7 Steps to Retiring Early

Hey guys, Sharon from digital nomad quest and today we’re gonna go over seven steps on how to retire early. Now if you guys are new to this channel welcome I’m all about teaching you how to build passive income become financially free and design your best lives and guys are interested in that make sure to subscribe and hit the bell button to be notified of my latest videos. Now before we begin, I want to thank today’s sponsor Delta investment tracker. So I have a bunch of crypto exchanges I invest on, but it can be super annoying trying to track all your stocks or ETFs and crypto when they’re all on different exchanges and brokerages. It doesn’t let you track everything like or overall unrealized gains and percentage changes all in one place. So luckily, Delta investment tracker allows you to track both stocks and crypto. It’s a free mobile app in which you have access to live pricing of your investments across multiple asset types to get a clear overview of your portfolio. So let me show you guys, you can manually add your transactions by tapping here. Or you can integrate your wallet or exchange accounts as you can see here and broker accounts are coming soon for integration tracking all in one place makes things easier to see the macro view of your portfolio and you can use delta investment tracker to do it all for free, and they’re constantly updating quickly. So you’re gonna get the latest and greatest features, sign up with my link below to try it today. So now let’s get right into today’s topic. Before we go into the steps, we got to talk about what retirement means to you. So my opinion people think of it in different ways. For me, it’s more like you are financially independent, you can pick up work if you want to, but it’s more like you’re financially free. So you don’t need to worry. Most people find that after they’ve retired, they feel kind of like they need more purpose, they start picking up some type of work. And that’s all good. It’s just more about kind of being financially free and not feeling restricted in that way. So some people might say, okay, when you quit your nine to five, that’s retirement, some people say okay, if you’re financially free or retired, you could still be working if you want to, while others might just want to never work again. And that’s retirement for them. So honestly, it really depends on you. There are people who kind of consider themselves semi retired, so they start picking up part time work or side hustles and stuff like that, because it just gives them more fulfillment in their life. Like in this Forbes article. Northrop says early retirement is not about stopping a work, but rather gaining complete control of your time. So when we’re getting into all of this, make sure you understand what it means to you. So in my own example, I actually digital nomads did quit my job travel the world for two years. And I was building up my online businesses. And what I found was that my passive income essentially covered my expenses and allowed me to save more and build my net worth while I was traveling. So I found that essentially, I could have retired early in like Thailand, or in a lot of these other countries that I was spending my time in, I was doing one two month at each place, I found that I could probably do that forever if I wanted to. And just continue with my side hustles versus taking a full time job, I decided to come back though and take a full time job while I’m still building. But essentially, in that scenario, I could have possibly been financially free if you know your income is covering your expenses. But it ended up not being exactly what I wanted, I still wanted to build more of a brand, I still wanted to learn more skills, there’s so many things I wanted to do. That’s why I came back and took a full time job. But in that moment, that was kind of like early retirement because I could have probably just kept traveling not take a full time job and keep kind of working on my side. hustles when I wanted to I was basically financially free because I had the income covering my expenses. And right now to this day, I kind of feel that way as well. Like I don’t totally have to take my full time job now because I spent so many years building up what I’ve built up now with this whole early retirement thing you guys have probably heard of the fire movement. If you guys haven’t checked that video out that I made before in the past about the fire movement, go ahead and check that one out basically means financially independent retire early. And so normally people are retiring in their 60s. But basically people who are all about the fire movement are trying to retire in like their 20s to 40s Trying to get financially free as soon as possible. Now let’s go right into today’s tips. So first off, you need to figure out your retirement number. First off, when you’re doing this, you’re going to need to figure out your net worth. So what does that mean? The net worth means your assets minus your liabilities. So for example, how much your home is worth how much you have saved in your bank account, how much do you have in stocks minus your liabilities, which could be like student loans mortgage, any debt, you might have your assets minus your liabilities will equal your net worth. So figure that out first. Next, you’re gonna want to figure out your annual spending, you can also tally it up on your spreadsheets, one way you can do that is you might look at your last six months of spending, figure out that average monthly expense and then multiply that by 12. But while you’re doing this, you might also want to account for in the future, if you’re going to have kids or more kids as well as you’ll need to find a cost effective solution for health insurance because usually your nine to five is going to give you that benefit. So once you quit that, you’re probably not going to have that and you’re going to want to sign up for another one, which means you’re going to add that on top of your annual spending. Another thing is you might want to think about if you’d want to move somewhere that would lower your expenses to kind of think about what your future might look like and see if that’s going to affect your projected annual spending. So there’s this thing called the 4% rule or the 25x rule that you guys might want to know about. So the 25x rule basically says that a person needs to save and invest 25 times their annual spending to become financially free. And this is based off of that 4% rule and the 4% rule says that theoretically or invest
