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3 Easy Steps to Retire By 40

by retirebyforty on September 19, 2012 · 65 comments

in early retirement, goals and milestones, side income

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Last time I wrote about the Retire By 40 Movement and why everyone should at least think about retiring from their career by the time they are 40. Today, we’ll dive into how this could be done in 3 easy steps. Well, these steps are easy to say, but they are not that easy to do. Most people finish college around the age of 22 and that only gives them 18 years to approach Financial Independence. This is plenty of time if you are 22, but if you are in your 30s and are just getting started, it’s probably too late to get there by 40. You can still shoot for 50. :)

3 easy steps to retire by before 40

Get a Job with a big paycheck

The first crucial step is to get a job with high earning potential. Take a look at this highest paying job list and see if your job is in the top 100. It’s much easier to save and invest if you have a job with a big paycheck. If your job isn’t generating 6 figures by the time you’re 30, then you need to earn more money somehow. Building a business on the side is a good way to generate extra income. Self employment is also a great way to earn more money, but it’s more risky as well.

Minimize Lifestyle Inflation

The second step is even more important than the first. Most people increase their spending when their earnings go up. This is lifestyle inflation and it will absolutely derail your chance of early retirement. Once you are used to a certain level of lifestyle it’s much more difficult to cut back. Another important thing to keep in mind is that you will need a bigger nest egg for retirement as you inflate your lifestyle. Bigger nest egg = more time working. That’s why it’s better to keep your lifestyle moderate when you are young.

Minimizing lifestyle inflation is very difficult because everyone around you will buy big houses, luxury cars, and spend a lot of money on entertainment. You have to remember that every dollar spent on luxury goods will earn much more if you invest it instead. A new BMW can cost $20,000 more than a recently used Hyundai. If you invest that $20,000 and receive 7% annual earning, then you’ll have over $150,000 in 30 years. In contrast, the new BMW will become a rust bucket much sooner than 30 years.

Grow Your Net Worth

The 3rd step is to grow your net worth. If you earn a lot of money and can keep your lifestyle to a modest level, you should be able to save a big chunk of your income. Most people think saving 10-15% of their income is enough, but this is not going to work for the Retire By 40 Movement. You need to save 40-60% of your income to have a chance at financial freedom.

My suggestion is to max out your 401k and Roth IRA to start with. After that, invest the same amount in a taxable brokerage account. This is more difficult in the beginning when you are just starting out, but it should be doable after a few promotions. Having investments outside of the retirement account is crucial to early retirement. These investments can be geared to generate income so you won’t have to dip into your retirement fund after you quit your day job.

It’s important to be diversified when you are growing your net worth. If your only investment is in the stock market and it tanked, then you will need a lot of time to recover. It’s better to be invested in a variety of wealth-building assets such as stocks, bonds, CD, rental properties, commodities, and peer to peer lending.

Paying off your debts is also a part of building your net worth. The best policy is to avoid consumer debt as much as possible. Investment debt on the other hand is really up to you.

*update* Step 4Put off withdrawal. If you can put off withdrawal, then you don’t need to accumulate a huge retirement portfolio. Click over to read about the FIRECalc retirement calculator and how it can help you.

Optional – Find a hobby that can earn some money

A person who is disciplined enough to carry out these 3 steps is unlikely to desire a traditional retirement. It’s important to explore your interests and see what you want to do after leaving your big bucks job. Many people are able to leave their day job and pursue their hobbies once they make a little income from them. A little income goes a long way when you live a modest lifestyle. Here are a few examples from the Personal Finance blogosphere.

