Every Australian has the potential to retire early and create a large nest egg. You don't need to be a CEO earning millions to build significant wealth and give up the day job.
There isn't a simple solution to becoming wealthy, it takes hard work and a lot of discipline to get there. Here are some strategies you can implement to make a big difference to your finances over the coming years.
1. Live below your means
Whether you're 16 just starting your first job, or 60 and getting closer to retirement, there will always be temptation to spend your hard-earned money.
To build wealth it's imperative to spend less than you earn and save the difference. Don't underestimate the power of a budget, once you know your expenses you can commit to saving and investing a pre-set amount of your monthly net income.
2. Invest
Now it's time to make that money work harder. Investing is key if you want to get ahead.
Whether you choose property, shares or something else, it's important to invest regularly. Historically, shares have provided the best long term returns, particularly when you include the juicy and tax effective franking credits.
There are many different shares to choose from. You could invest in listed investment companies (LICs) which make the active investment decisions for you. Or maybe you'd prefer exchange-traded index funds which track the performance of a large group of companies within an index, such as the iShares S&P 500 ETF (ASX: IVV).
Or you can choose individual shares that will probably outperform the market and provide the best returns. Don't be put off if you only have a small amount to get started, as just a few thousand dollars a year can make a big difference over a long time frame.
3. Take advantage of compounding
Albert Einstein once described compound interest as "the eighth wonder of the world. He who understands it, earns it and he who doesn't, pays it". He wasn't wrong.
Compounding involves re-investing the dividends you receive back into buying more shares. Essentially, your interest is earning interest and snowballing as the regular income shares pay offer the opportunity to compound your wealth over and over. Warren Buffett has shown how amazing compounding can be, by growing his wealth to over $70 billion.
You can use a compound interest calculator to calculate how much you can grow your money. For example, investing just $500 a month for 20 years at a return of 7.5% a year would result in $277,000 in savings.
4. Start early
It's never too late to get on top of your finances. Every year earlier you start your financial journey is perhaps one year earlier you can retire. The earlier you start the more chance you give the power of compounding to see you get richer as your retirement progresses.
Warren Buffett only reached $1 billion by the age of 50 and now he's worth over $70 billion thanks to the incredible power of compound returns.
5. Supercharge your finances
If early retirement is your aim then it comes down to what's important to you in life. Are you willing to put off some 'luxuries' so that you can put more towards investing?
- Would you prefer to have a Porsche or retire two years earlier by driving a more affordable car?
- Would you be willing to try some supermarket brand products instead of name brand ones and save hundreds of dollars every year?
- Could you stick with the same smartphone for six or twelve months longer?
Those are just a few examples of questions to ask yourself. Each family's finances are different but if you figure out what's important and what's not, it makes saving for the future a lot easier. Remember to combine boosting your income with disciplined spending for your ticket to a blue-chip retirement.
Don't forget that a person who earns $200,000 but only saves $10,000 a year will take longer to retire than someone earning $100,000 and saving $20,000 a year. Once you're saving, you can start investing in great Aussie companies built for the future.
Foolish takeaway
You don't need to be on a giant salary to get rich, but you do need to make some tough choices. Today can be the start of fast-tracking your finances to great heights by saving and investing regularly to create a portfolio of great shares. Staying disciplined in this strategy could set you free to retire early and rich.
