When it finally becomes time to exit the workforce, everyone wants the freedom to pursue their passions and spend time with their friends and family. Retirement should be a period of reduced stress, cherished memories, and cultivating hobbies that you didn’t have time for during your working years.
However, these retirement dreams don’t come cheap. You will need a significant nest egg to sustain your current lifestyle and explore new interests without a salary. The key to retiring wealthy is to develop strong financial habits when you are young. The following habits will help you build a strong financial foundation and allow you to thrive in your retirement years.
1. Start Investing Early
Investing early and intelligently is crucial for building wealth over time. Saving a portion of your salary alone, even in a high-yield savings account, often isn’t enough to outpace inflation and support you for potentially decades after retirement. Your greatest allies when you are young and working are time and compound interest.
Albert Einstein reportedly said that compound interest is “the eighth wonder of the world”, and for good reason. Compound interest is the addition of interest to the principal sum of an investment, or in other words, interest on interest. This is a powerful tool because you earn money not only on your initial investments, but also on your profits over time.
The chart above compares two consumers who invested S$10,000 with no additional investments and earned a 10% return every year. This means that after one year they would have $11,000 ($10,000 x 10% = $1,000 and $1,000 + $10,000 = $11,000). Person 1 began investing at age 20 and Person 2 began at age 30. By age 65, Person 1 has more than double what Person 2 has thanks to 10 extra years of compound interest.
Of course, investing comes with significant risks, especially if you don’t do your research. You should study the various financial products on the market and build a diverse portfolio of assets so a single bad purchase doesn’t deplete your wealth. You can leverage innovative new technologies like robo advisors to help you create an investment plan and identify trades that align with your objectives and risk tolerance.
2. Make a Budget
Creating a budget and tracking expenses is an effective way to find extra dollars to save and invest. By itemising your purchases and visualising where you spend the most each month, you can identify areas to cut back and invest more for the future.
Starting a budget doesn’t have to mean writing down every dollar you spend and thinking through every minuscule purchase (though for some, this is a highly effective strategy). To start a budget, you can utilise a simple method like the 50-30-20 rule. This rule advises splitting your income into 3 categories:
- 50% for essential needs like rent and food
- 30% for discretionary spending like entertainment and travel
- 20% towards your savings, investments, and emergency expenses.
By dividing your paycheck into these categories as soon as you get it, you ensure you will hit your savings targets and won’t overspend on discretionary purchases. You can also itemise your expenses for 1 month and identify areas where you tend overspend. By making cuts in these areas, you can marginally increase your investments every month, resulting in tens or hundreds of thousands of extra dollars by the time you retire.
3. Build an Emergency Fund
Establishing an emergency fund is an essential bulwark against disrupting your regular budget and withdrawing investments early. Many people live paycheck to paycheck and assume there will never be a disruption to their income, Still, an economic downturn, job loss, or health emergency could easily derail your plans.
An emergency fund acts as a cushion that reduces the blow of a crisis and allows you to preserve your financial foundation. For example, if you lose your job, it would be much better to rely on your emergency savings to pay your bills and make essential purchases than to open a high-interest line of credit or withdraw from long-term investments.
When you first establish an emergency fund, you should save enough to cover your essential expenses for 3 months. Over time, you should save enough to handle 6 months of expenses, especially if you have children or other dependents and more potential bumps in the road. To see some return on this fund and keep it separate from your other assets, you might consider opening another savings account with a competitive interest rate that mitigates the cost of inflation.
4. Find A Side Hustle
Securing a supplemental source of income is another great way to boost your savings and retire rich. There is a wide range of potential side gigs you can try depending on your availability and skillset. Popular options include tutoring, driving for Grab, writing for a monetised blog, and dog walking.
The table above demonstrates how dog walking on the weekend can earn significant extra income over time. Ideally, a side hustle can allow you to pursue an interest that isn’t satisfied by your full time employment, like walking dogs or writing about a topic of interest. Even if gig work isn’t something you particularly enjoy, the extra money you earn can be invested and generate huge returns by the time you retire.
5. Invest In Professional Development
While savings and investments are critical to retiring wealthy, investing in your professional development is a great way to earn a promotion or negotiate a higher salary. Spending time or money on new skills will demonstrate your value to your employer and give you a step up at work.
Earning a professional certificate online can teach you a new skill and make your resume more competitive. Learning a new language can allow you to work at a multinational company or even work abroad. Accumulating knowledge should be a lifelong journey, and research suggests better educated people make more money over time.