Friday, April 23, 2010

Early retirement - part 2

Retiring early

As I explained in the previous post, retiring early is something that got my attention. The most obvious way to accomplish this, would be to gather a lot of money. If you have enough money, you could live of that pile, for the rest of your life.
I explained a lot of options already, on how to get a lot of money. There is another way I would like to talk about: saving.

Saving money

In stead of trying to get more money, you could also go the opposite way. Keep the income you have now, but try to make sure there's as little money going to payments as possible. Cutting expenses is the best way I know, to save money. The less you spend, the more money will be available to put in investments. Combine this, with the magic of compound interest and your money will grow steadily over time.

This means that for every amount of money you save, you gain interest. That interest will have to be reinvested too. This causes you to gain even more interest. This will have to be reinvested too. This causes you to gain even more interest, etc. It's like an avalanche effect. Or like a snowball you roll down the mountain. The longer you roll the ball, the bigger it's going to get. And in the beginning, the new snow does not have a lot of place to stick to, but the bigger the snowball gets, the easier it will be for snow to find a new place to stick too. So the longer you roll the ball, the easier it will become to make it bigger.

The same thing is true for money. That's why they say that the rich keep getting richer and the poor don't. So the more you save, the more you can make your nest egg grow. It's very difficult to gain interest at first, that's why many people give up on this method, even though it's easy to do. But patience, will be rewarded.

Creating wealth

Saving money, is withouth a doubt the most important aspect of creating wealth. The more you're a cheapskate, the more money you will attract. But wealth without friends and family, is not a good thing... you need to find the point to which you can go, in order to save as much as possible, without jeopardizing your social life.

It's an exciting occupation, that could turn into an hobby. You save a bit here and there, at first, but after a while, you're finding new and ingenious ways to save money. And the more you save, the better you'll feel. This goes together with trying to live a modest lifestyle. Why want more, when you can settle for less and be just as happy?

It's also basic logic: you can only save money, if you gain more money than you spend.

dollar-in > dollar-out
or
euro-in > euro-out

So if you try to apply and optimise this formula, you will be creating wealth.

Conclusion

There's a lot to say about saving money, I'll dedicate an extra post about how to do it, later. But the important thing we need to remember is this: the best way to create wealth, is by not spending money. If we combine this with investing the money we save, we put ourselves in a situation, where 'becoming rich overnight' is possible. And because we change our lifestyle, so we can optimize our savings, we also put ourselves in a situation, where we will become wealthy, no matter what... even if it doesn't happen overnight.
So if you want to retire early, save that money! Change your lifestyle! You will get there!