Category Archives: Financial Independence

The House We Did Not Buy

Buying a house is a major decision.  For most people, it is the largest major financial decision that they will ever make.  There are many aspects to consider when deciding on a house.  Do you want to live in a city, the suburbs, or in a rural area?  Finding your dream house and neighborhood can be a major undertaking.

My wife and I have lived in our current house since we were married.  She bought the house from a relative before I was in her life.  It is nice house and we live close to many of her relatives.

The house did need some upgrades when I moved in.  It was built in 1964 and much of the house was outdated.  After I moved in, we remodeled the kitchen, bathroom, added a deck, as well as many other upgrades.

The house was about 1,200 square feet and we wanted a little more room.  We added a nice 320 square foot addition.  That addition is our sitting room and we spend most of our time in there.

The house is almost paid for.  We only owe about $30,000 on the mortgage.  The house was appraised for $226,000 in 2012, so we have a nice amount of equity in the house.

By staying in this house, my wife and I have avoided lifestyle creep.  Having a small mortgage and low taxes enabled us to have a high savings rate.  If we upgraded to a $500,000 house, we would not have been able to save 50% of our gross earnings over the past 10 years.

We are not planning on retiring until 2028.  After we retire, we are planning on buying a house on a lake because we enjoy kayaking, boating, and fishing.  We are planning on staying in Pennsylvania for 9 months per year.  For the winter months, we plan on becoming snowbirds and head south for the winter.

A major life event caused us to rethink our plan.  A close family member recently passed away following a four-year battle with cancer and other major health issues.  Watching him suffer made us think about living more in the present and not focusing on what our life will be like in retirement.

We decided to look at some houses that were for sale on the lakes that are close to where we currently live.  The nice thing about living in the Pocono Mountains is that there are many nice lakefront homes.  The region is also known for private gated communities that attract people from New York City, Philadelphia, and Boston who buy weekend homes in these developments.

We started by looking online.  What I found did not surprise me.  Most of the lakefront houses were very expensive.  Older houses that were lakefront cost $400,000 and needed upgrades.  The newer houses are much more expensive.

Our next move was to look for a house that was not lakefront but had lake rights.  This was a more modest priced market.  Houses that were only 5-years old were less than $350,000.  That was more in our price range because we would be putting about 60% down on the house.

We found a few that we really liked and decided to spend a Sunday looking at these houses.  The first few were nice but way too big.  We do not need or want 4,000 square feet of living space.

After looking at 5 houses we were starting to get tired.  It is fun to look at these houses, but also overwhelming.  Before we called it quits for the afternoon, I wanted to look at one last house.

The last house was a little less expensive.  It was listed at $258,000.  This house was in a private community that is only 8 miles from where we currently live.  It also comes with lake rights to a private 150-acre lake.  It is a serene lake that does not allow outboard motors.  Only sailboats, kayaks, or boats with electric motors are allowed.  It is also a catch-and-release lake that is stocked with bass, trout, catfish, and walleye.

For me, it was love at first sight.  For my wife, she really liked the house, but more legwork was needed before we decided.  We both agreed that we needed to do our due diligence and not buy a house after our first visit.

The next day, I called the realtor to set-up an appointment to tour the house.  The realtor was nice as well as transparent.  She gave me some interesting details about the house.  In 2010, the house sold for $389,000 and is now listed for $259,000.  I did not want to admit it, but that was the first red flag.

I asked why there was such a deep discount on a 10-year old house?  She said that the taxes doubled because of a county reassessment.  There is also a homeowners association (HOA) that charges $2,500 per year.  The total annual cost of the taxes and home owner’s association fees would be $8,200.  We now pay $2,700.

I was not happy about the major jump in taxes and fees.  It was, however, not a deal breaker.  I was smitten with the privately stocked lake.

The next evening, my wife and I decided to take a ride over to see our potential new house.  We were excited.  Our excitement, however, did not last.

We pulled into the driveway and got out to walk around the house.  It was not currently occupied by the owners.  We only took about two or three steps and we saw the neighbors Doberman Pincher as he came barreling towards us.  Luckily, the dog’s owner was in his yard and called the dog back.

The Doberman caused me great concern.  I am not afraid of big dogs, but my wife and I have a little dog.  His safety trumps everything.

