A friend of mine recently asked me what – in my opinion – the top 5 financial misconceptions are that people have early retirement. Never shy about sharing my opinion about money and investments, I happily obliged and we engaged in a lengthy discussion about why not more people are financially independent.
Since I have written a lot about this subject – money, investments, IPAs – I thought I condense my thoughts into one quick blog article.
Here are the top 5 things most people don’t understand about early retirement.
- People don’t save money.
The savings rate in the U.S. currently (early 2018) stands at just 4 percent. If you just save 4 percent of your disposable income, how are you going to accumulate a decent amount of money for investments? If early retirement is your goal, you have to sacrifice, and that includes socking away the majority of your disposable income, reinvesting cash flow, and leaving frugally for a few years. Save as much money as you possibly can.
- People are complacent and don’t really want to sacrifice anything.
Why are not more people financially independent? Because they simply don’t know how to do it. Most people are looking for shortcuts, an easy solution that solves all of their problems. A solution that doesn’t require them to sacrifice anything, really. A lot of people are simply too complacent, and, Yes, lazy.
- People don’t want to leave their comfort zones (a.k.a. taking risks).
That’s a big one. We all are guilty of this to some extent, it is just what makes up human. Leaving your comfort zone, however, opens your world up to new experiences and opportunities. Staying within your comfort zone makes you feel superficially safe and dramatically limits your growth. Once you are prepared to leave your comfort zone and take risks, the world is at your feet.
- People don’t understand investing.
Most people have a low financial IQ. Understanding how inflation rates eat at your nest egg, or how you can harness the power of compounding through reinvestment of investment earnings are crucial concepts that you need to understand and apply. Picking up a financial magazine every once in a while and reading up on financial topics is a great way of upping your financial IQ, leading to better financial and investment decisions, long-term. Investing is a marathon, not a sprint!
- People don’t believe early retirement is possible.
How often have you heard someone say something like this: “Work hard all your life and then you can retire with a good pension and enjoy your retirement!”
Bullshit. Corporations are cutting back on defined-benefit plans, shifting the retirement burden to employees. Governments are cutting pensions due to demographic factors. Your retirement is already almost entirely in your hands.
The good news is that new business models online and passive income streams can more than compensate your pension shortfall. Once you understand how to make money online through different ventures and create passive income streams, you’ll laugh into people’s faces when they tell you “early retirement” is unrealistic, or out of reach for the regular guy and gal. Early retirement is most certainly within the realms of possibility for everyone who makes it his or her goal!