A Lifestyle Change That Can Radically Transform Your Financial Future


Becoming wealthy isn't rocket science. It doesn't require specialized training or skill. In fact, the prescription is the same as it was a century ago.

First, you need income. You can exchange your labor for a salary, then increase that salary through performance. Or you can start a business and hope to generate profit.

Most of us are pretty good at this. With an education, the right skills and a work ethic, it's not difficult to become a valued -- and high salaried -- employee. Running a business requires a different set of skills. Yet if you succeed, the sky is really the limit.

Once you have the money, the smart wealth builder puts it to work. Stocks, bonds, real estate, gold etc. Here, too, we're largely successful. It's easy enough to put money in an index fund and watch it grow. And there's plenty of professional help available in the financial services sector.

So where's the problem? What's the impediment to having a healthier, wealthier and happier life?

The answer is simple -- we're the impediment. As good as we are at earning and investing, we're terrible at saving. And we're getting worse.

The Center for Retirement Research at Boston College estimates half of Americans have almost no retirement savings. That's a sobering statistic. Yet retirees aren't the only ones who suffer the effects of poor financial habits. If you're in your 30s, 40s or 50s and you're not saving, you're doing your future self a serious disservice.

And that future will be here sooner than you think.

A Change in Lifestyle

While the majority of Americans are saving less and spending more, not everyone is aboard that sinking ship. There's a movement afoot -- people willing to make dramatic lifestyle changes in order to reach financial independence.

The movement -- sometimes called "early retirement extreme," has a radical prescription: Live well below your means. That doesn't merely mean no boats, no new cars and no luxury vacations. It means organizing your life around the notion of building a self-sustaining retirement portfolio. Trimming the fat to the bone.  Saving as much as possible, then putting it to work.

Many of those involved with the movement live on half their salaries -- or less. They blog about about their lifestyle, sharing tips and tricks they picked up along the way. There's even a website (retireby40.org) dedicated to the early retirement movement.

Some of these extreme savers relocate to countries that are more "cost friendly." By living in the Caribbean or southeast Asia, you can maximize the money you're earning and saving. This works particularly well for those with Internet-based businesses. The income they earn stretches much further in Mexico, rather than in California. Some are able to drastically reduce their housing costs by house sitting.

There are, however, caveats. While it's great to retire early, you'll have a serious gap in your resume should your money run out. Returning to the workforce won't be so easy. You also have to be extremely careful with your investments. Once you stop earning income, a market reversal could prove devastating.

Many market observers believe the "four-percent rule" governing withdrawals is outdated. That rule is predicated on a 30-year retirement. If you plan on stretching your retirement to 40 or 50 years, the four-percent rule will be totally inadequate -- so you'll have to adjust accordingly.

Steps to take for an early retirement

Let's say you're willing to make the necessary sacrifices to join the early retirement ranks. You'll embrace Draconian budget cuts. You vow to scrimp and save.

What else can you do to make financial independence a reality?

First, you'll need to make a rigorous financial inventory. A comprehensive list of assets and debt. You'll need to determine how much money you're spending every day. Then you'll need to take out the scalpel and start cutting. If it's not painful, it's probably not doing you any good.

Now you need to consider investments. What are you going to do with the money you're no longer spending? Real estate is one smart option -- it provides reliable, lifetime income. Investing in low-cost index funds is another great choice. If you can save 25-percent of your income and divert it into an index fund, financial security is virtually guaranteed.

Finally, consider developing other sources of income outside your job or business. It doesn't have to be lucrative. Even a relative trickle of money can make a huge difference when compounded over a long enough horizon.

Extreme saving isn't for everyone -- it requires real, tangible sacrifices and it requires them immediately. That's a problem for most of us. Neuroscience studies have shown that our inability to resist immediate gratification is embedded in our own brain chemistry. We're biologically biased to privilege the present over the future.

That's why it's so difficult to build wealth through saving. It takes a real effort. We have to override our own evolutionary programming.

Yet saving is the one path to wealth open to almost everyone. If you have to discipline to see it through, you'll be in great position to achieve financial independence.

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