How to become financially free by 40

Achieving financial freedom by the time you turn 40 can seem like a pipe-dream to many but it’s a reality for a few. Through careful planning, smart spending, and consistent investing you can be financially free and retire at 40, and who wouldn’t want that? You will have to make sacrifices now but it will be worth it when you’re able to make decisions without money being a worry. Keep reading for a few financial freedom tips that will help you reach this very attainable goal.

Decide on your retirement style

Once you retire the lifestyle you lead will be based on how much money you have saved. There are a number of ways to enjoy your new life, and if you’re going to be financially free by 40 you need to define what retirement is for you. 

For some, retirement means traveling more, and for others, it’s more about spending their spare time with family, hanging out with friends, or volunteering in their communities. Make sure you think about how you want to spend your retirement years to ensure you have enough money saved to live out your dream. 

Estimate your savings growth

Once you know how you’ll spend your retirement years the next step is to determine how much money you need to have saved to reach your goals. How much will your new lifestyle cost monthly? Yearly? How much money do you need to save now in order to live that way for 30 or 40 more years?

Before you start doing the math yourself, use a retirement calculator to get an accurate picture of how much savings you need to have stashed away to retire at 40. Your current income, age, retirement savings, and other important factors are used to estimate how much growth your savings account needs to see to reach your financial goal.

Set long-term goals

Becoming financially independent by 40 means setting long-term goals to reach your financial milestones. That will ensure you prioritize your retirement when making important decisions regarding spending. Developing a realistic and detailed plan that lays out each step clearly.

The specific goals will differ from person to person as some may want to pay off a mortgage while others will want to free themselves from credit card debt. No matter the long-term goal, take the time to sit and map it out so you know exactly how you’ll get there.

Be proactive with ways to save

The best way to save money is to stick to a set budget. Budgeting will help keep you on track by limiting spending to what is necessary. You need a proactive, not reactive, approach if you’re going to retire at 40. Below are some tips for saving as you set out on your journey to becoming financially free.

Pay off debt

There are so many different forms of debt, but the most common are loan and credit card debt. High-interest rates make it difficult to pay off this debt when only making the minimum required payments. That’s because your payments are mostly going toward the interest and not the principal amount. This ends up costing you more money in the long run, leaving you with less to save. Paying off high-interest debt quickly will allow you to take the next steps to achieve financial independence.

Increase your income

Another great way to add to your retirement savings account is to increase your current income. You may not realize it, but there are plenty of side hustles out there that can bring in extra money that goes straight into the retirement fund.

For instance, if you’re an experienced nurse there may be a healthcare website that pays for content submitted by healthcare professionals. Or, you may have the knowledge and skills to tutor others in various subjects. Think about some of your hidden talents and find ways to make money using them.

Asking your employer for a raise can also net more income. If you want to move up but don’t have the education required for the position, take some courses to get a certification that will land you the job.

Don’t fall into the trap of increasing your expenses once your income rises. When the additional income starts rolling in, stay focused on the end goal, becoming financially free.

Reduce unnecessary spending

Living frugally doesn’t mean giving up everything that makes you happy, but it does require you to be smart about spending. How many subscriptions to different streaming services do you need? How many times a week do you eat out? How much money do you spend on clothes that you never wear?

To retire at 40 you need to take a hard look at your monthly spending habits and find ways to reduce unnecessary spending. Tracking your expenses can be an eye-opening experience once you’re aware of exactly what you’re spending money on. Most people don’t pay much attention and purchase things because they’re stuck in a buying routine. Every morning they buy breakfast on their way to work, then they order lunch with their coworkers. That is all money that can be saved with simple meal preparations.

Tracking your expenses allows you to measure your progress. Once you reduce your spending you’ll see an immediate increase in your savings, and you’ll be that much closer to financial freedom.

Live within your means

In order for your savings plan to work you have to stick with your budget and spend less than you’re making. Overspending inevitably leads to debt and severely decreases your chances of hitting your financial goals. Living within your means ties back into reducing unnecessary spending.

Just because you can afford a down payment on a new car doesn’t mean you should buy the high ticket item. If the car you have isn’t giving you any trouble then there’s no need to put down a high down payment on another vehicle. You’re just subtracting money from your retirement fund.

The same goes for mobile phones. Why spend money on a new model when the one you bought last year meets all of your needs. Spend wisely and make a plan for any future purchases you deem necessary to avoid falling into debt.

Hold off on buying a home

Owning a home may be a dream you want to accomplish before turning 40, but there are better ways to invest your money. Rather than take on a huge mortgage right now, continue to save until you can afford a larger down payment or just buy the house in cash. Doing this will give you the opportunity to save more money for retirement.

Putting down a bigger down payment will result in a smaller loan, lower monthly payment, and a better interest rate. If you wait a little longer and buy the house in cash you may miss out on certain tax deductions, but you’ll have unlimited amounts of peace of mind.

Build your savings vehicles

While saving money may sound like a great idea, many aren’t aware of the different savings vehicles available to drive them toward financial freedom. Next, we’ll take a look at some of the options you have to turn retiring at 40 into a reality.

Emergency fund

Life is always throwing us curve balls and you want to be prepared for these surprises to avoid derailing your financial plans. Keeping an emergency fund will ensure you can handle any expenses that pop up unexpectedly.

Car repairs and medical expenses are two items that sneak up on us out of nowhere. An unexpected trip to the mechanic or emergency room can end up costing us a huge portion of our savings. However, if you already have an emergency fund for these situations they won’t drain your accounts and you will remain on track to retire at 40.

401(k)

Investing for financial freedom means setting money aside in an account that generates interest. It’s even better if the account offers tax breaks on the money you invest and your employer matches your contribution. Because the money comes directly out of your paycheck it serves as an automated savings plan that you don’t have to think about.

Most employers match your contributions up to 6%, offering you free money toward your retirement savings. Depending on the specifics of your plan, the tax breaks are available either when you make a contribution or when you withdraw it during retirement.

Since the contributions are taken before they’re taxed you won’t feel an enormous cut in pay. Contributions can also lower your income taxes while increasing your savings power. If you contribute $20,000 toward your 401k and make $70,000 per year you will only pay taxes on $50,000. This savings vehicle comes with perks that are hard to pass up.

IRA

While a 401k is a good savings vehicle, it has contribution limits that may not help you obtain the lifestyle you desire for your retirement years. An individual retirement account (IRA) can assist you with reaching your goals.

An IRA account is set up with a financial institution and permits you to grow your savings tax-free or on a tax-deferred basis. Financial experts estimate you’ll need up to 85% of pre-retirement income to live off of during retirement. Because of the 401k restrictions, you may have to contribute to an IRA to hit that 85%. Luckily you can contribute to both accounts simultaneously.

Diversified investment account

Opening a brokerage account is another vehicle to use when investing for financial freedom if you find yourself maxing out your retirement funds. A diversified portfolio balances volatility by spreading your investment across a wide range of assets to reduce risk.

Diversification is the easiest way to increase your investment returns because you don’t have all of your eggs in one basket. Instead, you will have a mix of bonds, mutual funds, and stocks to push you closer to reaching your retirement goals. 

Invest now for the early retirement you deserve

When you ask yourself, “Where should I be financially at 40?” and your answer is retired, then it’s time to start planning for that goal now. Investing in your 40s for an early retirement starts today by creating a long-term plan and seeing it through. Retiring at 40 is not impossible or unheard of so if it’s on your list of life goals, go for it and enjoy the retirement you deserve.

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