When many people see the amount of money that they need to accumulate for retirement they often become disenchanted. Of course, people should be saving up for retirement from a young age and benefiting from the compounding effect on their earnings. However, for those who are behind on their savings, as well as for those who are looking to retire early and get a leg-up on their retirement goals, frugal living can make a huge difference in how much you save. Here is some advice on how to live frugally and to plan for a frugal lifestyle so you can more effectively plan for retirement.
The Importance of Living Below Your Means and Borrowing to Thrive
The most important point to keep in mind at all times when you are trying to live frugally is to live below your means. This means cutting corners on expenses when your income is low and staying within your means. With the money that you have left over, you can build a nest egg that you invest and let grow over time. The more that you live within your means the more you have to invest and have mature.
Except in rare cases and emergencies, never borrow money, unless borrowing will be financially beneficial to you in the long-run such as student loans or a home purchase. Even so, perform an detailed analysis and consider if taking out these loans is a smart choice financially. Many people borrow for elite school and pursue jobs in low paying professions. When choosing a school you should keep in mind the earnings potential for your profession.
Start with a Budget
It is important to start with a budget where you outline all of the things that you spend money on so that you can better order yourself and find opportunities for cutting down your expenses. To build a budget, list out all of your sources of revenue and perform estimates for any revenue that is variable in amount. Variable revenue can be challenging to account for and can require conservative estimates to avoid falling short on your budget. Then move on to the expense side and start listing out all of your expenses.
Many people will not provide a full picture of their expenses and it is important to look at your bank and credit card details in order to get a full picture of the expenses that you typically incur. When building out your budget be sure to link like items together such as your mortgage and rent with your heating costs, and your car insurance costs with your gas and other vehicle costs. By doing so you will be able to get a fuller picture of the costs that you have on each major expense driver in your life. Amortize out annual costs into monthly components, but mark them as annual costs as you will need to pay attention to these major expenditures when they come in.
Then, see how much you have left over in your budget or how short you are. The first step towards a budget is making sure that you are living within your means and not spending more than what you earn. If you are, then pat yourself on the back, but keep in mind that frugal living and early retirement requires more of a sacrifice than just that and requires a significant deep dive into your budget.
Find What You Can Comfortably Slash
When you look through your budget there will be some obvious items that you can comfortably slash without compromising your lifestyle. Here are simple solutions for trimming expenses and living more frugally without impacting your lifestyle significantly:
– Downgrading to a smaller and more fuel-efficient vehicle
– Renegotiating and shopping around for cheaper home and vehicle insurance
– Disposing of items that you no longer need and moving into a smaller home or apartment
– Performing home repairs and maintenance yourself, when practical, like lawn mowing and painting
– Removing electronics from plugs, replacing bulbs with energy efficient alternatives, and pushing out upgrades of new devices for additional time
– Decreasing the amount of air conditioning and heating that you turn on in your home and instead dressing in layers of clothes
This is by no means an exhaustive list of ways to comfortably slash your expenses. There are many little steps that you can take, without pain to yourself, which can significantly reduce the amounts that you spend on a regular basis. These items are table stakes for living frugally, and should be pursued regardless of how comfortably you are below your budget so that you can continue to prosper.
Make The Difficult Budget Decisions Needed
Living frugally often requires making difficult decisions in your expenses that can allow you to live well below your means and comfortably retire early. Examples of ways to take extreme measures include:
– Disposing of your car and walking, bicycling, or using public transportation to get to work or school
– Getting a roommate or roommates to share the burden of your home costs
– Washing your clothes by hand in your sink to reduce your laundry costs significantly
– Cooking all of your meals yourself and buying bulk food items
– Obtaining television and other media from libraries and free programs and cutting down on related expenses
– getting rid of a smartphone and using a cheap tablet and prepaid phone instead
– Moving In with older relatives to avoid housing costs and offer them cleaning or other services in exchange for rent
Again, these are only some examples of steps that can be taken to lower your expense burden and have the funds available to comfortably put away money for retirement. Keep in mind that it is what you do with these excess funds that will likely determine just how comfortable you will be financially and how early you can retire. Invest the excess funds in the investments that you feel comfortable with and see your money grow over time and provide you with greater financial flexibility.