  • Mr. Money Mustache took up carpentry and is making income from that.
  • Andrea @ Nuts And Bolts media became a freelance web designer.
  • Charleen @ My Personal Finance Journey left her software engineering job to become a freelance writer and a stay at home mom.
  • Brent @ On Target Coach is writing and coaching full time since he left his job last November.
  • Jon @ Affiliate Help moved to Morocco so he could afford to live on his hypnotherapy website earnings. He worked on his websites for 18 months before finally being able to return back to the UK.
  • Glen @ Free From Broke left his job to be a full time parent and work on web publishing.
  • Sam @ Financial Samurai is exploring self employment in the internet marketing arena. His sites are already generating good income, but there will be more to come from Sam.
  • Steve @ Money Infant is freelance writing from Bangkok.
  • Crystal @ Budgeting in the Fun Stuff left her job to become an advertising rep for bloggers.
  • Let me know who else I can add here.

That’s it. Easy, isn’t it? Here are a little more details on how I did it.

  1. Job. I was a computer engineer and left a six figures salary job earlier this year.
  2. Lifestyle. We live a modest lifestyle and spend about $3,000-$3,500 per month. See August Cash Flow.
  3. Net worth. I maxed out my 401k contribution for many years and built up a modest nest egg. Now that I’m not working anymore, I won’t be able to add to the retirement fund. However, I don’t plan to touch the retirement funds until I’m in my 60s. This will give it 20 more years to grow. Instead of drawing from the retirement fund, I’m using the income from my dividend stocks, rental properties, and peer to peer investments to help pay the bills.
  •  Hobby – I’m generating some income from blogging and freelancing. This is very helpful and if I didn’t have them, I would have continued at my job for a few more years.

As you can see, it is possible to retire from your career before you’re 40 to pursue other interests. This is much easier if you start out with this goal in mind when you are young. Most people realize they yearn to be free from a job a little too late to reach this goal. I didn’t know I want to quit my career when I was in my 20s. I was just lucky that I was frugal by nature and saved a large portion of my earning.

Are you happy with your career? If not, how are you planning to get out? 

There is a great new website to help you manage your investments - Personal Capital. You can keep track of your income, expenses, and investments, all in one place. Personal Capital is geared for investors and have many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.

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{ 57 comments… read them below or add one }

William @ Drop Dead Money September 19, 2012 at 3:19 am

Good list! On step #3 (grow your net worth) I would add: one of the most important ways to grow your net worth is to keep a keen eye on the economic cycle. Buying at the top can kille you, but buying at the bottom can put big bucks in your pocket without lifting a finger…

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Michelle September 19, 2012 at 5:24 am

Minimizing lifestyle inflation is something that we need to work on! We’ve been dreaming of buying a new house and that’s not what we should be doing.

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retirebyforty September 19, 2012 at 12:46 pm

You can buy a decent house and not overspend. :)

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Kurt @ Money Counselor September 19, 2012 at 6:43 am

Nice formula for financial independence. I think it’s important to resolve to live far below one’s means from day 1 after college. Then, as you recommend, avoid lifestyle inflation. As income rises, sock more cash into your financial independence fund!

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retirebyforty September 19, 2012 at 12:46 pm

It’s much easier to do if you start from day 1. Once you spend more money, it’s really difficult to go back to living like a college student. I’m sure we all know that.

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jefferson @SeeDebtRun September 19, 2012 at 6:52 am

there is no doubt that the most important aspect of improving your finances is not earning more money, but instead spending less.. kudos to you on making your goals come true.

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retirebyforty September 19, 2012 at 12:48 pm

The problem with earning more money is most people spend more money. It’s rare to see a family that save instead of spend.

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@kimolsonphoto September 19, 2012 at 7:58 am

It seems so simple boiled down to 3 steps. But I’d think #1 would be difficult to achieve for most people since the median US salary is far less than 6 figures. #2 and #3 are a bit more realistic, but definitely take a lot of discipline. Especially if you’re gonna save 40-60% of your income.

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retirebyforty September 19, 2012 at 12:50 pm

Hey, How’s it going? Are you up in AK now? :)
#1 is difficult and that’s why kids need to pick the right major in college OR generate more income from other sources. If you make less than 6 figures, it will be much harder to save 40-60% of your income.