I was happy that the neighbor was outside.  He came over and spoke with us.  He seemed like a nice guy.  He was young.  I would guess in his early 30’s.  We spoke about the house and of course what the fishing was like at the lake.  I asked him about the homeowners association.  He said they are not too bad to deal with, but he gets in trouble with them often.  He said that he gets in trouble with the homeowners association for driving his ATV and snowmobile at night.

On our drive home, I was still thinking about fishing on a private lake every evening after work.  At this point, my wife decided that she did not want to buy the house.  She did not say anything to me on our drive home because she did not want to bust my bubble.

That evening, I could not sleep.  My anxiety was out of control.  I did not fall asleep until after midnight.  The house was very nice, and I loved the lake.  Deep down, I knew that it was not a good fit.  All those red flags would not go away.  They kept running around in my mind.  I could not justify all of these issues.

As a member of the financial independence community, I do not like to pay taxes.  I love fishing but hate taxes.  Having my taxes go up almost 200% did not sit well with me.

The second source of anxiety was our dog.  We don’t have children, so our dog is our baby.  He currently has his own two-acre field to enjoy without worrying about being eaten by a Doberman.  I would never do anything to put him in an unsafe situation.

The third warning sign was the neighbor.  He did seem like a nice young man.  However, I am not willing to put up with him driving his ATV at night.

When I awoke, my wife said that she wanted to talk.  She told me that she loved me and wanted me to have a lake house.  I worked and saved for over two decades and she wanted me to be happy.  She just felt that this house was not for us.

I told her that I agreed with her.  There are many reasons why my wife and I have a happy and successful marriage.  We love each other, communicate well, and think alike.  If a situation is not right, it is wrong.  The house was not the right fit for us.

We could have afforded the house.  It might have caused our saving rate to go from over 50% to 40%.  That does not sound like a big deal, but I am more interested in saving and reaching early retirement than owning a lake house at this point in my life.

We have not since looked at any other houses.  It was too emotional of a process for me.  At this point, I think that we are going to stay in our current house until we retire.  I have said this before, once you become a saver, you will never be a spender.  As a saver, I will have to settle for fishing at our local state parks and public lakes instead of a private lake until we retire.  Life can be much worse.

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What Stage of Financial Change Are You In?

If you choose to pursue financial independence and an early retirement, you will need to reject many of the popular, preconceived mindsets and behaviors that you’ve been taught about your relationship with money.

Over the past two decades, the average age at retirement has been increasing. Studies predict the average age of retirement for Millennials may reach 75 due to the growing costs of rent and prevalence of student loan debt.

The good news?

You don’t need to follow the same financial path as your peers (no matter what generation you were born in).

The “bad” news?

To reach retirement earlier than your peers, you will need to handle your money in a different way as well.

Pursuing financial independence will require self-education, practice, and persistence. You may or may not have the support of your friends, co-workers, and even family members… but you will need to make financial changes in your own life regardless of their own money habits.

In this post, you’ll learn more about the five stages behind every major life change, how these stages apply to your personal finances, and how you can use this model to stay committed on your journey toward financial independence.

The 5 Stages of Financial Change

In the academic world, the stages of change are more formally recognized as the “transtheoretical model of behavior change.”

This model was first proposed by psychology professors in 1977. The model is often applied to health-related changes, such as quitting smoking, starting a new exercise or diet plan, and managing anxiety and depression.

Here are the five stages:

    1. Precontemplation (not ready to change)
    2. Contemplation (considering change)
    3. Preparation (getting ready for the change)
    4. Action (making the change)
    5. Maintenance (reinforcing the change)

While you typically progress sequentially through the first four stages, it’s possible to “backslide” and revert to an earlier stage if maintenance is unsuccessful (breaking your diet during the holidays, for example).

This model not only applies to physical behavior changes but can also be applied to belief changes or decision-making as well.

Let’s take at how you may journey throughout these stages as you make significant changes in your financial habits.

Precontemplation

During the precontemplation stage, an individual is not seriously considering making a change. In fact, they may not realize that a change is necessary at all.

In the context of a health-related issue, a person in the precontemplation stage may assume they are totally healthy – perhaps unaware that their high cholesterol or blood sugar may already have them on a trajectory for a heart attack or diabetes down the road.

If you have just started your professional career, you may find yourself in the precontemplation stage of your retirement planning.

