An early retirement may seem like a dream, but it can be easier to reach than you realize. The trick often comes from modifying your current lifestyle to optimize your savings. If that sounds like it's easier said than done, read on for some practical tips to change your mindset and boost your savings.
1. Look to the future
When it comes to spending, it's all too easy to think short term. There always seems to be time to save later and retirement is something you will figure out down the road. Retiring early requires a different approach. Start weighing your current expenses against your future plans. Is your daily latte worth putting off your retirement? Remember, every dollar you don't spend today is a dollar that can be invested toward your future.
2. Track your income and spending
To really understand where your money is going, make the effort to track your income and spending. There are many great options for personal finance software, like AceMoney, Quicken, Moneydance and Mint. Get in the habit of reviewing your spending at least once a month. How do you feel about those purchases? Were they worth the expense or do you see places where you could cut back and save more money?
3. Consider your meaning of life
What really makes life worth living? Is it eating out at fancy restaurants? Going to concerts, movies and the theatre? Traveling? Planning for an early retirement doesn't mean the end of the things you love. Learning to live frugally will actually help you prioritize your spending. You can cut out frivolous expenses and set aside more money for the things you love, both now and during retirement.
4. Make saving a priority
When most people create a budget, they decide how much to spend in different areas (utilities, groceries, dining, clothing, etc.) and let whatever is leftover go toward savings. If you want to retire early, a better approach is to make your savings a key part of your budget. Set aside a certain amount of your income upfront and then decide how you will spend the rest. This subtle change can make a big difference in your spending.
5. Live below your means
One of the best ways to save for retirement is to simplify your life now. Don't wait for retirement to scale back, and stop trying to keep up with the Joneses. You can downsize to a more affordable home, cut back on your cable package, clip coupons and limit how often you eat out. In the long-run, your growing savings will be a bigger reward than a big house or fancy car.
6. Create a financial plan
A budget is great for monthly spending, but your financial plan should cover more. Your overall plan should include an estimate of how much money you will need for retirement and a goal for when you want to retire. You can use an online retirement calculator to help you get started, although meeting with a financial planner is often the best way to set up a savings and investment plan.
7. Invest wisely
Saving money is important, but you also want to grow your nest egg with careful investments. Take the time to understand what investments are best for your financial situation and retirement goals. Be aware of investment fees, particularly hidden fees that will eat into your savings over time. Boost your contributions to programs with tax benefits, such as IRAs and 401(k) plans, especially if your employer offers matching funds. By living your life with an eye toward the future, you may be able to pass up frivolous expenses, boost your savings and reach your retirement goals earlier than you imagined.