Quitting work earlier is easier than you think. Early retirement may seem like a big goal, but by taking small steps it is certainly achievable for many. Below I describe my approach to retire early. I like the work I do, but I want financial security so that I can decide for myself whether or not to work. My goal is to build up enough reserves so that I never have money worries in the future and can do what I want. Do you want to know more? Then it’s a smart move to read about the top 10 brokers online in The Netherlands.
1. Economical life
It’s not about what you earn, but how much money you have left. Many work hard and earn a lot to pay for their lifestyle. More salary leads to a bigger car and a nicer house. This lifestyle is a choice, but that way you will never become financially independent. I don’t like the concept of having to work until I’m 67 years old. I’d rather have enough money as soon as possible to be able to do what I want. If I earn more, I put more aside.
- We live frugally, but certainly not super frugally. Living frugally takes some getting used to in the beginning but also means that you will need much less money later to stop working sooner.
- For years I focused on earning a lot of money, but then I noticed that it is very easy to live by that. Ten years ago we changed course and started living more frugally. We save a lot on fixed costs and groceries. Spending relatively little on the house, transport and clothes. But we don’t really save on vacations and outings. We opt for experience instead of more possessions.
- Meanwhile, we save and invest 30% of our income in order to be able to stop working sooner. That doesn’t mean you have to do that right away. We started 10 years ago to set aside 50 euros every month and have slowly but surely increased that. Now I just enjoy watching my assets grow more than spending more money. If you start young, you only need to invest a small amount per month because of the magic of compound growth.
2. Taking advantage of compound growth
We invest the difference between our income and expenses in assets that generate money. Assets such as shares and bonds. This is how we benefit from compound growth. Slowly but surely, this leads to an enormous increase in your assets. Some call compound growth the eighth wonder of the world. That’s a bit of an exaggeration, but it’s getting close. For example, if you spend 20,000 euros on a new car, it’s worth nothing after 10 years.
If you invest this amount at 7% in shares and bonds, you’ll have an extra 40,000 euros of capital after 10 years. After 20 years 80,000 euros and 30 years even 160,000 euros (see Investing for beginners). 7% is a realistic estimate based on historical returns, but depends on how you distribute your assets. This is no guarantee for the future, even when investing in volatile assets such as marihuana or CBD stocks.
Composite growth ensures that your investments can grow enormously in the long term. Much more than in a savings account. With a return of 7% per year, your assets double every 10 years. With 9% even every 8 years. That’s why it hurts me so much to spend money on, for example, a new car, bathroom or kitchen. I’d rather stop working and put the money aside to let my money grow.
- The money we have left over every month is invested through DEGIRO, ABN Amro, ING and Lender & Spender. We do most of it with index investments in ETFs. At Lender & Spender I get 4.1% interest by investing in personal loans. Because we live frugally, we are able to set aside relatively large amounts of money each month to achieve financial freedom.
- Some people find investing exciting and only put their money in a savings account, but then your return is too low to be able to stop working sooner. In the long term, the risks in a well-spread portfolio of equities and bonds are very limited. My investment horizon is over 15 years, which is why I invest quite a lot in equities etf and individual shares. This is not advice to do the same. I only describe how I do it.
3. Employer’s pension
I work part-time as a teacher at the HvA and build up a good pension through the ABP. There are various schemes to retire early or stop working sooner. My plan is for my employer’s pension to start only at my retirement age and to pay for the years before that from our own capital that we build up by investing.
- I won’t build up a pension in recent years, so I’ll have to build up extra capital myself.
- The advantage of an employer’s pension is that your employer pays a large part of the premium and that your investment is tax-free. This allows your money to grow faster. Are you an entrepreneur? Then you can open a pension account yourself with a tax benefit.