Make Damn Sure To Pay Yourself First
Face it: Budgets arent the most exciting things in the world. They take time and effort to create and maintain. And, they typically cause so many of us to manage our finances completely backward. Maybe its time to ditch the budget.
Traditionally, budgeters take their money and pay other people or entities first. That could mean the government through income taxation, social security taxes, property taxes, etc or loan repayments, or monthly service fees, or anything else. Those things tend to come first. Then, whatever we have afterward becomes ours to do with as we please. To spend. To save.
What if we turned this phenomenon on its head and funded OUR futures first, then worry about paying our bills?
Paying ourselves first means we fully fund our retirement accounts before paying anyone anythingyes, even the government. And best of all, there is nothing illegal about it. Its called a 401k , or SEP IRA) plan.
We max out our 401ks and IRAs. If those arent available to us, we fully-fund a brokerage account or any other long-term investment account. Our savings account. Our emergency fund. We continue to build our FU money fund each and every paycheck, eventually accumulating at least six months of living expenses. All this comes first.
Then, we can spend the remainder on things that provide true value.
A Post Financial Independence Perspective
Listening to ERE several years after my first read, and over a year after achieving my financial independence, I walked away with an entirely different message. It was the kick in the ass I neededin a good way.
Embracing a Renaissance mentality is the cornerstone of the EREs philosophy. The Renaissance man avoids narrow-minded specialization, and instead embraces learning a wide range of skills. Sure, he will specialize in a few areas, but will have a working knowledge of many things in life. This desire to learn and self-serve has the practical effect of not needing to outsource many daily tasks. A highly specialized individual, like a director at a corporate IT office, might choose to outsource meal prep, cleaning, cooking, home repairs, home renovation, vehicle maintenance, etc. Of course he has the money to pay for these conveniences, but only when he is employed. So, if his W2 income is his only source of income, losing his job becomes a costly and high-stress event.
Compare that to the Renaissance man who is more inclined to clean his own home, cook his own meals, learn how to resolve minor home and vehicle repairs, and enjoy renovating his own home. Another mindset shift that can drastically reduce your expenses while building your knowledge, and making you an all-around more interesting person.
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From Nest Egg To Passive Income
Most people start their retirement planning by asking the wrong question. They ask, How much money do I need to retire? when they should ask, How much passive income do I need in retirement? From there, you can estimate how much money you need to retire. But it starts with your target retirement income.
Retirees typically withdraw a certain percentage of their nest egg each year to cover their living expenses. They base that percentage on whats called a safe withdrawal rate, which varies based on how long they need their nest egg to last. If you retire at 75 and only expect to live another 10 to 15 years, you can pull out money much faster than if you retire at 40 and hope to live another 50 years.
Many retirees follow the 4% rule, taking a withdrawal rate of 4% of their nest egg each year. Historical returns on bonds and the stock market suggest that a withdrawal rate of 4% should leave your nest egg intact for at least 30 years.
Knowing your future withdrawal rate enables you to calculate how much you need to save for retirement. At a 4% withdrawal rate, you need 25 times your target annual retirement income as a nest egg . So, if you wanted $40,000 per year in retirement income, youd need $1,000,000 as a target nest egg.
Dont Rely On Discipline To Save Instead Automate
Automation removes the element of discipline from the equation of saving money. With automation, we dont have to remember to move our money to where it needs to go. We arent manually transferring our cash every single month, which definitely takes discipline. We dont need to lift a finger after we set up an automated process to save money. Its all done for us, like clockwork.
How does automation work? Payroll deductions are often the easiest way to automate your savings. If your company offers a 401k plan, youll probably be able to setup auto-deductions from your paycheck to fund that account for your retirement. An IRA account can work the same way. But, even if your company doesnt offer these retirement savings accounts, banks often support monthly automated transfers that can be easily setup by logging into your banks website.
For more on how automation works, check out my automation resource.
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Early Retirement Extreme Forums
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Wed Oct 23, 2019 8:24 am
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- Joined: Fri Jun 28, 2013 8:38 pm
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Wed Oct 23, 2019 10:47 am
C40 wrote: Wed Oct 23, 2019 9:28 amThe challenge I often have with audiobooks when listening to more complicated subjects/writing is that there’s no time to stop and think like there is while reading a book . If you do start thinking, the book words just keep coming out on top of your thoughts and suddenly you wonder how long has past since you last listened to the words.