Perhaps you are contributing a small percentage of your 401k toward retirement each month. What you may not realize is that contributing just 5% of your salary is going to place you squarely in the “retire at 75” club.

To move out of the precontemplation stage may require a “financial epiphany.” This could be saving up to buy a house, preparing to have a child, or earning a salary for the first time. At this point, you’ll realize it’s time to make peace with your financial past so you can reach your goals.

Contemplation

The same year that psychology professors created the “model of behavior change,” film director Woody Allen was attributed in the New York Times for his popular quote, “Showing up is 80 percent of life.”

Just by “showing up” to read this post, you may have already progressed out of precontemplation into the next stage of behavior change: contemplation (surprise!).

During the contemplation stage, an individual is aware of their problematic behavior but are still weighing the pros and cons of change: Can I make time to exercise without hurting my career? Will my friends support me in my decision to quit smoking or drinking?

In a stage of financial contemplation, an individual may be considering their financial goals and the associated trade-offs.

  • Should we be focused on saving up a down payment for a home or paying down student loans instead?
  • Is it worth the inconvenience of downsizing our home or moving in with roommates to save additional money?
  • Can we commit to meal prepping for a few hours each Sunday night to reduce spending on lunch during the work week?

Preparation

An individual in the preparation stage has determined the pros of change outweigh the cons. At this stage, they may start performing research, creating a plan, or making small steps toward their improved for behavior.

If you are someone who wants to lose weight, your preparation might be purchasing a healthy cookbook, grocery shopping for nutritious foods, or signing up for a gym membership.

Many times, it’s tempting to skip from the contemplation stage directly into action (which we’ll discuss below). It’s important to spend time in the preparation stage to lay a framework for success.

You may have to remove barriers from your financial goals as well. This could involve learning more about debt payoff strategies, calculating your net worth to understand your current situation, or building a solid budget that organizes your finances.

Action

In this stage, individuals begin to actively change their behavior. This decision is often one of the shortest stages of change – most of the effort is either exerted in (1) building motivation during the contemplation the stage, or (2) maintaining and reinforcing change.

If quitting smoking is your health-related behavioral change, then the action stage would be the first few weeks of cessation. The behavior change requires consistent, active effort to make. You may be using aggressive strategies like substituting a new behavior in its place, rewarding yourself for the proper behavior, and avoiding any scenarios that trigger the old behavior.

There are many ways to take action and improve your personal finances. You may start scheduling recurring payments on your debt, setting aside an additional portion of your income with direct deposit, or creating a budget to keep yourself living within your means.

Maintenance

In a successful behavioral change, the maintenance stage will have the longest duration. The goal of the maintenance stage is to reinforce the new behavior to minimize the chances of a relapse. With time, the new behavior will become second nature.

It is not uncommon for individuals to relapse back to a previous stage. A successful behavior change will depend on how an individual responds to this situation:

Do you prepare yourself to eat healthily by going grocery shopping and planning your upcoming meals – or do you tell yourself that you’ll try again next New Year’s?

Financial independence is a long-term objective that requires maintenance as well. You may have to dip into your emergency fund to cover an unexpected expense. You might splurge and make an impulse purchase that falls outside your budget.

It’s important to avoid letting one setback justify additional bad behavior. Even if you aren’t perfect with your money, you can find ways to improve your finances each and every day.

How can you maintain your positive personal finance habits to minimize the impact of a setback?

  • Continue learning new financial principles with personal finance blogs and books
  • Surround yourself with like-minded individuals who share your goals and values
  • Be publicly accountable for your goals by sharing them with family and friends
  • Automate your behaviors with recurring transfers, payments, and direct deposits

Conclusion

To do something spectacular with your personal finances, you will need to adopt different beliefs and behaviors about money that may be different than your peers.

You can make this financial change easier by understanding the how the “stages of change” model applies to you and your personal finances, assessing your current status in the model, and finding ways to reinforce the right behaviors until our reach your goal.

No matter how long you’ve been focused on your personal finances – whether you’re just contemplating your goals or maintaining your progress – there are strategies you can use to make good financial behavior easier.

How do you stay committed to maintaining the positive financial changes in your life? 

Author Bio:

Aaron is a lifelong entrepreneur and internet marketer who started Personal Finance for Beginners to share experiences and insights from his own financial journey as he pays down student loan debt, sticks to a deliberate budget, and saves and invests for the future. You can find him at Personal Finance for Beginners or on Twitter @PFforBeginners.

