At the age of just 33, Anita Dhake had saved enough money that she was able to quit her day job, retire early, and travel the world. You can read her story in my Forbes column here. She also blogs about her amazingly inspirational life on The Power of Thrift. “I love my life because I feel like I am in control of it,” she says. “I feel free. Retirement is better than you think. At least my retirement is better than I thought it would be, and I thought it was going to be pretty damn good.”
Here, Dhake shares 20 tips for how you can retire at an early age , too.
1. Make my motto your motto: “The most valuable thing money can buy is freedom from worrying about money, yo.”
When I had a lot of student loan debt, I constantly thought about money. I was always worried about getting laid off. I was terrified and anxious and life kind of sucked. With each paycheck, I had a choice: I could either buy something that could perk me up temporarily or I could kill some of the anxiety by paying down my debt. It was never even a choice to me — it was just obvious. Why would I buy a new iPhone when I could buy my sanity? Why would I buy a new dress when I could buy my freedom? Money can’t buy you happiness, but the lack of money can certainly cause unhappiness. As soon as you have enough money, you stop worrying. I can’t tell you how much happier and calmer I am these days.
2. Get out of debt.
Every paycheck, I would calculate how much I would need for my bills. I knew how much I had left to pay down to the penny all the time. I was constantly playing with loan calculators to see how much less in interest I could pay. I still occasionally went out with friends (maybe one to two times a week), but everything else went to my student loans.
3. Remember: Income minus expenses = capital
The more capital I could accumulate, the quicker I could pay down my loans. I kept about $4,000 (a few months of expenses) in my checking account for breathing room — the “emergency fund” that everyone should have. Each paycheck, I would calculate how much I would need for the next month’s bills and then I would gleefully make an additional payment to my student loan debt with the excess the very day I received it.
4. Define what you want.
Retire early? Save for vacation? Move to a new city? The more concrete and clear you are about what you want, the easier it will be to reach it. “Retire early” was item #7 on my life’s bucket list, but quibbling about the definition of retirement is not mathematical enough for me, so I quantified this bucket list item as, “Generate enough passive income to cover my expenses.”
A system is a deliberate activity that you do regularly just because you know your life will be better if you make it a habit. A goal, meanwhile, is a very specific objective that you can very possibly fail miserably at. I find most goals fall somewhere between those two extremes of utter failure and easy success (retiring early!).
6. Or create mini-goals.
Pick one loan to pay off, one expense your passive income will cover, one dime at a time, and celebrate the victories as they come. When you realize that you have control, the bigger goals seem a lot less scary. People have a tendency to overestimate what they can accomplish in a day but underestimate what they can accomplish in a year. Play the long game and change what you do one day at a time.
7. Don’t buy crap you don’t need.
Make two lists. On the first list, write down everything you need. On the second list, write down everything you want. Differentiating between a need and a want is a crucial step in bulking up your financial avatar. Hint: Almost everything is a want. When you go shopping, take only your “needs” list and buy only those items.
8. Next step: Consider the opportunity cost of your “wants” purchases.
Get estimates of whatever it is that you want to buy. Invest that money instead. Understand what you’re giving up and realize that the more “wants” you indulge in, the poorer you will be because spending your money on depreciating assets will never make you rich.
9. Decide what you’re going to do and then go out and do it. Remind yourself of why you made that decision when the moping starts.
Feel empowered. Leaving my law job brought me to tears. But I knew corporate law couldn’t make me happy. That was my decision and knowing I had control and was doing the best thing for me greatly lessened the sorrow. It can work for you, too. Tell yourself that you get up and go to work because you decided you’re going for financial independence. You’re responsible and that is the type of person you want to be. Nobody is making you do anything. You want a bigger life. You’re not going to buy that crap. You’re going to put that money toward making everything better long-term.