C40 wrote: Wed Oct 23, 2019 9:28 amI don’t think the ERE book would work very well in audio format. It would take very intentional listening. For me, at least, much of my podcast and audiobook listening is done with maybe 80% focus. It’s also a book where one stops and thinks while reading.The challenge I often have with audiobooks when listening to more complicated subjects/writing is that there’s no time to stop and think like there is while reading a book . If you do start thinking, the book words just keep coming out on top of your thoughts and suddenly you wonder how long has past since you last listened to the words.
Putting Theory Into Practice
The first half of Early Retirement Extreme establishes a philosophical framework with which to evaluate your relationship to money. After he sets the stage, Fisker spends the last half of the book explaining how to put this theory into practice, how to work toward extreme early retirement.
In some ways, for instance, Fisker is like the opposite of Tim Ferriss. In The 4-Hour Workweek, you’ll remember, Ferriss advocated outsourcing as much of your life as possible in order to give yourself more time to do the things you want. Fisker thinks this is nuts.
People spend eight hours a day for 30 years to buy electric can openers, Fisker writes. The solution is to reverse the outsourcing of ordinary life skills and gradually insource skills that were previously acquired in the marketplace. He urges readers to mend their own clothes, grow a garden, cook their own food, walk and bike for transportation, and so on.
Some parts of Early Retirement Extreme are brilliant. For instance, the six pages on construction methods are some of the best I’ve ever read about the value of doing things yourself. Fisker doesn’t actually tell the readers how to do anything instead, he provides a framework for problem solving.
And I love the section on deciding which things to own. Fisker says that the stuff you buy should:
- Have appropriate quality and a low lifetime cost.
- Be durable.
- Be easy to dispose of.
- Be small and lightweight.
- Be easy to make.
- Be easy to service.
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Dont Worry About Being A Minimalist
Minimalism to me is a negative term. Nobody wants the bare minimum.
After all, if youre eating healthy, do you make yourself a minimal dinner or a sensible dinner? If youre looking for a new car, are you looking for a ride with just the bare minimum in features, or the right balance between cost and comfort? Do you go on minimal or sensible vacations?
You get the idea. Minimal is just the wrong word.
The concept of minimalism I think is a good one living with less, or living within your means . I think most of us could get behind that statement. It does not take a barely adequate lifestyle to retire early. There is no need to compare every one of your possessions to some amorphous definition of minimalism. Becoming a minimalist is not the key to a lifetime of happiness and jobless bliss.
Be sensible, not minimal.
Invest For Passive Income
Saving money is all well and good, but the real magic happens when you invest that money to compound or generate passive income for you. With enough passive income from your investments, you no longer need to work full-time in order to pay your bills. Its called financial independence : you can cover your living expenses without a day job.
For example, Im a real estate investor. I live on a fraction of my income, and save and invest the rest. Some of that savings goes into buying rental properties, which generate ongoing rental income for me each month. With enough rental income, I no longer need a day job I can go travel the world with my family.
Pro tip: If youve been thinking about investing in real estate, you can purchase turnkey properties through Roofstock. You can also invest in real estate indirectly through platforms like Fundrise or Groundfloor.
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Children Also Cost Money
It costs money to raise a child.
A study by the USDA estimated the average cost to raise a child at $284,570, factoring in inflation. That figure does not include college costs.
Critics contend that the FIRE movement ignores children, and early retirement is only attainable for people without kids.
My Take: First of all, children are an investment, not an expense. And I mean that not just figuratively, but also financially. My children are my insurance against superannuation: if I run out of money in retirement, my children can take me in or otherwise help with my care.
Fisker suggests keeping the costs of raising a child down by not giving them an allowance, encouraging them to save whatever money they get as gifts, buying childrens clothes at thrift stores, and encouraging them to go to a state school instead of an expensive private university. I dont think you have to do any of that.
Nearly one-third of the cost of raising a child comes from larger housing. But you can avoid paying for housing through house hacking.
