It's never too early to think about retirement - especially if you're planning to escape the rat race while you're still young enough to enjoy it. Unfortunately, if you're not a canny investor and don't have a fat inheritance coming, the only option is to build a financial nest egg out of your disposable income.
The majority of full-time workers spend a whopping 70 per cent of their salary in three key areas. If you want to start saving for retirement, these are the things you need to cut down on.
Grant Sabatier is a 30-something self-made millionaire and founder of Millennial Money, an online entrepreneurship community dedicated to pursuing financial independence. As Sabatier points out, the average worker spends around 70 per cent of their income on three things: housing, transportation and food.
Naturally, the percentage you spend on each depends on where you live - people in major CBDs blow a significantly larger portion of their wage on accommodation, while those who travel from city outskirts spend more on transportation. Then there are the people who dine out on a daily basis (avocado toast, anyone?) or buy luxury cars they can't afford.
Instead of removing all the fun and joy from your life, you should concentrate on reducing the cost of these three boring necessities. Sabatier explains how to get started:
If you move to a smaller apartment, walk to work, and cook at home, you could realistically increase your savings rate to 25%+ or even higher.
These extra savings can then be deposited into a high-interest bank account and left to grow. You'll be surprised by how quickly your nest egg builds over the years. If Sabatier can be believed, he was able to save an additional $US13,000 per year by doing the above.
Granted, reducing living costs is obviously much harder on a lower pay bracket - especially when it comes to accommodation. Sabatier recommends spending less than 30 per cent of your pre-tax income on mortgage or rent. This simply isn't going to happen in a place like Sydney.
If it's not possible to get down to 30 per cent on your current wage, you may need to think about moving elsewhere. This might not sound like much of a solution, but think about it - if you're not particularly attached to the city you live in, is it really worth squandering your retirement to stay there? (Even if you keep your CBD job, the extra travel expense will be a blip compared to what you'll save in rent.)
Thankfully, reducing transportation and food costs is a lot more manageable. As our assorted Mastercheap challenges have proven, it's possible to set a sustainable food budget in Australia for well under $50 a week. Avoid premade meals and snacks, buy raw ingredients in bulk and only eat out during special occasions.
When it comes to transportation, do some research to work out the cheapest route to work. Refrain from locking yourself into a car loan that will take you more than three to four years to pay off. If you can reach a destination on foot - walk! In addition to saving money, this will also increase the odds of you actually surviving into retirement.
[Via Business Insider]