10. Maintain a smart investment strategy.
I like a simple, time-tested, and logical investment strategy such as a Vanguard Index Fund like VTSAX. When you buy a Vanguard fund, you become a shareholder of Vanguard. When Vanguard makes money, you make money. Vanguard is the only investment company that I know of that uses this model. Hence, Vanguard has the lowest fees. And fees matter. When the market dips, which I guarantee it will, I happily notice that VTSAX is on sale. As a thrifty person, I love sales. I put money in every month and celebrate the “sales” when it dips and the “returns” when it’s up. Slowly but surely my net worth goes up. Of course, I’m in my early thirties and have a strong stomach. I can afford it when the market drops. In fact, I’d love if the market fell hundreds of points. Clearance sale!
11. Create some sort of visual aid that you can update as you progress towards your goal.
For my retire-early bucket-list goal, I used real graph paper and plotted my progress month after month for five years. I love charts. If you can make something pretty that you can hang up on your closet door and see every day and update every week or every month, you’ll be much more inclined to achieve that goal.
12. Remember: You can’t manage what you don’t measure.
Using a visual aid can help you navigate your financial world, forcing you to track your behavior, and tricking yourself into managing your money. For a lot of people, the trouble in keeping your financial avatar healthy is being fuzzy with the details. Numbers don’t lie. Tracking your spending is half the battle.
13. Keep your budget fluid and extremely personal.
I simply encourage you to think about your spending and consider how much is enough for you. Don’t compare yourself to others. Compare yourself to where you were a year ago.
14. Follow this formula: [(Net Worth)*0.04]/12 = Projected Monthly Passive Income
I read the book Your Money or Your Life, and that’s where that formula comes from. I assume that my investments will return 7% each year and inflation will be 3% each year. Thus, I can take out 4% and never touch the principal. Divide that number by 12, and I get my monthly projected passive income.
15. Set your target amount of money.
My minimum target amount for retiring was $450,000, which translates into about $1,500 a month in passive income.
16. Make the right relationship choices.
This was just the way that my life ended up, but I would say one thing I did that helped was not marrying the wrong person. Divorce is expensive, and it’s a lot harder to save hardcore when you have to take someone else into account. Especially if that someone else isn’t a saver.
17. When you’re traveling, be flexible about where you stay.
I do a little of everything. If I’m by myself, I usually rent out an entire apartment on Airbnb. If the country is very expensive, I’ll rent out a room on Airbnb. If I’m with other people, I tend to go with their travel budget. I have friends that prefer cheap hostels. I’ve done camping and Couchsurfing, as well.
18. Be smart with the airlines.
I use some miles, but I don’t have a great system. I just apply for credit card deals as I see them that sound good. I also use low-cost carriers. I pack lightly to avoid baggage fees. I’m flexible with my travel dates. I’m also constantly looking for tickets. I’m on kayak.com probably every day, just randomly looking for good deals.
19. Read these books on investing.
• Your Money or Your Life. This is easily my favorite personal finance book because it taught me how to think about money and work and value. My inspiration for my wall chart, my visual aid, came from this book.
• The Bogleheads Guide to Investing. John Bogle, the founder of Vanguard, didn’t actually write this book.
• A Random Walk Down Wall Street. I like this one because it gives an overview of all types of investments. In the end, it still recommends good old low-cost index funds.
• The Happiness Project by Gretchen Rubin. This isn’t a financial book, but it changed my life. I stole my resolutions chart ideas from Gretchen and that alone was worth the price of the book. It’s one of the few items I’ve purchased and not rented through the library. That is the highest praise this thrifty gal can give.
• The Simple Path to Wealth. JL Collins’ book on investing is a combination of #1 (how to think about money) and #2 (the investment advice I follow and exactly why) and #4 (some wonderful insights on happiness).
20. Follow these parting thoughts.
• Know that quite often companies would rather lower your bill than lose you as a customer.
• This doesn’t just apply to cable/Internet/phone. You can try this to get your interest rates lowered on your credit cards and I’m sure other bills in your life. I can’t think of any other examples, but I’m sure you can.
• Nobody cares about your money more than you do. If you don’t ask, an employer won’t give it to you. They have no incentive to give you something you don’t ask for.
• Pyramid schemes are scams. It’s not a way to make money. It’s not a way to get rich quickly.
Update 6/29/16: It appears that the traffic from this story has temporarily overloaded Anita Dhake’s site.
More Info: www.forbes.com