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@kimolsonphoto September 19, 2012 at 3:42 pm

Nah, we don’t leave for a few months yet. Lots of preparations still to do, though!

As for picking the right major, I can attest that that’s not always helpful, either. I don’t use my CS degree anymore (and hope to never have to). Yes, it would’ve been awesome income-wise if I’d stayed with it, but I didn’t. :)

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retirebyforty September 19, 2012 at 11:52 pm

I didn’t know you were a programmer. It’s not for everybody. I stuck with engineering for 16 years and it nearly drove me crazy. At least I’m out now. :)

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@kimolsonphoto September 22, 2012 at 11:17 am

Yeah, totally not for everybody. 16 years would’ve been way too long for me, but that’s awesome that you were able to stick with it long enough to get out and be where you are today. :)

W at Off-Road Finance September 19, 2012 at 8:11 am

There are certainly other formulas that work, but this one has the advantage of requiring very little in the way of special skills. I’m fairly sure I’ll be out of the workforce long before 40 (35-37 appears to be a realistic target) but the means by which I’m doing it are more esoteric.

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retirebyforty September 19, 2012 at 12:51 pm

I would love to hear more about your esoteric formula. I’ll PM you. Perhaps you can write a guest post for us.

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Jeff @ Sustainable Life Blog September 19, 2012 at 8:43 am

Great quick guide here joe, but I’ve got a question – would this have been harder had you had baby RB40 at an earlier date?
I think the most important thing on the list is to minimize the lifestyle inflation – it’s key to growing income!

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retirebyforty September 19, 2012 at 12:53 pm

Yes, baby RB40 cost a lot of money primarily due to the expensive daycare in our area. If we had a baby in our early 20s, we wouldn’t have been able to save and invest as much. As you know, it’s better to start investing early.

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mayanqueen February 18, 2013 at 3:53 pm

I agree, I had my babies in my 20s, I was still able to save and pay off our town home. But you are right, while others were buying million dollar homes that couldn’t even afford, we kept our town house and are debt free. Bills were always less and our friends were complaining all the time of their water bill. Our water bill was included in the association fee which was then $175.00, now is $200. It is also true that I could have saved more without babies, but I felt I had more energy in my 20s to juggle being a soccer mom, karate, music, baseball, basketball, swimming, you name it! I think with all those activities we did not need a larger home! I do agree with you that it is a matter of discipline. I found your site by accident today and I am having a blast with it! Yes, babies are expensive…but you took time off now to raise yours. Then, why do you have to pay daycare?
In regards to investment I am more of a chicken, don’t know much what to do. A bit scared. I have been wanting to buy a house in Las Vegas, I get scared and my husband doesn’t really help. We are in L.A. so many say that we have to be careful with rental properties that are too far away, is that true? I even finished the real estate classes to be more aware of the waters and I still have doubts, it might be because I am not familiar with Las Vegas. When you purchased your rental properties, how did you start? In your area? with condominiums? town homes? Any advice will tremendously help.

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retirebyforty February 19, 2013 at 12:49 am

Thanks for visiting! I quit my job last year to be a full time stay at home dad and we don’t pay for daycare anymore.
Great job keeping your expenses low. I know it’s a lot harder to live a frugal lifestyle in glitzy southern CA. :)
We got started with rentals when we moved to a new place. We decided to rent our old home because the market was tanking. I think this is the best way to start (for a reluctant landlord) because you know the property very well.
Let me know if I can answer any questions. I’m reluctant to do long distance rental properties too. I just want more control.
Good luck!

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QDN October 10, 2013 at 11:44 pm

@MAYANQUEEN: LA is a little tough, as real-estate price there is quite expensive. So, return on investment is low. I would start in Phoenix AZ. You can have management look after your properties for 10% of the income. I was lucky to buy properties in St Louis MO that cost $30k to $40k and rent them out for $700 to $900 per month.

