Recently, the FIRE (Financial Independence, Retire Early) movement has gained a lot of traction, especially among the younger generation.
The main goal of FIRE is to achieve financial independence much earlier than the traditional retirement age.
This concept is especially alluring to the younger generation as they learn that they, too, can start planning ahead for an early retirement.
By doing so, they can spend the remainder of their lives focusing on things they are passionate about.
Here are a few steps you can take to achieve this goal:
1. Saving and budgeting
The first step, savings, needs no explanation.
In fact, growing up in an Asian culture, many of us are already aware of the importance of frugality in building up our savings.
Yet, being disciplined in saving can be a challenge in a world filled with constant temptation.
When you earn your first paycheck, you may desire to splurge on branded goods that were previously out of your budget.
This temptation to spend money that you had initially intended to save has been exacerbated by the rise of online shopping, which has made it more convenient to make purchases.
For those of you who find it difficult to resist such temptation, you may consider setting up monthly automatic transfers from your main account to a separate account dedicated just for savings.
Setting up automatic transfers is based on the concept of “paying yourself first”.
By doing so, you force yourself to save a certain proportion of your income before you can spend it.
The rule of thumb is to save at least 20 percent of your salary.
However, if you intend to retire as early as possible, you should target to save a much larger proportion of your income.
The reason is simple.
The more you save, the faster your capital will accumulate.
This practice of automating your savings makes the process easy and fuss-free.
Budgeting is a healthy habit that helps you to keep track of where and how much of your income is being spent each month.
This way, you will be able to identify areas where you can cut back and, instead, redirect these funds to your savings instead.
The 50/30/20 rule is a budgeting technique that divides your take home income into three categories by percentages.
Source: Better Money Habits
The higher the proportion of income you manage to save, the faster you can reach your financial goals.
While saving diligently is important, relying on savings alone will not enable you to attain financial independence.
Some of you may mistakenly believe that savings alone are sufficient to reach your retirement goals.
Such a concept may be attributed to the environment you were raised in, where parents shared their idea of how they managed their money.
Nevertheless, the simple concept of “getting a job that pays well, working hard and saving diligently” is not the most efficient way of building wealth.
When we rely on savings alone, we are neglecting the effects of inflation.
Inflation leads to a general rise in the prices of goods and services, and is akin to an invisible tax that slowly chips away at your savings.
Singapore’s headline inflation averaged 6.1% in 2022.
How would you feel if the amount you saved up in the bank decreased by 6.1% last year?
Because this is exactly what happened last year as bank saving accounts pay a pittance of an interest rate.
You may not notice the effects of inflation because the amount reflected in your bank statement remains the same.
The reality is that your hard-earned money is losing value every day.
Investing can help you keep up with inflation and maintain your money’s purchasing power.
Your returns from investing can come in two forms.
The first is capital appreciation, defined as an increase in the share price of your investment.
The second is a regular stream of passive income from dividends.
One example of a stock that has delivered massive capital gains for shareholders is Alphabet (NASDAQ: GOOGL), whose share price has increased by almost 40 times since its initial public offering (IPO) listing in 2004.
On the other hand, Mapletree Industrial Trust (SGX: ME8U), has been giving investors a consistent dividend yield of at least 5% for the past year.
By compounding your money over time, it will help you reach your financial goals much more quickly.
3. Starting early
While we may understand the importance of investing, many of you may still procrastinate for various reasons.
Yet, the earlier you start investing, the more money you will accumulate by the time you decide to retire.
Starting a few years earlier can mean having twice as much money when you retire, as can be seen from the diagram below.
The power of compounding is most clearly illustrated by Warren Buffet, one of the world’s richest people who is well-known for his investment savvy.
Most of Buffett’s wealth can be attributed to the fact that he started investing when he was just 10 years old!
While other investors may generate higher returns than Buffett, these investors are nowhere close to equalling Buffett’s net worth solely because they only started investing much later than he did.
Moreover, the earlier you start investing, the longer your investment horizon will be.
Having a long time horizon enables you to better withstand stock market volatility through the years.
It is all right to start small if you do not have a large sum of money.
Over time, as your capital grows, you will be way ahead of your peers who have yet to invest their hard-earned money.
As your capital snowballs into a larger amount over time, you will be one step closer to your retirement dream.
Get Smart: Levelling up your knowledge
It is important to remember that there are no short-cuts to becoming a millionaire and retiring young.
The process requires patience and discipline.
Personal finance is but one aspect of building wealth.
The other important pillar, as discussed above, is investing.
We hope this article has given you a head start in kick starting your journey towards financial independence.
The journey towards financial independence is a lifelong one, and it is therefore important to continuously upgrade your financial knowledge.
Some of the resources that can help you along this journey include beginner investment articles or seeking professional advice from a financial advisor.
As you build up your knowledge base along with your capital, you will be one step closer to retiring at the age you desire.
If you’re nervous, confused, or worried about buying your first stock, then our latest beginner’s guide to investing can help. It’s easy to read yet packed with valuable insights. Download it for free today, and buy your first stock in the next few hours. Click here to get started.
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Disclosure: Ryan Yap does not own any of the shares mentioned.