I have a child and hope to have a second, and still plan to reach financial independence within five years of when I started taking it seriously.
As for college education, there are many creative ways to help your kids pay for college. None of which require bankrupting yourself.
Financial Independence Vs Retiring Early
Financial independence means being able to cover your living expenses with passive income from investments . Retiring early means quitting your job and no longer working.
Responsible adults need to be financially independent in order to retire, but they dont need to retire just because they reach financial independence. Because lets be honest, as much fun as sitting on a beach sipping margaritas is, it gets boring after a week or two. Most of us dont actually want to retire at 30 and never work again we want the freedom to do work we love, even if it doesnt pay well.
So, dont get hung up on the retiring young component of the FIRE movement. Instead, focus on boosting your savings rate, investing to build your net worth quickly, reducing dependence on your job, and using your financial heft to help you design your perfect life. In other words, use FIRE tactics to help you with lifestyle design.
People love to criticize the FIRE movement for promoting laziness and encouraging young people to quit the workforce. In truth, the FIRE movement uses the retire early angle as a marketing gimmick, because everyone can intuit what that means. Most people dont know exactly what financial independence or lifestyle design mean, so they make poor rallying cries.
But theyre where the meat of the FIRE movement lie.
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You Cannot Repeat Cannot Compare Yourself To Others
As human beings, each of us has a different life story. We were all brought up in our own unique ways. Some of us had a wonderful childhood while others had worse. Some of us went to college while others didnt. We all make different amounts of money. Come from all sorts of walks of life. Exposed to different things. Biased perceptions. Whatever, you get the idea.
All these differences mean we wont achieve financial independence and/or early retirement at the same time. We cant compare ourselves to others. Just because Johnny retired at 32 doesnt mean the guy or gal who retired at 42 is any less smart. Were all different.
And the only difference that truly matters in the question of FIRE is Determination. And, focus. Remain both determined and focused on your life, not the life of your neighbor, or friend, or that entrepreneur, or blogger, or
The more energy that we spend focusing on others is less energy well have for ourselves.
Have A Plan If The Shit Hits The Fan
What happens if everything fails in early retirement? Hopefully, you realized the discouraging trend before it got really bad and youre able to recover or stave off the worst of it. But if not, what will you do if nothing works as planned after calling it quits?
You may not be able to just go back to the job you were doing. After all, if youre out of work for five years, how realistic are your chances of rejoining the workforce doing what you were doing before you peaced out?
Do you reduce your spending? Does your lifestyle lend itself to a drastic reduction in expenses in relatively short order? If it does, youre probably in good shape if things dont work as planned.
For my wife and I, we have a couple of tricks up our sleeves. As full-time travelers, our lifestyle can be almost as cheap as we need it to be. We might boondock more to save on campground fees. Or, perhaps wed consider work camping at a campground, which puts you to work around the campground in exchange for a free full-hookup campsite. I could also hustle more with my blog and a few other opportunities that I could call in.
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About Early Retirement Extreme Pdf Free Download
Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence pdf offers a fresh look at what would have otherwise been a jaded topic. The author of Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence pdf book draws on a vast knowledge bank of insights and experience to execute this work.
Publisher : CreateSpace Independent Publishing Platform 1st Edition Language : EnglishItem Weight : 11.5 ouncesDimensions : 6 x 0.54 x 9 inches
Find another financial freedom books here. Books provide a narrative in which business activities are connected to current operations and financial reporting. Personal finance research helps you understand the importance of good personal finance skills. The importance of good books like this one cannot be overemphasized and it will help you learn all you need to know about personal finance in order.
Book Review: Early Retirement Extreme
For over five years now, I’ve spent most of my waking hours reading and writing about money. I’ve learned a lot. Using this knowledge, I’ve been able to get out of debt, build savings, and even begin pursuing my passions. What’s next? As time passes, I find myself thinking more about financial independence and early retirement.
No surprise then that over the last couple of months I’ve been obsessed with Jacob Lund Fisker’s Early Retirement Extreme blog. And no surprise that my first book review since September is of Fisker’s book, also called Early Retirement Extreme.
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