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savvyfinanciallatina September 19, 2012 at 9:07 am

Joe, as always thanks for the tips!!!
As a 22 year old, I’m already trying to implement some of your advice. Since I started halfway through the year, I won’t be able to max out my 401K, but I’m hoping next year I can.

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retirebyforty September 19, 2012 at 12:51 pm

Great job! I’m sure you can be financial independent by 40!

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Jacob @ iheartbudgets September 19, 2012 at 9:11 am

Great tips here! I do have a goal of earning $100k by the time I’m 30, so I’ve got 3.5 years to get there. I love the idea of saving half your income, and you can’t do that without minimizing lifestyle inflation. I don’t think I’ll retire by 40, but I do want to be in a job I love helping people at that point :)

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retirebyforty September 19, 2012 at 12:53 pm

Go for it! It’s all about living life to the fullest and doing what you want to do. Good luck!

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Lance@MoneyLife&More September 19, 2012 at 10:43 am

My career is decent. I am saving a large chunk of money in case I decide I want to follow a similar path. I am also working on my side income development.

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Kathleen @ Frugal Portland September 19, 2012 at 10:44 am

Your steps are SIMPLE but definitely not EASY! :)

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retirebyforty September 19, 2012 at 12:54 pm

Why not? If I can do it, anyone can. :)

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Rich In The Heart September 24, 2012 at 9:24 pm

I think Kathleen is referring to difficulty in the lower incomes.

Just because I was curious I did a that tied back to this one, which expanded on what some of the posters were saying. The title was: “How difficult is it to save for retirement at lower income levels”, and comes at it from a tax perspective (which is pretty good, but doesn’t offset the removal of current income diverted into retirement income).

Nonetheless, your post is very nice in it’s brevity and clarity … great stuff!

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retirebyforty September 25, 2012 at 4:49 pm

I’ll come by and check it out. I think it’s almost impossible to save for retirement at the lower income level. That’s why I think growing your income is the 1st step…

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Martin September 19, 2012 at 11:04 am

I would like to add some emphasis on the hobby. When you make more money on the side, you have more options. You can get more aggressive with your savings.

Do you have any tips to retire by 30? I have 6 years to go!

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retirebyforty September 19, 2012 at 12:56 pm

30 is tough. You’ll have to take up Mr. Money Mustache or Extreme Early Retirement’s models. That’s cutting spending very aggressively and live in an RV or something like that. :)
Or work on your side business to make more money, that’s another way to go.

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Early Financial Freedom September 19, 2012 at 11:35 am

I totally agree with you and I am speaking from personal experience.
*Try to make as much money as you can. One of the best ways of doing this is to work for you; own a business.
*Save as much as you can. Choice of saving may vary, but do save!
*Always live below your means, regardless of your income.
*Know, plan, and track your cash flow for short-term and mid-to-long term

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retirebyforty September 19, 2012 at 12:58 pm

Owning a business is great, but it takes sometime to get rolling. Isn’t that true? It’s also difficult to start a business with no money. Thanks for your comments!

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RichUncle EL September 19, 2012 at 11:46 am

Great Steps and somewhat geared to how you personally accomplished the retire by 40, I think the most difficult step for anybody including myself is to find a six figure income. I am a fan of the frugal lifesytle and saving a big % of your income. Hopefully I can bump up my side hustle income to get me over six figures in the coming year.

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Steve September 19, 2012 at 11:48 am

You left out step 4 (at least in the US) – have a spouse that is covering your health insurance. I’m not giving you a hard time about whether you’re “really retired.” I project that we might have enough money to cover our non-health insurance expenses by the time I am 40, or at least my spouse (who is 2 years younger) is 40. But covering 25(?) years of health insurance when that cost has been going up at significantly faster than inflation, is a big deal.

