We have had a few requests asking us to discuss how we were able to retire earlier than the traditional retirement age and to share any tips that might help others.
I will be honest; initially, we didn’t have a long-term plan to retire early. We were pretty typical: two jobs, spending (or trying to spend) wisely, focusing on family first, trying to stay just in the black while saving as much as we could, and overall just trying to figure finances out along the way.
Jim and I each grew up comfortably middle class, but neither was rich. Jim was an American teacher, so he was not earning a lot of extra income. I was a mid-level professional with a major bank; I wasn’t high enough to be considered an executive with stock options or executive perks. In fact, our marriage started in the red (much carried over from previous marriages), finance-wise.
Somehow, we managed to do more things right than wrong, taking advantage of opportunities, earned and accidental, along the way to our FI. I’m happy to share what worked, and didn’t, for us.
Disclaimer: To give you a full understanding, this post turned out to be quite long, so I think it’s best to publish it in 3 blog posts (making it easier to digest).
I imagine that our readers will fall into one of two categories:
- Those who are interested in detailed, practical personal finance and saving tips (Jiab-minded people).
- Those who are interested in general impressions, ideas, and observations, whose brains see money details as reminders of nap time (Jim-minded people).
If you are Jim-minded, please be patient. I highlighted key points for skimming, or you can just do like Jim always does: forward this to your significant other or financially savvy friend and ask them to summarize it for you.
If you are my kind of crowd, let’s get to the details.
Bridging the gap one plank at a time.
In my prior post on Mind the Gap, the gap referred to a financial gap, a potential tripping point, that might hinder or prevent you from reaching your third life and FI. The key is to pre-plan and build one’s waiting platform to make the gap as small as possible, so that when that train (or the opportunity for FI) arrives, it’s within reach and you only need a small step or leap to board it.
Platforms are built one plank at a time, so I organized our way of closing the gap into three categories, which I call the “three planks” to bridge the gap:
- Plank 1: We minimized our debts so inflow > outflow.
- Plank 2: We looked for ways to get extra savings socked away – to keep more of what we made.
- Plank 3: We made sure life remained enjoyable so we didn’t give up.
Plank 1 is the first and hardest to do, so I’ll cover it in this post and planks 2 and 3 in a follow up.
Plank 1: Stop borrowing from your future self.
When we started our lives together 15 years ago, we had three kinds of debt: credit cards, a car loan, and a mortgage.
While we realized it was very difficult and would take many years to pay off mortgage debts, we could reduce other debts that were more financially debilitating immediately. We aimed to stop borrowing from our future selves so the future us would have more money:
I. We targeted the most expensive debts, credit cards and other high interest debt, first.
II. We made the mortgage as small as possible.
III. We made our house a home by what we did, not by what built-ins and extras we could install (and have to pay for), in the process making us re-evaluate what were true “needs” for us.
I. Credit Cards and other debts: on principle, pay the principal, and have no interest in paying interest!
Since credit cards were the most expensive debt, we devised an aggressive game plan to immediately address them:
- We opened new cards that offered a 0% promo rate in order to transfer old balances to the new cards, then paid the balance off before the rate jumped up (often to a very high rate). We repeated this step a few times until all credit card debts were paid off, avoiding a lot of “one step forward, two steps back” with minimum monthly interest payments.
- After we paid off our credit cards, we then tackled paying off the car loan as soon as possible.
TIP: A good resource we used to shop for credit cards, checking and saving accounts is Doctor of Credit.
II. Make the biggest debt as small as possible.
A house is usually the biggest investment a family takes on. When Jim and I got married, we had to look for a new place for our combined new family.
We were pretty clear on what we wanted and didn’t want in a house. Generally, we wanted a comfortable home that would give us opportunities for fond memories as we raised our two cats and two boys (in order of importance). More specifically:
- We wanted a good school district, not necessarily “the best,” but one that provided opportunity with a diverse student body.
- We didn’t fall for the common realtor push to “buy the biggest house you can afford.” If a $150K house has what your family NEEDS, but you are qualified for $300K, stick with $150K! There is a post on The $121,500 Guestroom on Humbledollar.com that illustrates this point. Another benefit? When it was time for us to sell the house, we could do so more easily because of a low profit point.
With these 2 goals in mind, we ended up buying the smallest home that we could all be comfortable in, at a lower price than most homes in the neighborhood. The house had not been upgraded for 10+ years, with old-fashioned kitchen cabinets, wallpaper, and bathroom fixtures. As you’ll see below, you can either see this as unsightly negatives or chances for family projects!
