Early retirement requires discipline. Traditional retirement does, too. Spending less than you make and investing the difference takes commitment and vision.
The key to early retirement is spending far less than you make. Not only does this increase your savings faster, but it also decreases the amount of income you'll need in retirement. If you can live on 50 percent of your income, you'll only need half of your current income annually in retirement.
While this may seem impossible, odds are that most people spend more money than they need to live comfortably. Here are seven experiments you can try as a way to discover just how important certain expenses are in your life. Ideally each experiment should last 30 days, but even a 7-day trial can teach you a lot about what you value most.
1. Drive one less car than you own. Cars are expensive. Eliminating one car removes not only the cost of the car, but also the cost of insurance, maintenance, fees and repairs. Curbing a vehicle also reduces the stress of maintaining a second (or third) car. Unfortunately, many people believe that every adult in a home needs his or her own car. To test this doctrine, park one car for a month (preferably at a friend's house). This will require some planning. You'll start to think about public transportation, ride sharing, biking or maybe just staying at home. What you may learn is that you can eliminate a major expense without dramatically reducing your quality of life.
2. Say no to expensive coffee. This list would not be complete without the latte factor. If you have a Starbucks habit, break it for 30 days. To motivate yourself to quit, calculate just how much your daily caffeine fix is costing you. Then give it up for 30 days. By the end of the month, you likely won't miss it.
3. Cut the cable. Cable TV is expensive. Over a lifetime it's a small fortune. We recently saved $50 a month getting rid of cable. With streaming and other online options, we watch all the TV we want for very little money. Turn off the cable for a month to see just how important it really is. Chances are you'll eat less, sleep and read more and spend more time with family.
4. Dumb down your smart phone. Smartphones and the data plans that come with them are expensive. A plan with a 2-year contract can easily run $80 or more each month. There are less expensive alternatives, such as prepaid phone plans. Before you make that leap, commit to using your smartphone as just a phone for one month. Yes, I'm suggesting no Facebook, e-mail or Words with Friends on your phone for an entire month. Your driving will likely improve considerably. Stress will disappear. And at the end of the month, you may realize that a plan without cellular data for just $10 a month (yes, such plans exist) is all that you need.
5. Fire the chef. Eating out is as much about convenience as it is good food. The cost of eating out adds up quickly. For 30 days, commit to eating only what you prepare at home. This commitment will require some planning. My wife and I prepare a weekly menu that streamlines our shopping and eliminates those tiresome discussions in the evening about what we should have for dinner.
6. The $2 experiment. This is a variation of the $5 bill saving method. Back when most people used cash, some people would save every $5 bill they received. Over the course of a month the savings could really add up. Today, many people use debit or credit cards for most of their purchases. In this case, set aside $2 every time you use your plastic. The size of the purchase doesn't matter; set aside $2 every time. The money can be transferred to a savings account weekly based on the number of transactions. This experiment has the advantage of not only reducing the money you have to spend, but also making sure it gets funneled to your savings account.
7. Take a pay cut. Calculate what your take-home pay would be if you made 25 percent less. Then for the next 30 days live on that smaller amount. You may incorporate some of the experiments above as well as additional ways to reduce spending. The key is to do whatever it takes to live well below your means. You might be surprised at just how comfortable life can be even when you're spending less.
These experiments may prove how important some luxuries are to you. However, you'll likely learn that you can live comfortably without some of your current expenses.
Rob Berger is an attorney and founder of the popular personal finance and investing blog, doughroller.net. He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and the Dough Roller Money Podcast.
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