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retirebyforty September 19, 2012 at 1:00 pm

Steve, you are right about that. Health care cost is out of hand here in the US.
My one ace in the hole is my citizenship in Thailand. They have public healthcare there and it’s not too bad.
If you need extra healthcare, you can pay for private insurance which is cheaper than here.

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Kim@Eyesonthedollar September 19, 2012 at 12:37 pm

Missed the 40 boat but am shooting for 50. To my credit, I wasn’t finished with training until I was 26. Maybe I should have looked for a career that didn’t take so long, but I mostly like what I do, so no regrets on that.

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20's Finances September 19, 2012 at 1:32 pm

You forgot to add get married. :) That’ll be the secret to my success. haha. Just kidding (kind of). I plan to follow these three steps. I don’t think I will maximize my 403b though. Instead, I am investing in real estate and other avenues. I lose the tax benefit, but there are other benefits in the investments I am choosing. Plus, I want to diversify as much and fast as possible. Did you move your nest egg into more conservative investments? or since you aren’t planning on using it for 20 more years, have you kept the allocation the same?

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retirebyforty September 19, 2012 at 11:50 pm

That sounds like a good plan.
I did not move my retirement fund to a more conservative asset allocation because I’m not planning to withdraw anytime soon. With 20 more years, I can take a bit more chances.

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krantcents September 19, 2012 at 2:28 pm

It is not an either or question. If you are unhappy with your career, you can change it. I did 6 times and I am sure it is not the end. I think retiring or achieving financial freedom just gives you more choices. Those choices lead to more opportunities. My current career (7th) will give me a pension, lifetime health care etc. It helps I enjoy it for the most part. I feel I am in semi retirement and enjoy my vacations, travel, and working a lot less hours (about half).

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Sean @ One Smart Dollar September 19, 2012 at 3:29 pm

I have been fortunate over the past four years to be working for myself and loving every moment of it. I work a lot more than when I was with a company, but thats not a big deal to me. I get to be at home and work on my own schedule.

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Cherleen @ My Personal Finance Journey September 20, 2012 at 3:04 am

I will be turning 40 next year and I am glad to say I left the corporate world last year. From being a support engineer for a software development company, I moved to become a freelance writer and a full-time stay-at-home mom to personally take care of my kids. We are also generating income from our hobbies. My husband has a photography and printing business while I make hair accessories, such as hair bows, hair clips, and headbands.

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retirebyforty September 20, 2012 at 8:47 am

I’ll turn 40 next year too! I added My Personal Finance to the list.
Thanks for sharing your experience!

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Mike September 20, 2012 at 4:57 am

You also perhaps need to mention to not have debt either. Even if you have a 6 figure income, what good is it if the majority of the paycheck goes towards getting you a positive self-worth. But the post was informative as usual!

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retirebyforty September 20, 2012 at 8:46 am

I didn’t explicitly mention debt because that’s part of building your net worth. I’ll go back and see where I can add this. Thanks for the reminder.

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Mike September 20, 2012 at 9:24 am

Just an idea. I know some will be able to assume to reduce debt, but others may not be so keen.

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Little House September 20, 2012 at 7:47 am

I love the first step. Too bad I enjoy teaching too much! ;) I guess I’ll just stick it out until my 60′s.

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retirebyforty September 20, 2012 at 8:45 am

You’ll have a pension though!

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Financial Samurai September 20, 2012 at 8:38 am

The most important of the three really is to curb lifestyle inflation. Ask yourself if you really need a bigger house, a newer car, etc.

BTW, I’ve never been called an internet marketer. What’s that? Thx!

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retirebyforty September 20, 2012 at 8:44 am

I agree. Most people can’t save because they spend all their big paychecks.
As far as I know, an internet marketer is someone who is making money on the internet.
What would you like to be called? :)

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Jay September 20, 2012 at 8:58 am

Hi RB40

You’ve got a great blog here, I’m still going through the articles for you and Money Moustache.

