How to invest for early retirement?
We all have some associations with the phrase “retirement age” like people in their 60’s, who no longer can work and who receive finances from the government from the taxes he or she paid earlier. That’s called social retirement.
However, what we will discuss here is a bit different. We want to understand, what can a person do to retire early? And by retire I mean when the person can stop working for money. Although working is good for many reasons despite being able to finance yourself, who doesn’t want to have the freedom of doing what you love and not caring about the money it brings?
So, what should you do to escape the never-ending rat race for earning money and afford to live a good life? The answer to this question is that you need to save money by investing in things that will bring more money. Investment opportunities are many, including well-known bonds, stocks, real estate, etc. As soon as your investments earn enough money for you to live on each year, you will be able to retire.
The most important concept to understand here is your savings rate. That is basically how much money you are left with when deducting your expenses from your income. If you spend all of your expenses you will never be able to retire.
The first rule of early retirement is that you should start living below your income. You need to spend less. Not only you should budget your money not to spend more than you are making, you have got to spend less than you earn. Before even you start saving big amounts you should use the surplus money to pay off your debts. As it is said, you have to keep your belt tight.
The second rule of early retirement is to start saving as early as you can. It does not necessarily mean to save big. You can start small. $5 a day equals $150 a month and $1,800 a year. Investing that amount and earning with investment rates of returns will turn that amount into something big later. Even the little things count. There is this story about Warren Buffet. He was in the elevator with other executives and a penny was on the floor. And everybody was wondering if he will take it or not. When living the elevator he took the penny and without looking back said “the beginning of the next billion”.