When it is finally time to leave the workforce, everyone wants the freedom to pursue their passions and spend time with their friends and family. Retirement should be a time of reduced stress, cherishing memories, and nurturing hobbies that you didn’t have time for during your working years.
These retirement dreams don’t come cheap, however. You need a significant nest egg to keep up your current lifestyle and explore new interests with no salary. The key to retiring the rich is developing strong financial habits at a young age. The following habits will help you build a strong financial footing and enable you to thrive in your retirement years.
1. Start investing early
Investing early and smartly is critical to building wealth over time. Saving part of your salary alone, even in a high-yield savings account, is often not enough to outperform inflation and potentially support you decades after retirement. Your greatest allies when you are young and at work are time and compound interest.
Albert Einstein reportedly said compound interest was “the eighth wonder of the world,” and for good reason. Compound interest is the addition of interest to the principal amount of an investment, that is, interest on interest. This is a powerful tool because not only will you make money on your initial investments, but also your profits over time.
The graph above compares two consumers who invested $ 10,000 with no additional investment and achieved a return of 10 percent every year. This means that after one year they would have $ 11,000 ($ 10,000 x 10 percent = $ 1,000 and $ 1,000 + $ 10,000 = $ 11,000). Person 1 started investing at the age of 20 and Person 2 started investing at the age of 30. At 65, person 1 has more than double what person 2 has thanks to 10 additional years of compound interest.
Of course, there are significant risks involved in investing, especially if you don’t do your research. You should research the various financial products in the market and build a diverse portfolio of assets so that a single bad buy doesn’t deplete your net worth. You can take advantage of innovative new technologies like robo advisors to create an investment plan and identify trades that suit your goals and risk tolerance.
2. Make a budget
Creating a budget and tracking expenses is an effective way to find extra dollars to save and invest. By listing your purchases and visualizing where you are spending the most each month, you can identify areas where you need to invest less and invest more in the future.
Starting a budget doesn’t have to mean writing down every dollar you spend and thinking about every tiny purchase (although this is a very effective strategy for some). To create a budget, you can use a simple method like the 50-30-20 rule. This rule recommends dividing your income into three categories:
- 50 percent for basic needs such as rent and food
- 30 percent for discretionary expenses such as entertainment and travel
- 20 percent for your savings, investments and emergency costs.
By categorizing your paycheck into these categories as soon as you receive it, you will ensure that you are meeting your savings goals and not spending too much money on discretionary purchases. You can also list your spending for a month and identify areas where you tend to over-spend. Cutbacks in these areas can add insignificant increases to your investments each month, resulting in tens of thousands or hundreds of thousands of extra dollars when you retire.
3. Build an emergency fund
Establishing an emergency fund is an essential bulwark against disrupting your regular budget and taking back investments early. Many people live from paycheck to paycheck and assume that there will never be an income disorder. Still, an economic downturn, job loss, or health emergency could easily ruin your plans.
An emergency fund acts as a cushion that reduces the blow of a crisis and allows you to maintain your financial footing. For example, if you lose your job, relying on your emergency savings to pay your bills and make important purchases is far better than opening a high-yield line of credit or withdrawing from long-term investments.
The first time you set up an emergency fund, you should be saving enough to cover your essential expenses for three months. Over time, you should save enough to deal with six months of expenses, especially if you have kids or other dependents and more potential bumps on the road.
To get some return on this fund and separate it from your other assets, consider opening another savings account with a competitive interest rate that will lower the cost of inflation.
4. Find a sideline
Securing an additional source of income is another great way to increase your savings and retire rich. There is a wide range of possible side appearances that you can try based on availability and skills. Popular options include tutoring, driving for grave, writing for a monetized blog, and dog walking.
The table above shows how dog walking on the weekend can generate significant additional income over time. Ideally, a sideline job can allow you to pursue an interest that your full-time job does not satisfy, such as: B. Walking dogs or writing on a topic of interest. Even if you don’t particularly enjoy gig work, you can still invest the extra money you make and get huge returns by the time you retire.
5. Invest in professional development
While savings and investments are critical to the retirement of the rich, investing in your professional development is a great way to earn a promotion or negotiate a higher salary. As you spend the time or money on new skills, it shows your employer your worth and gives you a step in the work.
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Getting a professional certificate online can help you learn a new skill and make your resume more competitive. When you learn a new language, you can work in a multinational company or even abroad. Gaining knowledge should be a lifelong journey, and research suggests that more educated people make more money over time.
This article was first published in ValueChampion.