Should Millennials Contribute to a 401K?

Should Millennials contribute to a 401K? No, that is not a rhetorical question.  I was having lunch the other day with my co-worker Jill.  Jill is an exceptional young woman.  Jill’s parents divorced when she was young, so she grew up in a broken home.  That did not stand in the way of her excelling in school.  She went on to earn a BA in Psychology from one of the best state universities in the country.  She is also considering going back to graduate school for a Master’s Degree in Public Administration.

Jill and I have worked together for almost one year.  Jill was lucky because she was hired just a few months after she graduated from college.  She is a great employee, person, and is highly ambitious.

She told me that she developed her work ethic as a young teenager.  She said that growing up without a dad around, she had to work to help her mom pay the bills.  Jill started working at age 14 and has always had a job during high school and while in college.

When we were talking, she told me that when her parents divorced they had an agreement to give each child $40,000 towards their college education.  Her brother went to Notre Dame and the money he received from his parents covered about one year of his education.  Jill opted for a state university that was only a 2-hour drive away from her Mother.

Jill’s education cost her parents $30,000.  Her parents tried to be fair about the dollar amount.  After graduating college, her parents also bought her a used car for $10,000.  Even though she did not get to watch the Fighting Irish play football in South Bend, she still made out well.

During our lunch, she told me that she feels bad for her current roommates.  Most come from families that are more affluent than her family. However, they all have student loan payments that cost $700 or more every month.

She asked me my opinion about her situation.  Should she feel bad?  What should she do with the extra money she has compared to what her roommates have?  She said that she did not grow up with much and does not want to waste it.

I told her that she is in a fortunate situation.  She has a unique opportunity to save a great amount of money since she does not have any debt and her only large bill is her monthly rent.  I suggested that she pretends that she has as much student loan debt as her roommates and to contribute $700 per month to our employer’s retirement plan.

She asked me “Should Millennials contribute to a 401K”?

I told her that millennials should absolutely contribute to a 401K.  I said that she especially should because she does not have any debt to pay back or major bills.  These are the reasons why she should start contributing:

  • She is 22 years old and by starting at that age, she can be well on her way toward financial independence (FI) in 15 years or less
  • Our plan offers low-cost index funds
  • Our employer matches 100% up to the first 5% an employee contributes
  • The contributions lower her taxable income
  • The money grows tax-free and is not taxed until she withdraws it at retirement
  • She can take advantage of dollar-cost-averaging
  • She can enjoy the benefit of compound interest
  • If she gets a different job, she can take the money with her and roll it over into an IRA
  • Even though I would advise against it, she can borrow against her account if need be

I explained to her that time goes by very quickly and she has a golden opportunity to build some serious wealth for herself.  Unless she lands a government job, she will not have a pension.  She will need this money to support herself in the future.

Jill has a unique situation.  She is a young millennial without any debt.  What makes her even more unique is that she is a new college graduate without any student loan debt.

If you have student loans, you should still contribute to your employers 401K account.  Even if it is just enough to get the match.  After you pay down your debt, take the dollar amount that you were paying towards your loans and direct it to your 401K.

You might not get to Financial Independence as quickly as Jill does.  You will, however, get there if you take a few steps.  If you have debt, pay off your debt and don’t create new debt.  Save as much as possible.  Sign up for your employers 401K plan as soon as you are eligible.

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Note: This post was originally published as a guest post.  The post was moved here because it was not available to be read on dollardiligence.com. That site is no longer active.

Your Money or Your Life: Chapter 2 Review

Your Money or Your Life is a classic personal finance book.  Vicki Robin and the late Joe Dominguez wrote this book in 1992.  Your Money or Your Life is not the first personal finance book.  It was, however, one of the first personal finance books that started to explore the topic of Financial Independence.  It is a book that introduced the concept of examining and ultimately transforming your relationship with money.

This post is part 3 in a series of posts by a group of popular personal finance bloggers who are reviewing each chapter of the completely revised and updated edition of Your Money or Your Life.  The introduction to this series was launched on Rockstar Finance.  The review of Chapter 1 was written by Aaron at Personal Finance for Beginners.  That leads us up to this post.  Below is my review of Chapter 2.

