Retiring early -- it's the dream that serves as the motivation for many investors. But it doesn't have to be a wishful fantasy. With a series of smart decisions, some hard work, and a couple of lucky breaks, early retirement can be an achievable reality.
I will candidly disclose that I have yet to reach the goal of retiring early, but I know that I am doing all I can to get there one day. Along this journey, I have learned a few things that would have served me well had I known them earlier. The advice won't lead to an extra zero in your bank account tomorrow morning. However, when implemented into your financial strategy over the long haul, it can make the voyage to financial freedom a little easier.
Image source: Getty Images.
1. Neglecting the power of compounding
One of the most common yet detrimental mistakes investors make is underestimating the power of compounding. When we let our investments' returns compound over decades, it can lead to substantial life-changing gains. But often, investors lose sight of their grand vision as the allure of immediate profits clouds their judgment.
Delaying gratification is not easy, whether resisting the temptation of eating junk food to achieve fitness goals or allowing investments to compound instead of cashing them out. As humans, we tend to want things instantly, especially when we believe that they can improve our lives. However, recognizing this is the first step toward learning to become an investor. Once we acknowledge that it is natural to have that "take the money and run" feeling, we can act more prudently, take account of our end goal, and allow our investments to appreciate.
Furthermore, for those just starting out on their early retirement dreams, don't be discouraged about beginning with what seems like small sums. Even modest contributions can make a significant difference in the long run.
2. Good debt vs. bad debt
When I began my financial independence journey, I firmly believed that all debt was bad. I viewed it as the ball and chain that would hinder me from making it across the early retirement finish line.
But, as it turns out, debt can actually be an indispensable tool for fulfilling your financial goals. When used correctly, "good" debt can be used to purchase real estate or start a business. In this light, the debt taken on is more like an investment, as your upfront costs should eventually be worth more later.
Acknowledging and understanding the concept of good and bad debt was transformative for me. You should still avoid racking up credit card debt or taking on an auto loan you can't afford, but under the right circumstances, debt can accelerate the attainment of early retirement.
3. Accepting the reality of saving vs. earning
I saw a quote a while back that said something along the lines of, "It's easier to make $10,000 than save $10,000." While this isn't necessarily a mistake, it was profound and shifted my perception of how reaching an early retirement is actually accomplished. As it turns out, that $5 latte you enjoy every day isn't the reason an early retirement eludes you.
Now, this doesn't warrant frivolous spending. You should still be cognizant of your expenses and abide by a budget. But realizing that your energy is better off being spent discovering new ways to make money rather than trying to shave some extra dollars off your monthly costs can open up new, potentially lucrative opportunities.
From this perspective, your greatest investment becomes yourself as you acquire new skills, explore side hustles, or even consider entrepreneurship. Take the class, watch that YouTube video, or start a business -- it will get you closer to early retirement than ditching the overpriced latte you love.
