Fundamentals of Early Retirement – Part 1

Reduce Your Monthly Cost of Living

Since I retired at age 40, I’ve had the pleasure of sharing my new (un)employment status with several friends and former co-workers. The biggest question that comes up by far is, “How is that even possible?”

These individuals realize that I’m not a billionaire entrepreneur, or a pop singing sensation, or even a superstar athlete.

Instead, I’m mostly just like them. A regular guy living a middle-class life raising 4 little kids with my stay-at-home wife.

So how in the world does someone like me retire 25 years earlier than normal?

Maybe I’m not really like others at all.

The Fundamentals of Early Retirement

In this series, I’m going to lay out the core building blocks that have allowed us to retire 25 years earlier than normal.

Retirement, in general, can be a very complex topic, but my intention with this series is to provide you a framework to better understand how “average” people without a trust fund, recording contract, or shoe deal can build wealth that is sustainable for 30 or 40 or even 50 years.

And today we’re going to start with one of the most often overlooked aspects of being able to retire at all – significantly reducing our monthly cost of living 

To Get Different Results…

We’ve talked before about how wealth is invisible, and that’s often the first mistake most people make when looking at me – they judge my financial status based on what they can see.

This guy does not look financially savvy.

Here is the big problem with that.

  • You can see my car, but you can’t see my car payment. (I don’t have one.)
  • You can see my house, but you can’t see my mortgage payment. (I don’t have one of those either.)
  • You can see my clothes, but you can’t see where I bought them or how much I paid.
  • You can’t see any of my bank accounts.
  • You can’t see any of my retirement accounts.
  • You can’t see how much cash we have saved up for emergencies.

The simple truth is that wealth is completely invisible.

In fact, the most commonly accepted signs of wealth – cars, houses, clothes, technology, furniture, watches, jewelry – are often a sign of the exact opposite – debt.

When it comes to retiring early, DEBT is the four-letter word that will make it nearly impossible no matter what age you are.

So that makes our very first step to retiring early reducing our monthly cost of living as much as possible.

This serves two very important roles.

  1. While still working, it creates margin between our income and our expenses, allowing us the financial space to save money, destroy our debt, invest, and build wealth. We need to do all these things if we are ever going to retire at any age.
  2. When it comes to retirement, how much money we need and how long it will last are all functions of our expenses. Gaining control over our spending is the key that unlocks everything else. We’ll explore this more in Part 2 and Part 3 of this series.

For now, though, let’s focus on the lesson at hand and figure out how we can significantly reduce our monthly cost of living.

Cars, Houses, and TV’s. Oh, My!

Simple math shows us that in order to reduce our monthly cost of living by any significant amount, we’ll need to make some pretty big cuts.

Saving a few bucks on latte’s here and dish detergent there are great choices, but not likely to be the fundamental changes that make a big impact on our cost of living.

To really make a dent in our spending, we’ve got to do some hard work on the Big 3 – Cars, Housing, and Stuff. (Yes, “stuff” is a technical term for all the miscellaneous junk that keeps us broke.)

Let’s Start With Cars

Car payments are often one of the biggest monthly expenses people have besides their rent or mortgage payment.

Therefore, how we choose to pay for our cars is going to have a significant impact on our ability to save money, pay off debt, invest to build wealth, and ultimately retire early.

We’ve chosen to save up money to pay cash for used cars. That strategy has allowed us to save over $100,000.

And that option is available to anyone. We have no exclusive rights to it.

My Jeep was built for exploring!

The simple fact is that financing a brand new car is ridiculously expensive. It really doesn’t matter if it’s a Honda Civic or Mercedes Benz.

Committing that many of our future dollars to a car is going to be a huge drain on our monthly cash flow, keeping our monthly cost of living much higher than it should be.

Of course, people can’t see that we paid cash for our cars. They can’t see that we’ve never had a car payment or paid a penny in interest on a car loan for the two cars we own.

Sadly, car loans are so ubiquitous that the assumption is that everyone financed their car and is making monthly payments.

And those car payments often keep people living on the financial edge and tied to a monthly paycheck at a job they may or may not have healthy feelings for.

Most people end up stringing one car loan to the next and the next essentially staying in debt for their entire lives.

Instead, by saving up money and paying cash for cars that have already experienced their greatest depreciation (that is, cars that are at least 5 years old) we significantly reduce our overall operating costs in the long run.

