My plan was never to work a job for 40 years or more. From a young age, I planned to retire quickly and be financially free. The one lesson for retiring early is to spend less than you make and convert savings to investment capital and cash flow. Here are the five financial principles that allowed me to do this and retire decades earlier than most people.
- I spent less than I earned.
- I built an investment/trading portfolio and compounded returns.
- I avoided debt payments and focused on cash flow.
- I did whatever it took to become financially independent.
1. I spent less than I earned
I was never materialistic. What I enjoyed in life was never very expensive, a good book with a cup of hot tea, a simple video game, going for walks, and learning new things. I always maximized my earnings potential while also minimizing my spending. I had multiple income streams from a business, trading, investing, writing books, and my website. This led me to earn more than I spent over time. The first step to retiring early is spending less than you earn.
The higher your income, the easier it is to do this. The more frugal you are, the easier this is; however, being frugal has limits. Earnings can be unlimited if you leverage your time instead of just selling it. Your earnings power is your number one asset in your early years, and you must maximize it to get your cash flow as high as possible and from as many sources as possible. I decided to work hard and smart as early as possible because I didn’t want to work hard forever.
2. I built an investment/trading portfolio and compounded returns
As someone who achieved financial freedom decades early through building an investment/trading portfolio and compounded returns, I can attest to the incredible power of this strategy. I saw the power of this method as a teenager in an insurance brochure at 17 years old. I knew I had to get started as soon as possible and let time be on my side.
Starting early and consistently investing or trading, even with small amounts, you can take advantage of the power of compounding returns. Compounding refers to the ability of an investment to generate earnings not only on the original investment capital but also on the accumulated interest, dividends, and capital gains earned over time. The longer you can create positive returns, the more significant the compounding effect becomes.
Let’s take a look at an example of investing $100,000 with a 20% return for ten years:
After one year: $120,000
After two years: $144,000
After three years: $172,800
After four years: $207,360
After five years: $248,832
After six years: $298,598
After seven years: $358,318
As you can see, with a 20% annual return and ten years of compounding, an initial investment of $100,000 can grow to over $358,000. This is the power of compounding returns. The longer you stay invested, the more significant the compounding effect becomes.
Of course, it’s important to note that achieving a 20% annual return consistently over seven years is not guaranteed and would require a significant amount of skill, research, and risk management. However, modest returns can still result in substantial growth over time, especially when compounded. This was possible over multiple seven-year stretches of many bull markets over the past 30 years. This principle is one of the primary drivers of my early retirement.
This is why Charlie Munger thinks it’s so important to get that first $100,000 so you have a meaningful amount of capital to grow.
“The first $100,000 is [difficult], but you gotta do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.” – Charlie Munger
Ultimately, the key to building a successful investment/trading portfolio is to start early, be disciplined, diversify your investments, and have a long-term perspective. You must have a quantified investing or trading strategy that has an edge. By doing so, you can harness the power of compounding returns to achieve your financial goals and enjoy a more fulfilling and fulfilling life.
By building a diversified investment/trading portfolio and sticking to a disciplined investment strategy, you can achieve financial freedom much earlier than most. Financial freedom means having enough passive income or assets to cover your living expenses, so you no longer need to work to earn a living. With financial freedom, you can pursue your passions, travel the world, or spend more time with your loved ones. It doesn’t mean you stop working; it means you stop working a job and start working for yourself.
Achieving financial freedom early gives you more time to enjoy the fruits of your labor and pursue your life goals. You can retire early, start a new business venture, or enjoy your hobbies and interests without worrying about financial constraints. If your primary income source at retirement is your investment portfolio, then your new job will be to continue to manage it for returns.
Overall, the power of building an investment/trading portfolio and compounding returns can’t be overstated. Start with whatever capital you can and build it up over time quickly. By starting early and consistently growing your capital, you can achieve financial freedom much earlier than most people and enjoy a more fulfilling and fulfilling life.
3. I avoided debt payments and focused on cash flow
Many readers may question how difficult it would be for them to get to $100,000. It’s not as difficult as you would think if you don’t have large car payments, credit card debt, and a huge mortgage. I have had no car payment for almost my entire adult life. Most credit card debts come from vacations and overspending above your income. My goal was not a yearly vacation, but one permanent vacation as quickly as possible. Also, where you live determines your home’s cost; choose to buy a home where you can get the maximum value for size and location. I had enough money to pay off my first home in March of 2000 when I was 27, and most of the time since then, even when moving up in size.
4. I did whatever it took to become financially independent
I can say that it was not an easy path to retire young. It required a lot of hard work, sacrifice, and discipline. It meant making tough choices, like living below my means, saving up capital aggressively, and taking calculated risks. It also meant learning about personal finance, investing, trading, and business as much as possible—the flexibility of being willing to adjust my strategy as necessary. But in the end, it was all worth it. Financial independence has allowed me to pursue my passions, spend more time with my family, and live on my terms. It’s a journey I’m grateful to have taken and encourage others to embark on.
The final and biggest secret about retiring early is simple to do whatever it takes if that is what you want. If you start saying no to the required work or wanting to spend money on big purchases before you can afford to, you will sabotage yourself. I did whatever it took to be financially free and have never regretted my journey.