Saving for early retirement is an alien thought for most people but the story of the GoCurryCracker duo stirred up discussion at water coolers all around the country.
In a previous post I’ve talked about just how having a higher the average income was the key vehicle to retiring in your 30’s and outlined a target of saving AUD6300 a month. This is based on earning 2.45x the average household income and living with a budget similar to that of an average household.
In this post I’ll look at some strategies to start and maintain the high rate of saving for early retirement.
Saving is easy, just don’t spend money!
If only it was that simple, and in the ideal world it is, but out here with the rest of in the real world? Not so easy!
Here are some basic ideas that we need to implement when saving for early retirement.
- Pay yourself first: At first I didn’t understand this mantra, but it really should be rule number one. This one applies to any income level and savings plan.
- How it works? Every time you receive money “pay yourself first”, that is MOVE the money you have budgeted as savings into a dedicated location. ING, UBank and just about every bank in Australia have accounts which pay a working amount of interest (up to 3.5% at the time of writing) which can act as a “bucket” for your savings.
- Be consistent: The idea behind “pay yourself first” is that you make this payment consistently, if you’re starting a new savings regime start with a smaller amount – budget it, pretend you never had it and you’ll never miss it!
- Buckets or allocated Savings: Through careful budgeting you should by trying to save for regular expenses. A basic savings account that only collects the money budgeted for utilities that are paid monthly and quarterly will accrue interest and relieve stress when the bills roll in.
- Pay your bills from this on or barely before their due date via the most cost effective (free preferably) means. Every day that money is in your hands it’s making you money!
- Re-budget/balance the incomings and outgoings of this account as your expenses change.
- If you’re not in a position to pay off your credit card in full each month use it as the intermediate “savings bucket” for bills. As most Australian credit cards charge around 20% interest every cent you don’t owe saves you money every single day.
- Do not “pre-pay” utility bills! It’s very convenient to set up a regular direct payment to your utility company which means you don’t get that “big bill” every few months. What you’re really doing is lending a company money for free. Go a day past your due date and you’ll quickly discover that the same company doesn’t care that every other day of the billing cycle you were in credit! Pay your bills on-time, or only a few days early.
- Saving to pay a Credit Card (in Australia) is wrong: Until you reach a stage where you are paying off your credit card in full each month (thus avoiding the extortionate interest) pay your budgeted amount onto the card immediately. There’s no better investment.
Budget, Budget and Budget
I used to think budgeting meant people were, err, stingy but in fact it’s just being prudent. You really need to know how much you’re spending and what cycles you’re spending it on!
Get online, do some research, find yourself a budgeting strategy that works for you. Apply it. Stick to it. Change it if it doesn’t work, never give up!
You don’t need to get fancy, Microsoft Office and Google Sheets/Docs offer templates straight out-of-the-box that will get you started!
Actually Saving for Early Retirement
Back to our GCC driven model. By virtue of the high household income and living as an average household we should be saving about AUD6300 a month.
I would propose that the first few months (or year/s) of the journey that is saving for early retirement be spent making sure you don’t need to ever dip into the retirement funds.
To this end I suggest having a decent sized pool of readily available (yet interest bearing) cash to meet emergency or unexpected expenses. Even in a country with universal healthcare (aka Medicare) you’d be surprised at how much you may need to dip into. The purpose of this middle bucket is to buffer your savings plan from more mundane expenses. How much is enough? Well that’s up to you – but it’s probably not unreasonable to suggest that 10% of your household income wouldn’t be a bad place to start!
In my next post I’ll talk about some ideas you could use to actually invest money, ways to be “in the market” without being a share mogul, slum lord or loan shark.