Expanding Your Mindset
Today’s lesson will explore the psychology of F.I.R.E., starting with your mindset. One of the biggest barriers to F.I.R.E. and improving your personal finances is living with a fixed mindset. This prevents you from being open to alternative ways of living. Today, I still come across people who tell me that they can’t afford to save enough, despite earning at least $70,000 in any given year. The problem they face is that they’ve become accustomed to a certain lifestyle. That’s not to say that they cannot retire early living off of $70,000, it’s just that they’d need to significantly increase their income and savings rate to make that possible.
Challenging the Status Quo
A common theme of early retirement is living a lifestyle that’s different to the status quo. As I mentioned, not everyone can retire early even if they’re earning a high salary because not everyone is willing to live a bit differently. So, what is the status quo? Here’s a typical lifestyle: working a 9-to-5 (likely office) job, living paycheck to paycheck (i.e., saving nothing), buying a property, buying a car, getting married, having children, and retiring when social security kicks in. Some go further to aim for nicer, bigger houses, flashier cars, luxurious trips, private education for their kids, and golf club memberships. While I can’t say that you wouldn’t enjoy attaining all this, I can say that these don’t have to be your priorities.
When I accepted that early retirement was more important to me than attaining things that most people strive for (or that society tells us to strive for), it became easier to reject the status quo. I have no desire or plans to buy a property to live in, buy a car, get married, or have children. That may sound extreme, but in many ways, early retirement is an extreme choice. One of my favorite quotes is from Dave Ramsey, a personal finance guru, who says, “If you will live like no one else, later you can live like no one else.” This is not to say, however, that you can’t retire early if you’ve bought a property, car, or are married with children, so if these are (or will be) a part of your life, there are several ways you can adapt your lifestyle to retire early.
There are many misconceptions about frugality. Being frugal isn’t about being cheap, it’s about being resourceful. We’ll talk more about this in the next lesson.
Working 9 to 5
Our main source of income is from working full time in a 9-to-5 job. Our Baby Boomer parents brought us up to believe in the security of an office job, and while these types of jobs usually do pay more than a part-time role or shift work, they’re still not like they used to be. Boomers may have worked like this for 30-40 years, but nowadays, with pay freezes, longer hours, and fewer benefits like paid medical insurance or 401(k) contributions, Millennials find themselves switching roles every few years. Such 9-to-5 jobs used to provide healthy pension pots that would allow your golden years to be truly golden, but today, it’s different. Many of us still rely on this type of job (myself included), but our income capability doesn’t stop there. People who retire early credit multiple sources of income as a key part of their ability to retire early. Not only do they increase their overall income, but by diversifying their sources of income, they’re also cushioned against a job loss.
Living Paycheck to Paycheck
When you don’t set any restrictions on your spending, it’s easy to fall into the trap of spending every cent of your paycheck, using the total amount as your limit. Sometimes we feel like our paycheck isn’t enough, so we take out credit to cover the extra expenses—we accumulate debt. Some of us do feel good about putting 5-10% into savings.
Buying a Property to Live In
Many have benefited from recent rises in house prices and thus seen their net worth (what they own vs. what they owe) rise exponentially. Most of us are told to get on the property ladder quickly, and while there are certain benefits to doing so, too few do a thorough analysis of whether it makes sense financially and commit the mistake of buying more house than they can afford. Too few factor in the closing costs, taxes, interest payments, fees, and costs of ongoing maintenance when comparing buying to renting. If you do buy, a larger down payment can lower your costs in the long run and make it more financially sensible to buy.
Although marriage is no longer a financial necessity, many still enjoy the tradition of getting married. While there are tax advantages, we should acknowledge that 50% of marriages end in divorce, which can be costly if you can’t decide on how to divide your joint assets.
There’s also the cost of weddings that can hold you back. The average wedding in the US costs $33,000. With the average salary in the US at $56,500, that means weddings cost couples nearly 60% of an individual’s salary. With research and frugality, it is possible to get married for much less. Before you think, “Why shouldn’t I spend what I want on a wedding?” consider this: There’s research suggesting that the more money you spend on a wedding, the more likely you are to divorce.
The number of people having children is decreasing, with many citing that they don’t feel financially secure enough to support a child or have no desire for children. On average, it costs parents $250,000 to raise a child from birth to 18 years old. If you have more than one child, double that amount. That’s without factoring in the costs of college, extra curricular activities, and vacations.
Taking these first three lessons, you may know why you’re pursuing financial independence and early retirement, but are you clear on how you can start working toward it? What lifestyle changes are you open to?
Tomorrow, we start with the biggest determinant of when you can retire early: your expenses.
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