That means our cost of living is likely $1,000 less each month than most people who are financing their cars.

What About Our House

Going back to what people can see, they can definitely see we live in a nice middle-class neighborhood in a reasonably-sized home.

It’s not a fancy neighborhood like some of our friends enjoy, but we’re not slumming it on the wrong side of the tracks either.

But just by looking at our house, you would have no way of knowing that our mortgage has been paid off for the last several years.

That’s right, we don’t have a mortgage payment.

Of course, people can’t tell that just by coming over to our house for dinner. I doubt any of our neighbors even know that our house is paid off.

What people see is a young couple raising their 4 young kids in a nice neighborhood filled with other families raising kids. That’s not the typical picture of people living a mortgage-free life.

That’s what our parents do.

That’s what grandparents do after slaving away for 30 years.

People are fooled by their eyes.

Just your typical mortgage-free family playing in Costa Rica.

The truth is, if we’re focused on reducing our monthly cost of living as much as possible, that means the mortgage has got to go.

So we paid ours off in just 7 years.

That’s another huge monthly cost of living reduction.

AND without a mortgage payment, we’ve been able to invest significantly more of our money in tax-favored retirement accounts, helping us build our wealth.


Not Buying Stuff We Don’t Value

While cars and houses are generally the two most expensive items that increase our monthly cost of living, there are plenty of other big-ticket items that can add up as well, such as…

  • furniture
  • TV’s
  • personal electronic devices
  • subscriptions
  • vacations
  • anything we buy on Amazon
  • home decorations
  • home renovations
  • home maintenance…ations.
  • basically all the stuff we cram into our homes.

If we aren’t intentional about how we spend our money, we can often accidentally buy things that we simply don’t need, don’t enjoy, or in some cases, can’t afford.

To fight against all this miscellaneous spending on “stuff”, we decided to do an opportunity cost analysis on any of our big-ticket purchases to decide if we really needed them.

This allowed us to really scale down our spending and only purchase those things that truly brought value into our lives.

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Let’s take TV’s for example.

Today we’ve got a 55″ LED TV in the living room and a 42″ LCD TV in a bedroom upstairs.

That sounds pretty normal, but those are fairly recent acquisitions.

Many of our family and friends remember our 32″ big boxy CRT TV we had for over a decade.

That was our one and only TV and it was right in the living room.

It looked like it came straight out of 1995, but we didn’t care. It worked just fine for us…and eventually our kids, who weren’t even born yet when we got it.

While nearly everyone around us spent the last 15 years buying one flatscreen TV after another for hundreds if not thousands of dollars each, we didn’t spend any of that money.

We simply made the decision that having a better TV wasn’t valuable to us, and the opportunity cost of spending our money on a TV was just too great.

Rather than spending upwards of $2,000 or $3,000 on multiple TV’s over the years, we got to save and invest that money.

In fact, in the last 15 years, we’ve spent exactly $0 on TV’s. The two we have now were both used TV’s that were given to us.

And that’s just one of many categories where we made value-based spending decisions that have saved us thousands of dollars.

Conclusion – How Much Your Lifestyle Costs Matters

In case you haven’t noticed the trend yet, having a lower monthly cost of living is one of the key ingredients to early retirement.

Having a low cost of living doesn’t necessarily mean you have to live a cheap or less valuable life.

It simply means we make conscious decisions to only spend money on those things that are truly valuable, and avoid spending money on anything that isn’t.

We may have spent $0 on TV’s in the last 15 years, but we also spent more than $30,000 on trips across the country and around the world.

Again, the effort isn’t to avoid spending money, it’s to only spend money in ways that truly matter.

And when you start evaluating all your purchases from that perspective, you’ll realize that very little truly matters.

Most of what we own is just stuff with very little value. Yet all that money we exchanged for that stuff is gone forever.

Realizing that material things aren’t a sign of success and won’t bring lasting happiness is critical to reducing our monthly cost of living.

And a reduced cost of living often leads to a much smoother ride in life and less stress way before we ever start approaching retirement.

But if we’re serious about retiring 10, 15 or even 20 years before our 65th birthday, we have to get serious about doing the hard work of reducing our monthly cost of living.

Let’s move on to Part 2 of our Fundamentals of Early Retirement series where we’ll take a look at the highly touted yet often confusing Retirement Number. How much money do we need to retire anyway?

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