You are right about the engineering career burning you out. I’m a software engineer that’s nearing 40 as well and wish I was closer to the dream of hanging up my skates. I used to love the job and was excited about it, but after almost 20 years on the job, I now hate it and am getting health problems. That’s a lesson to you guys just starting out: You may love the job now, but just in case, start preparing right away for a very early exit. It’s likely it will take it’s toll; even if it doesn’t, you’ll be in better shape anyway.

I have started my personal journey toward early retirement in ’09 by getting into investment properties. So far I have four rentals and my primary mortgage is now paid out of that. But, there are so many other smaller expenses! I haven’t sat down and crunched the numbers, but I feel that if I’m able to go for another 5 years, I’ll have it licked and can just relax.

By the way, how do you feel about mortgage payoff vs. using the money for new investments? With the rates so low, I don’t see the point of it, but I’m interested on your take.

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retirebyforty September 21, 2012 at 12:35 pm

Thanks for sharing your experience. An engineering career is a good fit for some people, but it didn’t work out for me in the long run. Good luck in 5 years. I’m sure you can do it.
I pay a little extra on the primary residence, but I don’t make any extra payments on the rentals.
We want to pay off our home earlier.

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mayanqueen February 18, 2013 at 4:20 pm

We paid off our place in 11 years instead of 30 and it was the best decision that we ever made! First we refinance to a lower interest rate and once I understood the numbers I was able to make extra payments to the principal. Being debt free in all 360 degrees has been wonderful! Just try making extra payments on your own and before you know it you gonna see that principal getting smaller so fast that will encourage you just pay it off. Just look at your interest rate and that will help all make a wise choice. If it is 8% or higher just pay it off. If it is 4% or less take your time. Ours was 8.25% for 15 years when we did the refinance. The 15 years made the big difference, interest was a lot less!, so I was able to pay that balance in 7 1/2 years. Just use the free calculators on line and plug in your numbers to see the difference 15 and 30 years. The 30 years does not help anybody but the banks or other financial institutions.

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nicoleandmaggie September 20, 2012 at 3:53 pm

I am happy with my career and quite ambitious. I’m kind of excited about my husband exploring more flexible options with his career because that adds a bit of freedom with mine. I am going to miss the extra money though!

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retirebyforty September 21, 2012 at 12:37 pm

I would love to hear how your husband’s career turns out too. I’ll keep up with your blog. :)

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Louise August 11, 2014 at 12:33 am

Thanks for the guide, I’m a bit late to the game, starting seriously at 33, so 40 isn’t my target, but 50 seems achievable.

I like the fact you put a number on the percentage of income to be saved. I’m currently at 28% which seems like a lot to me, but isn’t going to get me near my dreams until I increase to about 50%.

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Andy August 23, 2014 at 10:23 am

I quit my job at 40 at April 2014 and start to do things I like for a living. I am a family guy with 14 years old boy. Last year, my wife and me started to setup a small business for marketing research and IT consultancy especially for the open source software. The income is still between 3-4 digits but that is fine considering we want to have a freedom to do the things that we like to do. So pushing ourself to the limits at our own company is not an option, instead we just enjoy the process; like meeting up with new people in current line of works. Doing a regular routines like from 9 to 5 is truly not an option for myself. Too tired for that. Beside starting our own company, I also do stocks trading, I’ve been doing that since I quit my regular job. The fund that I used for trading mostly from previous savings and severance package. Thanks to our Lord, I also save some of the profits in another stock investment, gold bars and mutual funds. It is not retired yet but it is a truly wonderful experiences for our small family, even thou I have no idea to answer question like how much money that I can earn for next month. So good luck to you all! All the best from Indonesia!

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retirebyforty August 24, 2014 at 3:42 pm

Thanks for sharing! Good luck with your company. I also can’t work as much as I’d like, but I’m enjoying my life as a stay at home dad right now. Pretty soon our kid will be in school and I’ll have more time to work. Best of luck.

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