should increase 7% per year on average, and then inflation will be around 3% per year. So then that difference is 4%. So in that case, theoretically, you can pull out 4% without tapping into the principal. So let’s say you have a million dollars, that means the 4% rule, you can spend $40,000 per year on average. And that means you won’t tap into that million dollar principle, because you’re mainly tapping into the gains from your investment. And then that 25x rule is derived in the same way. So if you multiply 40,000, by 25, you’re going to get a million dollars. And that’s basically a guideline. Okay, so treat this as a guideline, it kind of depends on your risk tolerance. So if you want to be safer with it, maybe you do like a 30x rule, or 40x rule, or instead of a 4% rule, you might want to do 3%, it just kind of depends on your risk tolerance. For me, I probably want to say more than that 25x, I’m still in that mode, where I’m enjoying building businesses having residual income, I’m going to keep building because I’m young right now, or at least I feel young. Another way to think of your calculated retirement goal is by figuring out your savings rate as a percentage of your take home pay. So this is all referenced by Mister Money Mustache, you guys can check out these two graphics here and looking at it, you can figure out how much money you’re taking home and how much you’re spending. So if you spend 0% of your income, you can basically retire now, right? Well, if you’re spending 100% of your income, you’ll never retire, having passive income businesses and real estate can actually help you retire earlier. Alright, that was a pretty long tip. So let’s go into number two, you’re gonna want to understand the difference between fire, lean fire and fat fire. So what people basically say is that regular fire again, that’s the financially independent retire early movement is basically someone who’s spending in line with the average US household, which is basically $60,000 per year. Now, when it comes to lean fire, that means that maybe you’re spending a fraction of that maybe you’re spending 50% of that, or even less, so obviously, you’re gonna need more to save. If you’re spending less annually. If you spend more than that $60,000, that’s going to be called fat fire. Maybe you’re spending $100,000 a year if that’s your lifestyle, you’re going to need more in your savings and investments to uphold that in order for you to retire early. This number also depends where you live. So in the Bay Area, your average household expenses might be higher, whereas a more affordable market, you’re probably spending less on average. And the reason why you want to understand this difference is that you want to understand if you’re okay with Lean fire, or if you want fat fire. So for me, I realized that after traveling for a while kind of doing the Lean fire away because I wasn’t spending like crazy, I was being mindful in my expenses and stuff like that, to me that was like lean fire. Whereas now my goal is more fat fire where I feel a lot less restricted, a lot less worried where I can spend more casually and be okay with it. But obviously, I always preach saving money and investing it so I’m not going to spend like crazy, but it’s more about having that freedom. To me, that might mean more fat fire, a lot of people might be comfortable spending less than $60,000 a year might be comfortable with Lean fire. So you got to know what your goal is. Number three, you’re gonna pay off all your high interest debt as soon as possible. According to creditcards.com, the average credit card interest is around 16%, which is insane. So with credit cards, you want to make sure you’re paying on time and in full every month because you don’t want to cruise credit card interest, that credit card interest can be really difficult to dig out of. And if you’re paying off your credit card bills on time in full, then you’re going to actually help your credit score as well. So make sure any high interest debt you get rid of as soon as possible. So you don’t have more and more to pay off as time goes on. Alright, step number four, you got to reduce your biggest expenses. So you should think about your biggest expenses right? Are there ones that you can get rid of, or ones you can reduce, and usually your biggest expenses are going to be your living costs. So one thing I think is great if you’re trying to get into real estate investing, for example, is to house hack. If you have hacked by a duplex somewhere, you could get an FHA loan, which is 3.5% down. So you will have to put a ton of money into a down payment, you’re going to be able to live in one unit, and then rent out the other unit to tenants. Now we’ll help cover the mortgage and other expenses that will allow you to reduce your expenses a lot. And that will also allow you to help you build your wealth quicker. One thing is Shawn and I are actually considering moving to Texas for a little bit to reduce our expenses, Airbnb out this property we have in the Bay Area, which will make up for a lot of our living expenses. And that would also help us build our wealth quicker inside. No, it would synergize well with a lot of the things we’re trying to do, for example, real