Previous Reviews:

Rockstar Finance – Introduction

Personal Finance for Beginners – Chapter 1

Chapter 2 – MONEY AIN’t What It USED TO BE – AND NEVER WAS

As with many books, chapter 2 is where the author starts to get into the thick of things.  The narrative of Chapter 2 follows that natural flow.  In chapter 2, the reader is introduced to money.  What does money mean to you?  Do you have money problems?  How do you earn it?  How do you spend it?  Do you save money?  How should money be invested?  Do you love money, or do you resent it?  Is money good or evil?  To better understand what money is, Vicki and Joe suggest that it needs to be looked at on the material level as well as the nonmaterial level.

THE FOUR PERSPECTIVES OF MONEY

In the first edition, there was a major section of chapter 2 that broke down the four perspectives of money.  That was not included in the updated edition.  The updated edition is more streamlined.  It is rumored that Joe would get animated when presenting the four perspectives at their original seminars.  I feel the four perspectives of money are still relevant and will break them down in case you have not read the original edition.

The Street-Level Perspective of Money – The Practical, Physical Realm

The street-level is where the day-to-day transactions occur.  This is where people are introduced to money in their youth.  The street-level is why people work to earn money and advance their education to earn more money.  This is the level where the masses learn how to earn money, spend money, and hopefully save money.

The street level is also where many people get into trouble with money.  This is the level where people fall victim to the concept of more.  To buy more stuff, people go into debt.  To pay off debt, more work is required.  To make more money, more risk is taken.  The street-level is where most people get off on the wrong footing.

The Neighborhood Perspective of Money – The Emotional/Psychological Realm

The neighborhood perspective is an examination of the emotional perspective of money.  Were you born on the wrong side of the tracks?  Did you grow up rich, poor, or somewhere in the middle?  Do you base your security on money?  Should you?  Do you see money as power?  Does having money enable you to get what you want from others?  Does money truly make people more socially acceptable?  Is money evil or does it just bring out shortcomings in people?

The Citywide Perspective of Money – The cultural Realm

The citywide perspective is a view from above.  This is where individuals blend together.  It is where different neighborhoods are connected by streets that flow from the rich to the poor part of town.  The citywide perspective is the view where the individual and their own relationship with money is lost.  General norms and assumptions are made on this level.  This is the big picture perspective of money.  It is rooted in history, economics, and sociology.  This is the level where financial fear is distributed to the masses.

The Jet Plane Perspective of Money – Personal Responsibility and Transformation

The jet plane perspective is where the transformation occurs.  This is where you let go of your old ideas about money.  The jet plane view is where people become honest with themselves and start to accept the truth about money.  This is where money and spirituality converge.

Money is life energy.  We trade energy for money.  People work for money, worry about money, spend money, and plan their whole life around money.  Most people will not admit it, but money truly is the center of their universe.  Once a person can accept that fact, they can decide how to better channel their energy and break away from the bondage that money has over them.  The jet plane level is where people start to think about how they truly want to live when money is not the motivation.

A Simple Summary of What is – and is Not

The updated edition replaces the four perspectives of money with a simple summary of what money is and is not.  Vicki briefly touches on the four perspectives and reflects on Joe’s past performances.  In this edition, Vicki gets to the point quicker than Joe did in the previous editions.

Money = life energy, but having money is not a magic wand that changes your past relationship with money.  Money flows in and out of our lives.  Our relationship with money needs to be examined.  Where does it improve our lives and where do we get the most pleasure or use from it?

Money is simply a reflection of who we are.  Do we use it to buy things to display status?  Do we spend it in an environmentally conscious way?  Do we pay our bills on time?  Do we have a healthy or unhealthy relationship with money?

There are people who want to take your money.  Marketers have a job to market their products.  Marketers are paid to make people believe whatever it takes to sell a product or service.  I used to work in Marketing.  That is 100% true.

To prevent them from taking your energy, just don’t buy what they are selling.  To do that, a person needs to act.  Chapter 2 breaks down a course of action to follow.

Your Life Energy 

Vicki asks the reader “what does money = life energy mean to them”?  The reader is free to decide how they want to spend their time.  Do you want to spend your limited amount of time living or do you want to spend that time working to spend more on things that do not add meaning or happiness to your life?

