I managed to check out of the full-time working world with a seven-figure portfolio at age 33. It wasn’t through some crazy get-rich-quick scheme, insider trading, or blackmailing the right politician. I made a few smart but simple financial moves during my decade of work that greatly accelerated my journey to financial independence.
Here are the two big ways we accelerated our path to early retirement and how you can too.
1. Make Your Starter Home Your Permanent Home
Whether you rent or own, housing costs tend to be the highest expense for most households. If you want to turbocharge your capacity to save, it makes sense to focus on the areas where you can make the most difference.
Right out of college, we bought a four-bedroom fixer-upper in a decent area. We were in the beginning stages of our lives so we were relatively poor. We snagged it pretty cheap from a city auction and spent some time and money fixing it up over the years.
Our intention was to sell it and buy a nicer, larger house in a better area once our incomes could support a higher mortgage payment. After all, if you spend four to seven years in college, pick up an advanced degree and work hard all week, you’re entitled to live in your very own private McMansion now that you’ve “made it,” right?
Not if you want to grow wealth at an early age.
After we got settled into our new (to us) home, we realized we kind of liked it. The kitchen was a little small and we didn’t have a garage. After a round of new paint inside and out, new carpet, new tile, new furnace, and a mini-update to one bathroom, our fixer-upper was mostly new. Not long after we bought our house, a few kids showed up and filled the bedrooms. Our house was now a home.
After a few years of living in the house with our newly created family, we realized the location wasn’t that bad at all, since we were centrally located, near everything. The house itself was sound and comfortable after all our efforts.
The next step most families take, after swapping in the economy sedans for a minivan or SUV, is to buy a bigger house in a shiny new neighborhood so “the kids have somewhere nice to grow up.”
We were already aggressively paying down our mortgage, refinanced to a 15-year loan by that point, and didn’t want to restart the amortization clock with a much larger house payment on a 30-year repayment schedule. We stayed in our starter home and still live here 12 years later.
The purchase price isn’t the only cost of upgrading to a new home. It’s actually just the first – but largest – battle in the house upgrade war. Other costs include:
- Prepping the old house for sale
- Paying the 6% real estate agent’s commission upon sale
- Paying origination points and fees for a new, larger, home loan
- Closing costs/attorney fees
- Mortgage tax or transfer tax
- Decorating a larger house
- Furnishing a larger house with extra furniture
- Larger ongoing costs like taxes, insurance, HOA, and maintenance
- Keeping up with wealthier Joneses in a more exclusive neighborhood – ditch the Civic; upgrade to a Lexus if you want to fit in
I love visiting people with really nice houses that are much larger than mine. I appreciate the luxurious finishes, huge closets, spa-like bathrooms, sweeping staircases, vaulted ceilings, and all the other modern aesthetics that make upgrading to a bigger, more expensive house so alluring.
It’s too bad most of the owners get to visit their houses only briefly for a few hours each night and on most weekends, when they aren’t away on business trying to pay for those added luxuries.
2. Bank Your Raises and Bonuses
If you’ve been working for a while, think back to the first good job you had after college. Remember the feeling of getting that first offer letter that included a salary of tens of thousands of dollars per year? You were suddenly much richer than you’d been throughout most of your life. With that first steady post-college paycheck, you could afford a house, a car, dining out and plenty of high quality foods. Life was pretty freaking great, right?
Over your working career you probably received raises from promotions or from switching to a better job. If you worked for a private business, there’s a good chance you occasionally received a bonus. Most people slowly raise their standard of living each year as they get raises and start counting on annual bonuses as part of their guaranteed salary.
Don’t do this! It’s easy to qualify for a loan for more house and more car as your income rises. And it’s easy to fall prey to the peer pressure from coworkers, friends and neighbors who might make a lot more than you to constantly upgrade your lifestyle to the edge of what your paycheck can support, or beyond.
If that describes you, think back to how happy you were when you first started working after college and how awesome that lifestyle was. What if you kept living like you did right after college? Wouldn’t you be almost as happy as you were back then?
Have your gains in income gone toward expanding a consumerist lifestyle or toward building financial strength and security for you and your family? Was this a conscious choice or something that just happened without realizing it?
In our case, we didn’t view raises or bonuses as an excuse for profligate spending or a way to upsize our house, cars or vacations. We kept living like we did straight out of college and used any pay raises to increase our savings. Before long, we were able to contribute the maximum to our 401ks and IRAs and enjoy all the tax savings that came along with maxing out those accounts. Instead of spending to the max and neglecting our savings, our raises and bonuses went toward buying a retirement lifestyle in our 30s that most can hardly afford in their 60s.
I understand the objections to a minimalist lifestyle, and we hardly lived minimally at all. With two well-maintained but basic cars, a modest four-bedroom house, and the occasional overseas vacation, we definitely enjoy life quite a bit. But we always focus on spending money in a very efficient manner so we will have funds left over each month for aggressive savings goals.
This lifestyle is not for everyone though. Life events like disability, caring for elderly parents or having kids can certainly present challenges to banking most of your raises or staying in your starter home forever. But that’s no reason to abandon those goals outright.