Even after we bought the house, we continued to look for ways to lower the mortgage:
- After we paid off our credit card debts and the car loan, we made extra mortgage payments every month. At a minimum, we totaled at least one whole extra payment each year.
- For the mortgage, we made sure we had the lowest mortgage rate both at the time of sale and afterwards. We refinanced the mortgage once to take advantage of a lower rate.
III. You buy a house, but you make it your home (whatever size or condition).
In choosing this kind of house, we had to, of course, give up some things (like a showcase house), but in hindsight, they were not things that we valued too highly:
- We didn’t need all the size or frills (even if could have afforded it at the time). We didn’t need 20-foot entry arches (we had no friends who were giants), nor vaulted 20 foot ceilings (that demand air conditioning of that space), or of multiple game rooms (that could lead to “family time” in four separate rooms).
- We never spent money on big, expensive renovation projects that aimed to merely ‘beautify’ the house, like big kitchen or bathroom upgrades. If anything, we loved the old fashion cabinets, the big Spanish tile entrance that we were told was out of style, and the simple white bathroom tiles. They were functional with good quality, built to last (not just to sell the house) when the house was built 40 years ago.
- Our one big mistake we made was buying a house that came with an old, un-kept swimming pool that required year-round upkeep and incurred high electricity and water costs. When the motor broke down, and we knew we faced replacing it (along with resurfacing the pool), we did the unthinkable; we had the pool filled in and replaced with a deck and yard!! We spent about $7000 to have it done, but with the saving about $200 per month on electricity and water, we broke even in three years (and had a patio and croquet field of dreams)! It was worth it.
- We didn’t spend a lot of money on home decor. In fact, when we moved in, Much of our furniture was second-hand. A dining room table with (often repaired) chairs was passed on to me from my ex-husband’s aunt, while Jim’s (and the cats’) favorite grading chair was used over 20+ years (and has been passed on to a new young teacher today). We bought furniture at garage sales, from thrift stores, and one of our son’s desk was snagged from bulky trash!
Where did we put money into the house?
Lest you think we just refused to spend and let the house break down like an abandoned building that was the neighborhood eyesore, we chose carefully what to spend on.
- Since our house was old, we anticipated things would break down or require replacement, so we took advantage of the home warranty the house came with (and renewed it) to help with costly repair costs. We ended up getting a new water heater, dishwasher, cooktop, garage door track, oven, and even central air conditioning unit under (or partially under) warranty.
- We put in money for insulation, taking advantage of a tax deduction for making our home more energy-efficient while saving on utilities.
- As needs arose, we addressed particular issues. We put on some fresh paint. We also put in a new hardwood floor to replace carpet damaged by a water leak. When we did renovate (such as the hardwood flooring), it was done as a family project. Family projects actually became ways to not only save money, but to pass on some handyman skills to the boys, and, most of all, to have family memories that last a lifetime.
Once, we had the boys help put in a ring of shelves around the top of their rooms. A neighbor, seeing them, said, “I really admire you; it would drive me crazy to constantly see how those corners don’t fit right.” Maybe we’re less picky, or maybe our discomfort at uneven corners has remained outweighed by the boys’ pride in having built them, learned skills, and all of us having a collective feeling of accomplishment. At the very least, we have the family teasing of “Let’s hope you do it better than you did those shelves,” and that kind of shared (loving) grief makes a home priceless!
So to recap (Jim-minded people can start reading here) on what we did right:
- We tackled the worst debt (credit-cards, car loan) first.
- We bought for just what we needed, realizing that every dollar overspent today is a dollar less (plus interest) for ourselves in the future. That included buying the smallest house that we all could be comfortable living in, not the biggest house we could afford.
- We chose not to spend a lot of money to upgrade our home, or on a lot of new furniture. We were still comfortable, plus today we use that money (plus interest) for retirement and travel (and it’s easier to leave old furniture behind!).
All of the steps we took were never part of a concerted plan. We made the best decision we could for each circumstance; then again, sometimes a collection of good individual decisions can turn into one great big plan, with the achieved goal of having more money coming in than going out.
Today, we future-selves are grateful for the good decisions are past-selves made (and such nice people they were!).
In the next post, I will share how we looked for ways to not only stay in the black, financially, but even increase the margin to get extra savings to reach FI sooner.