estate investing in Texas. So you got to consider Can you lower your living expenses by doing something like house hacking, or even like moving to another city or state in order to reduce your expenses, or you can even temporarily do that, which is what we’re trying to do temporarily reduce our expenses, build up our cash flow and then come back. So think about these strategies in order to reduce your biggest expenses. Having a lower mortgage or lower rent, having a car fully paid off, having loans paid off, that’s just gonna make your life so much more stress free and less worrisome. Number five, you’re going to want to increase your income. So with your full time job, you’re going to want to negotiate salary increases, possibly every year Glassdoor released a study that found that the average American could be earning about $7,500 more per year than their current annual base salary. So a lot of people are missing out with their full time job. One thing I actually did was I would jump John’s a lot to be honest. So I actually started
off with a $30,000 per year job. And as I went to different positions with different companies, I ended up getting a bigger salary bump each time until I landed at a job, which I’m currently at, actually. And now I’m at a solid six figure role in a full time position that I really enjoy. So it’s up to you if you guys want to look into other positions, but you should definitely try to negotiate if you can, when it comes to getting a raise. Now on top of that full time job, you’ll probably want to increase your income through side hustles. I feel like side hustles is becoming like an ordinary thing. Now most people are getting a side hustle because it makes a lot of sense to increase your income through other income channels, you never know what’s going to happen with your position. So having multiple income streams is kind of like diversifying and not putting all your eggs into one basket. And in this scenario, when we’re talking about early retirement, you want to increase your income as much as you can build up that nest egg as quickly as possible so that you can retire earlier plus with side hustles, especially if they’re passive. For example, with real estate investment, I’m collecting rental income every month, and that cash flow allows me to cover my expenses. And that’s not even including my online business side hustles as well. Having those multiple income streams gonna make it even easier for you to retire earlier. And on top of that, it kind of gives you more purpose today, especially if you are really passionate about your side hustles it can be your main thing after you feel financially free, you quit your nine to five or whatever, you’ll have something to work on for fun and give you more purpose. Now number six, you’re going to want to max out your retirement account. So some people don’t do it this way. It’s kind of up to you. For example, some real estate investors don’t actually want to put their money into the 401k They’d rather put that into their real estate investments. However, your tax advantaged accounts may help you a lot. When you take advantage of your retirement counts, you can optimize your savings and actually get tax deductions you can contribute after tax to Roth IRA or contribute pre tax to a 401k or a traditional IRA. For example, the thing is, you can’t take money out of your 401k without a penalty until you’ve reached 59 and a half years old. So that’s kind of why a lot of real estate investors just want to put that back into real estate versus tying it up into a 401k. However, you can dip into your Roth IRA, which is funded with after tax money with this you’re going to be able to withdraw your contributions but not the earnings from the contributions but you’re going to be able to do that tax free and penalty free. However, I would suggest not even touching it until 59 and a half years old. Now lastly, I want you to invest your money you can actually invest with your retirement account money. So for example, my Roth IRA is invested a lot into ETFs into stocks. And with the Roth IRA for example, those earnings from the after tax money you contribute are going to be tax free when you withdraw and then also my 401k I invested into index funds which is another safe investment if you’ve already invested your retirement account money you can also invest into a brokerage account and there again many people stick to low cost index funds and ETFs and obviously I advocate real estate investing so I do a mix aside from stocks I definitely invest in real estate Shawn and I currently have 23 units right now and we are still growing our portfolio and having rental properties have good tax benefits gives you cash flow makes money through appreciation as well as that debt pay down. It also helps you build generational wealth where you can pass those properties down to your heirs with the benefit of step up in basis. If you guys want to look at the tax benefits of real estate you should check out my video on the benefits of real estate investing I think it’s a really good video to grasp the reason why I invest in real estate and why I think you should do it too. Of course I think real estate is not for everyone ETFs and index funds are definitely going to be easier to invest in is definitely more of kind of a set it and forget it type of technique where you just contribute to it every month now I hope you guys enjoy this episode on the seven steps to retiring early we covered a lot in this episode I talked about what retirement means how to figure out your number and then all the different steps to essentially achieving that goal. Now if you guys liked this episode, let me know in the comments below which tip you like the most smash the like button subscribe and hit the bell button to be notified of my latest videos. And I’ll see you guys in the next one.
Transcribed by https://otter.ai