Live Below Your Means: How to Retire Early by 40
It’s a dream of many to retire early at just 40 years old.
You quit your job and leave your old career behind. You can finally tell your boss what you really think of them.
I had a very pleasant time working for you, but now is the time move on – Glenn
What? Not everyone has a bad boss!
Your days are now dedicated to your hobbies, family, travel, and anything else you’re interested in.
Yet many people just don’t believe retiring at 40 is possible. We’re here to show you otherwise.
If you start living below your means now, retiring early is more than possible. Here are six of the best ways to change your lifestyle, save more money, and retire by 40.
Retire Early: Develop Good Financial Habits
Developing good financial habits is essential, even if you don’t plan to retire early.
Start by tracking your income and expenses. Knowing exactly where your money goes each month helps you cut costs on unnecessary expenses.
You can then plunk that extra money down into savings.
Retire Early: Spend Less Than You Make
The key to living below your means is to spend less than you make. Much less!
Tracking your income/expenses and creating a budget is the first step. Even if you don’t write your budget down, always ask yourself “do I really need this?” Or, “is there a cheaper alternative?”
I personally don’t use budgets, and only ever spend what I have to spend.
It’s all too easy to overspend if you don’t know exactly where your money goes each month.
An emergency savings account is also essential. According to Vanguard, most experts recommend an emergency fund that covers at least 3 months of normal expenses.
Fall back on this account during hard times rather than overusing credit cards.
Retire Early: Minimize Lifestyle Creep
Lifestyle creep is an unfortunate side effect of making more money. It’s all but unavoidable.
It works like this: as your income increases, so do your expenses. A lot of people, especially young people, spend a bump in pay on more dinners out, a new car, or a larger home rather than sticking that extra money into a savings account.
We will buy X when I get my raise/bonus.
Get into the mindset that you don’t need to “keep up with the Joneses.” What’s most important is living within (and hopefully below) your means even as your income increases.
If your budget stays the same despite an increase in pay, you’re on the right path to retire early.
Retire Early: Pay Off Debt
Value Penguin states that the average debt for an American is $5,700. Much of this is the kind of consumer debt that comes with high-interest rates.
You should make it your goal to avoid consumer debt wherever possible, but life sometimes gets in the way.
The next best thing is to pay off your debt as soon as you can.
The money you save from these paid-off debts can now be placed in savings to facilitate early retirement.
There is no reason why you need more than one credit card. And that credit card should have a very low maximum amount, to make you think every time you spend: “am I going over my limit?”
One soon-to-be early retiree, one credit card.
Retire Early: Boost Your Income
Boosting your income, and then saving this extra money, is another way to live below your means to retire early.
According to JP Morgan, the average sharing economy worker adds an additional 15% to their earnings through these side gigs.
Best of all, you can make money with these platforms whenever you have a few hours to spare. A few hours over the weekend, waking up early and spending a few hours before work, and so on.
Here’s a more in-depth discussion of getting started in the sharing economy.
Not sure where to start? Try our sharing economy quiz to find out which sharing economy platform best suits your lifestyle.
Retire Early: Save as Much as Possible
All of our advice so far hinges on saving as much money as possible.
Most experts recommend saving 10% to 15% of your income – but that’s with a normal retirement age in mind. If you hope to retire early by 40, you need to increase that amount considerably.
A combination of a strict budget, frugal lifestyle, and side hustles with sharing economy gigs should make it that much easier to save well over 15% of your income.
Those with a good income (say $100,000 per year) should shoot for the moon and try to save at least 25% of their earnings.
Final Thoughts on Retiring Early
It might seem like a pipe dream, but retiring by 40 is completely possible.
Let’s do quick math. I know, I know, but stay with me.
Assume you make $60,000 a year, throughout your career. Yes, you start lower, but you finish higher. You work from 20 to 40. That’s 20 years.
Throughout that 20 years, you adhere to the above advice, and save diligently. Almost half your income in fact. On a monthly basis, you put $1,600 away into your savings account.
Now, the average return on the stock market and mutual fund investments is 7%. So let’s use that.
Based on these numbers, when you retire at 40, you will have a nest egg of about $1 million dollars. Yes, $1 million!
Take our 7% average return, and $1 million dollars will give you a yearly income of about $70,000 before taxes. Not too bad for a retirement fund!
Thousands of people just like you have successfully accomplished this.
The key is to start following the tips above as soon as possible. There’s no time like the present!