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Sunday, October 25, 2020

My uncle retired early at age 56 after living by 3 money rules his whole life

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Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, like American Express, but our reporting and recommendations are always independent and objective.

If you’re like me, you didn’t grow up in a wealthy family that taught you how to manage your money. Lucky for me, my uncle was my mentor early on. He would visit during the holidays each year and always shared life and financial lessons with me.

Let’s face it, the millionaire sprint rarely happens. It’s the millionaire marathon that’s more realistic. So how does one reach the finish line? For my uncle, the journey started when he was a teenager. 

He taught himself about money by reading books. He followed the work of John Bogle and Peter Lynch. With careful planning, he retired at the age of 56, and used the knowledge he gained to help family, friends, and coworkers. He’s proof that it’s possible to become a millionaire by living within your means, managing your cash flow, and saving. 

Here are three valuable money lessons I learned from my uncle that I still follow today.

Save early and save aggressively

It’s much easier to develop the habit of saving when you’re young and have few responsibilities. My uncle started saving with his first job out of college, and continued to increase his savings as his income increased. I followed in his footsteps, and those early days of saving put me well ahead of my peers by the time I was 30. 

As your life becomes more complex, it’s harder to find the extra wiggle room in your budget to save. Saving early gives your money time to grow, and you can take advantage of compound interest.

In addition to saving early in his career, my uncle aimed to save at least 15% of his income. In this recent article, Fidelity Investments illustrated how saving 15% of your income starting from age 25 can prepare you to retire at age 67. It also shows how saving later affects your financial trajectory. For example, if you start saving just five years later (at age 30), you’ll need to set aside 18%. At age 35, that amount jumps to 23%. The longer you wait, the more you’ll need to save. Also, while saving 15% of your income is a great place to start, you should save even more if you want to retire early.

Are you just now getting on the savings bandwagon? Don’t worry! Start where you can, even if that means saving 10 or 15% of your income. Increase your savings by at least 1% each year — or more if you receive a raise — until you reach your target.

Think before your borrow

While taking on a loan or credit card debt can feel easy and painless in the short term, there is an unfortunate long-term financial impact. Whether it’s “good debt” or “bad debt,” the monthly payments can add up. Before you know it, you’re spending a large portion of your paycheck on debt in addition to your regular living expenses. This leaves little room for retirement savings.

My uncle recommends that before you take on debt, ask yourself, “Is the debt really worth it?” If you’re taking on credit card debt to purchase something you want, how will that debt hold you back in the future? If you’re considering going back to school or getting another degree, is it reasonable to expect an increase in salary? 

I took this advice to heart. Even though I paid my way through college, I graduated with less than $10,000 of student loan debt. I also fought hard to resist the temptation of buying things I couldn’t afford and I avoided consumer debt.

Have you taken on too much debt? There’s no better time to take control of your debt than now. Start with high-interest debt, such as credit cards and personal loans, then work your way down to low-interest debt. The sooner you pay off your debt, the sooner you can start saving and investing for the future.

Invest for the long term

Investing is a long-term game. Many new investors have turned to the stock market as a way to make quick profits during the pandemic. Trying to make profits in the short term can backfire, and investing in a diversified portfolio helps to reduce the ups and downs of individual stocks. 

A short-term investing mindset also feeds our natural tendency to make emotional decisions when the market is volatile. This can cause us to buy when the market is up and sell when the market is down. As my uncle says, “Be willing to take risks in the market so you can benefit from the returns.”

What’s an easy way to stay the course when the market gets rough? Only invest money that you don’t need for at least 10 years. My uncle always had an emergency fund to cover unforeseen expenses or a job loss, and he kept that money in cash. Also, he set aside any money that he would need in the next three to five years (such as money to purchase a car). He kept this money in cash, so it wasn’t subject to market fluctuations.

What if you have the urge to play the stock market? My uncle has a small account from which he can buy and sell individual stocks on a whim. He keeps this account small (no more than 10% of his total portfolio) and opts for a diversified mix of index funds in his long-term investment portfolio.

Even as a financial planner, I still refer back to the lessons I learned from my uncle: save early, think before you borrow, and invest for the long term. The road to financial success is all about the delicate balance between the desires of today and tomorrow. It is possible to save your way to millions and retire early. Start now — your future self will thank you for it!

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