Frugal Budgeting

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Investing for early retirement is actually more about budgeting than investing. Finding a high growth rate on your investment is nice, but by contributing more each month, the end result is dramatic.

If you were able to save $500 a month and invest it with a 6% rate of return, after 30 years you would have about $500,000
If you saved $500 each month but managed to find a 7% rate of return, after 30 years you’d have over $600,000
But, if you raised your savings to $1000 a month, at 6% return, you’d have just over $1,000,000 after 30 years. A MILLION DOLLARS!

Additionally, by adapting to a cheaper lifestyle, you also reduce the amount of money you’ll need when you retire. This makes good budgeting skills a two pronged attack on early retirement.

One common problem most people have with budgeting is knowing how much to plan for. Most people have trouble looking forward, but hindsight is 20/20. Look at your bills from last month, this is the best way to get an idea of what you spend each month. First, compare the total to your income, and determine if you have any money to save at all. If so, great! If not, then it’s time to make some cuts.

I guarantee that if you haven’t been budgeting in the past, there are some things you could cut down on. I’m a sucker for eating out. The weekend rolls around and I want to celebrate with tacos and margaritas. The thing is, I could make tacos and margaritas at home for a fraction of the cost.

You’ll probably see your weak spots when you go through your credit card bill item by item. Once you identify the areas that you can improve, it’s time to make a plan and stick to it. My plan going forward is to only eat out if we’re invited out with friends, and cook at home the rest of the time. This takes discipline, but the most rewarding things in life usually do.

Good budgeting doesn’t stop there though. You need to look back each month and do this same exercise until you’ve got your spending optimized. Now you can invest more money and hit your target number faster.

The big 3 costs that most people have are housing, food, and transportation. These are not only the biggest costs, they’re also the biggest changes to your lifestyle. However, if you can get them lower and get used to the lifestyle, you’ll see dramatic benefits in your budget.

At the same time, small things can add up fast. Consider “cutting the cord” and switching to streaming services like netflix instead of cable. Do you REALLY need a data plan for your phone? chances are you’re within range of an open wifi network more than you think. Try giving people hand-made gifts during the holidays instead of buying them expensive gadgets.

Also, remember that anyone that judges your frugal lifestyle is probably going to be working 20 years from now when you’re waking up at 11:00 AM while your dividends cover your expenses. Money buys time, and time is more valuable than stuff.

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