How do I start saving to retire early?

Today’s question comes from Brian. He asks:

I’ve just recently become familiar with the concept of financial independence and retiring early and the idea that saving money is a good idea. It sounds silly but I’d bought into the idea that if you have money, it’ll just get taken from you via lawsuit, friends/family in need, or inflation. But this past philosophy aside, my technical foundation of financial knowledge is strong. I took finance/accounting classes as part of my Business Administration degree and I’ve actively studied investing, which is kind of silly given my track record of saving (RE: none).

I’m 32 with a wife and two kids. We’d never made any FI plans and my wife is slowly starting to get on board with the idea. But we have a large house, two cars we bought new about two years ago that we’re under water on and would have to take loans out to sell, and have adjusted to a pretty good lifestyle, even though we have saved nothing.

So, here’s my question: Would it be best to pare down expenditures one at a time, to avoid shock, or go full-on blitzkrieg in changing our lifestyle from hedonic to frugal? My gut is telling me that it’s easier to boil a frog slowly, and to get buy-in, I should tighten up over time on things like cars and housing, although some things we can quickly switch, like downgrading cell phone plans, internet speeds, etc.

Thoughts on this?

The concept of “financial independence” is replacing “retirement”. Because when you reach financial independence you get to decide if you want to keep working or if you want to retire. Either one is okay.

This really isn’t about the money, it’s about having control over how you spend your time, something we traditionally waited until our 60s for.

But the majority of people aren’t retiring in their 60s because they can’t afford it. They spent too much, and they didn’t save, and they didn’t invest.

Remember, becoming financially independent is simple. Spend less than you earn and invest the difference. That’s how it works.

And I coach a lot of high earners in their 30s who struggle with this.

They tell me they made $2 million over the last few years with nothing to show for it. It makes them sick. And they know if they don’t make any changes then ten years from now they’ll be telling me the same story.

So here’s what I tell them.

Forget about the big changes like downsizing your house and selling your cars. Big changes require you to adapt, and adapting is stressful. And who needs more stress in their life?

So, keeping that in mind, start with making a small change. Making a small change gives you the ability to make the big ones.

What’s a small change? It might be giving up that daily $5 latte, or that $10 lunch. And before you tell me that you love these things and you’re not giving them up, that’s fine.

Everyone has some minor, habitual expense. Pick that.

Okay, and now that you’re saving $10 a day, how do you become financially independent? When you need a million or two?

When you save $10 a day it adds up to $3,650 a year. And if you invest that $3,650 a year and get a 7% return then in 35 years you’re going to have $539,890.

Think about that. Half a million just because you made one small change. What do you think happens when you stack a few small changes together?

My savings rate went from about 10% to over 50%. And now that I’m thinking about it, I was making the big changes without even realizing it.

For example, selling my car was too overwhelming so I kept it. Now I drive a 12-year-old car. It was only recently that I tested going carless. While you’re making the quick small changes, you can slowly grow into the big changes.

Make sense?

What’s most important right now is taking action.

Because if you keep doing what you’re doing, a year from now you’ll be telling me you have nothing saved, and that you’re no closer to financial independence.

And most people will spend their entire life just talking about it, saying how great it’d be. Those are the people who have to work until they’re so old and sick they can’t work anymore.

The people who actually do it are the ones taking action. So if you really want it, then start doing what you say you want, and you do that by starting with one small change today.