You may have already heard or read about people thatÂ decided to stop working at young age and live entirely off passive income. Although making this choice seems unrealistic and many would say impossible, there are people out there enjoying their free lives having done exactly this.
Iâ€™m here to tell you what you need to know before making the decision to retire early (or extremely early). This way you can start preparing for the changes youâ€™ll have to make in your life in order to achieve this goal.
First off, imagine what you want to do with your life? Are you religious? If so, you probably believe in some form of salvation and reliefÂ at the end of your life, making it easier to deal with the day by day drag thatâ€™s been tormenting you for most of your life. But what if you donâ€™t believe in that stuff? What happens when your life ends? Will you just disappear?Â If so, youâ€™d probably want to make something moreÂ of your current life.Â These are questions no one can answer but yourself.
You probably already have a feeling with your day to day working life. Maybe you like your job and enjoy spending time on it every day. On the other hand, chances are you feel like living in a drag, doing the same things over and over again waiting for weekend to come and end, just to start things over again. If so, then the alternative of ending this job as soon as possible and live life on your own terms might sound attractive to you.
Good news! This is entirely possible if, and only if youâ€™re willing to alter your lifestyle to achieve this goal as soon as possible. Here ill make a brief overview of the things youâ€™ll need to accomplish in order to retire as soon as 6 or 7 years from now.
Our goal is to build an amount of money big enough to live entirely off rent or investment income. Thereâ€™s an easy way to calculate what this amount should be for you. Considering a 4% generated passive income through rent or investments one would need 25 times his/her annual spendings in order to live entirely ofÂ the money saved up. Now many people will think: Hmm, Iâ€™m currently spending about 40k every year which means Iâ€™ll need 1 million to retire early. My god, thatâ€™s too much, forget it thatâ€™s never gonna happen!
WRONG! Fact is, youâ€™re spending over 3300 every month, now thatâ€™s too much! The real challenge for you is to reduce your spendings to a normal amount which will allow you to live on much less than what youâ€™re used to.
Step 1: Stop spending!
This sounds muchÂ easier than it is. Youâ€™ll have mostly psychological barriers that have to be removed. If youâ€™re really passionate about retiring early, than this is the step where it all begins. Check your bank accountÂ debits for the last 3 months and ask yourself at each and every one of them, is there a way to stop spending this money? For instance, do you really need all the insurances you have? Do you really need a car or is it just convenient? Consider other forms of travel like cycling, walking, taking the bus. Do you really need an expensive cellphone plan that includes the newestÂ phone every yearÂ or will a cheap one suffice?
Start buying store-brand groceries from now on. Check the price on every brand and always pick the cheapest option. Start repairing things yourself, donâ€™t pay a â€œspecialistâ€ to do it for you and donâ€™t replace it unless absolutely necessary.
Youâ€™re not done with reducing your spendings untill youâ€™ve reduced itÂ to 50%!
Step 2: Start saving!
This step is much easier and pretty much follows from step 1. Donâ€™t buy anything from your money saved in step 1. Instead, open a high interest savings account. Store all your money there to start earning rent. This will aid you in generating 25x your annual expenses. If youâ€™re into investing, this may be a better option for you since it usually generates better results.
A good guideline is to save about 65-70% of your entire income. This is very possible by reducing your spendings. You really have to make it second nature to live on as little money as possible every day. It quickly becomes motivating when you see your savings account skyrocketing! Doing all the above will make sure you will earnÂ enough throughÂ passive incomeÂ in about 6-7 years. Make a spreadsheet for yourself calculating your savings rate from now until youâ€™ve reached your magic number (25x your annual expenses). This way you can fine tune the amount youâ€™ll need to save each month, plus itâ€™s extremely motivating to be able to see yourself working towards your goal.