The blueprint for retiring early – Part 1

I achieved financial independence at age 38. This is the blueprint I followed to do it.

Step #1 – Fix your spending

First, you have to fix your spending. I don’t mean ‘fix’ like it’s broken, I mean fix it as in only spend a constant, known amount of money. You might adjust this up or down over time, but for any given year you need to set a target spending budget and stick to it.

I detail out exactly how to do this here (read it!), but here’s the technique in summary:

  1. This works best if you move to a better bank. At the very least, your bank needs to allow you to schedule monthly automatic transfers from your savings to your checking, which virtually all banks do.
  2. Change your employer’s direct deposit (or wherever your income is coming from) to go 100% to a Savings account that you mentally label ‘do not touch’.
  3. Create a monthly ‘spending transfer’ at the end of each month to go from Savings to your Checking of whatever you need to live on. Make sure ALL your bills are paid out of this single Checking account so that you’re not overspending vs your monthly goal. Consider ‘sub savings’ account like I mentioned in the full post to break your spending into ‘buckets’ like Travel, new Car, home repair, etc.
  4. Once every couple of months, transfer the money that piles up in your Savings in excess of your monthly spending transfers to your investment/retirement accounts. Repeat until wealthy.

Once you have this banking system of accounts + automated transfers (including your all-important direct deposit) set up, there are only two points of failure:

1) you forget to transfer money from your sub-savings accounts back to your checking to pay for once-in-a-while expenses. Avoid this by using your bank’s app and making transfers as soon as you spend money that comes from a sub-savings account. Say you buy plane tickets for $1,500. As soon as you buy them, transfer that same amount from your Travel savings account to checking so that the money is there when your credit card payment comes due. (I recommend setting all your bills up to auto-pay for simplicity and to avoid late fees.)

2) The second point of failure is outspending the amount you’ve budgeted for. If you’ve correctly computed your recurring expenses that come from checking, you’re ok there. If you haven’t, either adjust your monthly deposits upward, or if it’s just a temporary blip, ‘steal’ money from your subsavings accounts to pay for a higher-than-usual monthly bill. For your discretionary expenses that you’re accounting for in your sub-savings accounts, you must wait to spend that money until you have enough in your sub-savings account to pay for it. For example, if you have a Travel fund, do not book your next vacation until you have enough in that sub-savings account to pay for it. This develops the simple-yet-essential habit of not spending money you don’t have.

Your goal in all of this is to steadily increase your rate of saving as your income increases over time. People with steady employment that fail to build wealth are increasing their spending to match their income increases. Thus they never ‘get ahead’, and with credit cards and debt, they can even spend enough to fall further behind despite worker harder and earning more over time.

For people that are serious about accelerating the date at which they can work for fun versus money, you want to eventually save 50% or more of your annual income. This is hardest when you’re just starting your career and your income is low, or if you’re just starting to get a handle on your expenses. Don’t be discouraged: any increase in savings is a big step in the right direction! I saved barely anything straight out of college (but I did save something), and now, 15 years later, I’m saving well over 50% of my take-home pay as my income has increased by keeping my expenses at the same level they were for the past ~10 years.

The rich get richer

Once you fix your spending, you’re now banking every windfall that comes your way. Bonus at work? You get to keep all that. RSUs vest? Bank it. Annual raise? More and more yearly savings moving you closer and closer to financial independence.

In Part 2 we’ll discuss Steps 2 and 3: maxing out tax-free savings and what investments to choose for maximum growth with minimal long-term risk.

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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