Financial Independence 

The second half of chapter 2 is where the concept of financial independence is broken down.  Vicki does not deviate much from the original edition but just freshens it up.  The focus is still based on having limited time on this planet.  Should we spend our energy making money or living and enjoying life?  If a person decides that they want to live more and work less, they need to achieve financial independence.

Financial independence simply means that a person has enough.  Enough does not mean that you are rich.  Enough must be defined by the individual.

Financial and Psychological Freedom

Once an individual determines what enough is for them, they can change their relationship with money.  This is where the bondage from your past relationship with money is broken.  This is the level where you break free from the lies that surround your relationship with money.

Being in the Present – Tracking your Life Energy

To be successful, an inventory is needed.  It is important to track your life energy.  To better practice the art of living in the present, it is vital to take a deep dive into where all your energy is being exerted.

In this section of both editions, the authors get into actual costs.  How much energy is spent on commuting, clothing, and meals?  As the result of expending energy, a person needs to recharge.  As people attempt to recharge, they just spend more energy trying to decompress with substances, spend money on entertainment, and take expensive vacations or buy toys.  As the result of wasting energy on trying to gain energy people get ill and must spend more energy on getting well.

At this point, people start to realize that they are spending more energy than they are being compensated for.  Their salary ends up being much lower than they ever realized.  They are exerting far more in the untracked exertion of energy than they could ever be compensated for.  Their real hourly wage is much lower than they ever could imagine.

The authors understand that this process is life changing.  When people are faced with a change they tend to balk and not want to escape their emotional comfort zone.  This is purely a spiritual process.  There is no need or room for shame.  There is no reason to look for someone to blame.

The next step is to take positive action.  It will require some work.  The final step requires a simple writing exercise.  It is suggested to track energy spent vs salary earned.  It is a writing exercise to gain perspective on what you are truly earning from your employment.  In this step, the number of hours of energy that is put out is measured against actual earnings.  I did it.  It is an eye-opening exercise.

The authors also suggest that you track all of the money that comes into your life as well as the money that goes out of your life.  They refer to it a spiritual discipline.  This is much easier today with tools like Personal Capital.  You no longer need to write down with pencil and paper like most people who followed this approach did back in 1992.

Conclusion

It was fun to read the updated edition of Your Money or Your Life.  A few decades have passed since the first edition was published.  It was nice to catch up on how she views money today compared to the early 1990’s.  The updated edition of chapter 2 had a fresh feel to the narrative.  Even though it was revised, it still contained the same spiritual principles of honesty, vigilance, and willingness to change that was in the original edition.

If you were a fan of the original edition, you are sure to enjoy the updated edition of Your Money or Your Life and the new website yourmoneyoryourlife.com.

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Early Retirement: Removing Barriers

Many people dream of reaching early retirement.  Few people, however, are willing to do what it takes to make it a reality.  In most cases, to reach early retirement, a person must live differently from how the masses live.  People generally don’t want to be viewed as being different from their fellows.

The masses are living for the day, spending most of what they earn, landing in debt, and are in denial about their personal finances.  They have high hopes that their financial future will be secure.  Hope, however, is not a strategy.

To reach early retirement, a strategy is needed.  That strategy will require action and more action.  The primary objective of that strategy will be to first reach financial independence.  Financial independence is what enables people to retire early.  If a person is no longer working, the money to sustain their lifestyle needs to come from somewhere.  For most early retirees, that somewhere is their passive investments.

The path to being able to retire early is full of barriers.  Many are external like being able to maintain a budget while marketers are doing everything they can to get you to break your budget and buy whatever it is they are selling.  Some barriers are mental.  The purpose of this post is to identify a few of these barriers and to establish a plan of action to avoid them.

Ignorance

Most people are unaware of what is required when it comes to planning for an early retirement.  That is even true for those who have attended college.  People who hold a 4-year degree or beyond still struggle with doing what is required to escape having to work for a living.

When it comes to establishing a financial plan, many people truly do not understand what is required.  They feel that things will just work out like they have in other areas of their life like landing a good job or getting a mortgage to buy a house.  They are generally in denial about what is required to build a large enough net worth to sustain their desired lifestyle once they are no longer working.

The good news is that once a person decides to learn more about personal finance, there is an abundance of great information.  Once a person takes that first step towards learning about budgeting, saving, and investing, they have removed one barrier.  Once that barrier has been removed, they will discover that the basics can carry a person a long way.  The basics alone might be enough to carry some people to financial independence.

