13 seems to be an unlucky number for many but it could be the amount of years you need to reach financial independence and live comfortably. Whilst many dream of one day reaching retirement and having all that time to do what they want, you can make this dream a reality by following these 3 simple steps.
Whilst the steps below are simply , they won’t be easy to constantly do over the next 13 years. But by following them, the end result will surely be worth it.
It won’t be easy but it will surely be worth it.
1. Save at least 50% or more of your income
If you want to retire early, saving should be your number one priority. The higher your savings rate, the quicker the time you get to retirement.
If you are able to cut your expenses and maximise your savings to about 50% of your income, your chances of retiring early increase dramatically.
Let say you earn the average £30,000 a year. That means you are saving at least £15,000 of this. If you manage to earn 8% annually on your £15,000 contribution per annum through a low cost index fund, you’ll have a portfolio value of £336,237 after 13 years.
At 5% yield which is certainly attainable by purchasing high quality dividend paying stocks, your portfolio of £336,237 will give you an income of £16,881 a year. This will meet your expenses as you are already living on less than £15,000 a year.*
The reason that it would prove prudent to move your portfolio into dividend paying stocks mentioned above is that you never have to touch your capital but live off your dividends providing any companies you invest in don’t cut there dividends .
Given that many dividend growth companies seem to increase dividend payments every year, your £16,811 annual dividend figure will grow over the years. Let’s take a conservative 7% dividend increase across your portfolio. This means that in year 2 you will have £17,987 of dividends flowing into your bank account, in year 3 this figure will be £19,246 and in year 4 it will be £20,593
And the best part is, if you have been investing that £15,000 a year in an ISA, all the money you will be payed out in dividends will be tax free!
If you are having a hard time saving at least 50% of your income, you need to get a second source of income. Sometimes it is not possible to save 50% of your income due to expenses that can’t be cut due to your situation. So the only option in this case is to increase your income.
Get a second job if you have to. Even part time work an do your financial life wonders. If you earn just £100 a week through part time work and invest that for 13 years at the average 8%, you’ll have an extra £107,595!
Put a few extra hours now so so you don’t have work till 70. As Dave Ramsey says ‘ Live like no one else, so later you can live like no one else’.
2. Invest Regularly
Saving money on its own will only get you so far. By having money in a typical savings account, it is likely to be eroded by inflation over time.
If you look at the above example, if you put your money in a simple savings account paying 2% a year, you would end up with £222,583 instead of £336,237 if you invested the money. This is a huge £113,654 difference.
As you can you need to invest your money to make it work harder for you to not only beat inflation but to make your money grow exponentially over time. To grow your wealth, you need to prefer cash-flow over cash.
When investing, if you are not capable or unwilling to pick individual stocks, stick to investing in a low cost index fund using pound cost averaging (put definition of pound cost averaging).
investing regularly on a monthly basis ensures your money is working for you instead of just sitting around.
3. Budget and Keep Track
By setting yourself just 12 years or less to retire, your margins of error are much less than someone who want to retire in 30 – 40 years.
Goals and Progress are hard to quantify if you don’t keep track. By keeping track you can see how far you’ve come and how close you are to achieving your dream of retirement. Sometimes, it will lead you tweak your savings rate for the better thus allowing you to reach the goal of financial freedom quicker. Bu keeping goals and seeing your progress, you keep motivated!
In order to retire early, you need to constantly do the above three things. The journey will be hard but the end result will be sweet!
*Note that the above scenario does not factor in taxes and inflation and is made for basic illustration purposes only.