the above scenario, you obviously can’t eilimate your mortgage payments, but perhaps you can refinance at a lower rate. You probaby wouldn’t want to cut expenses allocated to your kids, but perhaps you can shop with a little more thrift. If they’re young they likely wont care too much about style and/or brands, so go with durable generic clothing. Do you have two or more cars? Cutting back to one car can also easily save you $800 per month when you add up the car payment, gas, insurance and maintenance costs.

Another crucial part of the plan is to pay off debt as soon as possible and to avoid accumulating it in the future at all costs. Just as compounding interest can grow your retirement savings exponentially over the years, interest paid on debt be can equally delibitating.

Reduce other expenses as well, such as monthly utilities. Assess your cable or satellite television plan to see if you need all the channels you receive. Rent movies instead of going to the theatre. Review your cell phone bill and reduce minutes if possible. Some plans allow for unlimited texting at a much lower rate than talking. Learning to spend less each month will allow you to save more each month, which is the third step to enjoying an early retirement.

Now, What to do With the Increased Savings?

In most economic markets, perhaps only excluding times of accelerated inflation, you will save the most if you begin to save when you are young.

Financial pressures, such as planning a wedding, paying off student loans, buying a home or saving for children, can vie for your attention when you just starting out, however, keep in mind you can multiply your money exponentially (through compound interest) when you invest it over the long term. This requires keeping your money locked away as long as possible.

A common example stressing the importance of starting young compares investing $5,000 at age 25 and investing the same amount at age 45. At age 65, the younger person will have earned $225,000 while the older person will have earned $30,000.

If possible, invest in a 401(k) or 403(b) through your employer. Some employers will match retirement plans and savings contributions. In other words, they are giving you free money when you invest with them. However, in some cases, you will not receive those matched funds until you have worked for the company for a certain period of time, usually around five to ten years.

The advantage to these plans is that the money will come straight out of your paycheck, and you will not be able to spend it. You will also defer taxes on this money until you withdraw it. This boosts your savings potential and can almost double your investment by the time you retire. You can decide how to invest the money depending on your age.

Individual retirement accounts (IRAs) allow you to invest a certain amount of money each year without paying tax penalties. The amount you can contribute annually depends on your age. Most financial advisors agree that you can take greater investment risks with your money when you are younger, which means you have a greater possible return on your money. Check with a financial advisor if you want specific advice on where to invest your money. Remember that you will need to make intentional choices about investing for your future because social security may not be available.

By combining the three keys of calculating what you earn each month, reducing monthly expenses, and smart investment strategies, planning for early retirement will be a manageable task that can make your golden years enjoyable.

Author Bio: Dan is the primary author for BankVibe.com where he covers everything from the interest rate environment for banks and credit unions to personal finance and retirement. You can follow him on twitter at @Bank_Vibe.

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