How Does Early Retirement Extreme Work?

How Does Early Retirement Extreme Work?

early retirement extreme

Many people believe that they need to work 30, 40, or 50 years before they are able to retire. However, Jacob Lund Fisker, the mind behind the book, Early Retirement Extreme, doesn’t necessarily agree. In fact, he thinks that retiring in as little as five years is possible. But, to make that happen, using the right approach is a necessity. If you are wondering how Early Retirement Extreme works, here’s what you need to know.

Slash Spending Substantially

One of the key tenets of the Early Retirement Extreme approach is to get away from consumerism. So, it should come as no surprise that slashing spending is a crucial part of the program.

In many cases, those who participate in the program reduce their outgoing expenditures to legitimate essentials. Along with keeping housing costs down, they avoid dining out, entertainment spending, and more. They scour grocery ads for loss leaders, allowing them to dramatically save on food.

Embracing the DIY approach is also popular, including having a home garden for fresh produce. Additionally, free resources are a big part of the plan. For example, instead of buying books, they rely on libraries.

The lower your costs, the less money you need each month. As a result, your savings or passive income will go farther, potentially allowing you to retire faster.

Prioritize Saving

With Early Retirement Extreme, saving as much as possible is another must. The more you set aside, the faster you’ll be able to retire.

Think of it this way; if you save 10 percent of your income every year, it takes approximately nine years to set aside enough to cover one year of expenses. But, if you stash 90 percent instead, you’ll fund nine years for every one that you work.

Along with putting money aside, placing it in the right accounts is necessary. For liquid savings, opting for a high-yield online savings account is usually best, ensuring you generate as much in interest as possible. In many cases, finding an option with a 1 to 2 percent interest rate isn’t overly challenging, including accounts that are fee-free.

Investing-A Wiser Approach

For the remainder, investing may be the wiser approach, as it gives you access to stronger returns. For example, the average annual return for the S&P 500 came in at nearly 10 percent (before the coronavirus pandemic). By investing in an S&P 500 index fund, you may be able to secure a return far above a traditional or high-yield savings account, allowing your money to grow faster.

While you don’t have to put 90 percent of your income in savings, the core principle is to set aside as much as possible. Additionally, you want to make sure you put the cash in the right places, enabling the money to work for you instead of sitting idly by the wayside. That way, you’ll be able to leave your profession sooner rather than later.

Generate Passive Income

With many early retirement approaches, passive income generation is a crucial part of the equation. It ensures you continue to have money coming in, even when you aren’t actively working for it.

Investing is a primary option for generating passive income sources. As mentioned above, with smart investing, you can achieve strong returns. Then, your money grows over time, even if you don’t touch it again.

However, investing isn’t the only choice. For example, if you become a rental property owner, that could serve as a fairly passive source of income. While you may have to manage the costs of maintaining the property or pay an agency to handle that aspect for you, anything above can function as income.

Technically, e-books, photographs, and a range of digital assets can generate passive income as well. Once you create them and list them for sale, the same properties can keep earning you money, suggesting people continue to buy them.

Ultimately, the principles behind Early Retirement Extreme aren’t odd. What sets the method apart is the aggressiveness of the saving approach. For some, it may be worthwhile, suggesting they are comfortable with the lifestyle extreme saving requires. However, it isn’t right for everyone. So, before you jump in, make sure you are comfortable with the concept. That way, you won’t be miserable while you work toward a very early retirement.

Have you considered giving Early Retirement Extreme a try? If you’re just now hearing about it, do you find it appealing? Why or why not? Share your thoughts in the comments below.

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