Procrastinating

Procrastinating is another barrier that stands in the way of reaching early retirement.  Not knowing about a topic is one thing.  Knowing and not doing anything is another.  To reach early retirement, it takes many years of earning a salary, saving a large percentage of that income, and investing it wisely.

The longer a person waits to start this process, the harder it becomes.  That is based on compound interest.  Let’s assume that an investor needs to have $1,000,000 saved to declare financial independence.  They also want to reach this milestone by age 50.

Based on an 8% percent return, if an investor starts to save $1,800 per month at age 30, it will take 20 years to reach their goal.   If they wait until age 40 to start saving, they will have to save almost $6,000 per month.  If they started at age 22, however, they would only have to save $900 per month.

When you are young, time is on your side.  The older you get, the harder it becomes.  Don’t procrastinate if your goal is to reach early retirement.

Not investing in stocks

To receive a return close to 8%, an investor will need to have a large percentage of stocks in their asset allocation.  Based on how investments are projected to perform for the next 10 years, an 8% return might not be reasonable.  Large-cap stocks are projected to earn 6.7% threw 2026.  For that same period, investment grade bonds are projected to earn 3.1%.

The average person has the tendency to shy away from stocks.  In the short-term, they are volatile.  Over long periods of time, they are one of the best wealth building investments for individual investors.

Instead of parking your money in a money market that returns 1%, consider adding stocks to your asset allocation.  A good place to start is to look at a balanced portfolio of 60% stocks and 40% in bonds.  This allocation is popular because it provides growth from the stock allocation and the bond allocation reduces volatility when the stock market has a correction.  Another general rule of thumb is to invest (110 minus your age in stocks).  If you are age 25, you might want to consider having around 85% of your asset allocation in stocks.

Lifestyle Creep

Lifestyle creep is a form of inflation.   As a person advances in their career and their earnings increase, it is natural for their spending to increase.  As raises and promotions pile up, people have the tendency to upgrade their lifestyle.  Instead of saving more of their earnings, people buy bigger houses, fancier cars, and go on expensive vacations.

If there is lifestyle creep in your life, it is a major barrier between reaching early retirement and being stuck as a wage earner.  Lifestyle creep inflates how much money you need in your retirement account before you can retire.  In contrast, if you keep your monthly expenses low, the less you will need to be able to retire.

If you plan on withdrawing 4% from your retirement account, have $100,000 in annual expenses, you will need $2,500,000 in retirement savings.  For those who only have $40,000 in annual expenses, they just need to save $1,000,000.  The higher your annual expenses are, the more you need to have in retirement savings.

To avoid lifestyle creep, some management is required.  A solid budget is needed.  A financial plan is also a vital tool.  First, focus on the big expenses.  Keep your housing, transportation, taxes, and education costs low.  For example, live in your starter house forever, buy an economical car, live in an area that does not have high taxes, and take advantage of public schools and state universities.

If you can avoid lifestyle creep on the major expenses, you will have more money for savings.  This will also lead to less financial stress.  Instead of stressing to cover your bills that are always increasing, you will be able to better enjoy your life because there will be less demand for having to earn more and more.

Conclusion

For most people, the road to early retirement takes a long time.  It generally takes a couple decades of solid earnings, a high savings rate, and compound interest.  To achieve this ambitus goal, there are barriers that need to be identified and managed.

To be successful with personal finance, education is required.  The great news is that there is an abundance of good books, blogs, and forums that provide unlimited information.  A good place to start is the Resources page on this blog.

There is no such thing as an overnight success.  Most overnight success stories have been a fifteen-year work in progress.  If you want to be financially successful and retire early, start today.  It is not an overnight endeavor.

Without some risk, there will only be a little return.  Identify the correct mix of stocks and bonds for your situation.  Be sure to take your age and risk tolerance into consideration.

Manage your expenses.  The greater your expenses, the more money you must save and grow.  By keeping your expenses low, the less money you will need in retirement.

There will always be barriers that stand in the way of reaching early retirement.  Once they are identified, they can be managed and overcome.  Keep your eyes open for other barriers that might pop-up.  Be vigilant and stay focused and you will be sure to reach financial independence and retire early.

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