The Simple Dollar posted a great article that is helping a member who is young figure out if he starts early, then when can he retire. If he start at the age of 20 years old, then he can retire early basically at about 42 years old. That will only mean that he will be getting the same salary that he has right now but he will be work free but still far from retiring rich.

If you were to take 20% of your annual income starting at age 20 and put it in a S&P 500 index fund, that index fund continues to grow at the long-term historical rate (12%), and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary, or quit at 43 and be able to give yourself a 4% “raise” each year from the interest, which is probably the better plan because it combats inflation. Raise the amount to 25% and you’re done at age 38 and able to live in perpetuity at age 40.

All he has to do is save 20% of each pay check and then invest into an index fund like the S&P 500 index fund, I prefer to use Exchange Traded Funds (ETFs) but all the same.

The hardest part is saving that 20% or heaven help you if you can 25% per paycheck.

But like snow-flaking debt, why can’t you snowflake to a rich retirement? And of course, once you start to save and that compounded interest really kicks in, then you can be saving an extra couple thousand per year just on interest alone.

If you can save $20,000 and get 5% in interest, then you just gained an extra $1,000 for having your money sit there. That $1,000 will then help you reach another $20,000 that much quicker then before you know it, you are now getting an extra $2,000 per year.

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In this interview with Vanguard Eric Tyson, one of my favorite investment companies, Tyson states that most time people are there own worst enemies because they overspend and run themselves into debt.

The number one problem is overspending. Some Americans, frankly, are not savvy consumers. They lack the discipline to live within-or below-their means. They live in the moment, pursuing instant gratification instead of doing what’s in their long-term interest. They abuse credit cards, buy stocks without doing research, and generally have little or no idea how much they should be saving toward future goals.This isn’t especially surprising. We’re all bombarded by advertising 24-7, and it’s difficult to insulate yourself from the pressure to drive the “right” car, live in the “right” neighborhood, own the “right” stock, and so forth. Americans need to learn that giving in to that kind of pressure can have serious consequences to their financial well-being.

It is as simple as that. Easier said then done as well because it takes amazing will power to hold back on spending and to treat yourself or those that you love. So in the retrospect, try to maximize as much as you can the amount of money that you do not spend and constantly try to beat that amount. Then simply invest until your early retirement comes around.

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Now this is a hard question that will rely 100% on your point of view and preference. Do you want to own the real estate property and/or house in a shorter period and pay less interest or in a longer and instead invest extra money into the stock market to gain compounded 7%-12% gains or more. Lets test some theories.

Fixed-Rate Mortgage Term Viewpoints

• Shorter Term is Key – You will have higher monthly payments but equity will grow faster. You will actually own the home faster and would have had paid much less in interest.
• Longer Term for Well Rounded Benefits – With a longer term you pay way more accumulated interest and equity builds slowly. You also have cheaper monthly payments money left over for other things.Prepaying a mortgage versus investing money in the stock market. You can invest the additional money that you save per month into the stock market by investing in Exchange Traded Funds (ETFs). You will gain around 7%-12% compounded annually and this will dwarf the 5%-7% interest rate that you are willing to knock down. In 10 years you would have accumulated far more money in return on investment (ROI).Another factor is that paying interest is a huge tax reducer that many individuals use. Even though you can pay off in full for your house, don’t, you will give up this huge tax reducer if you do.
• Flexibility – As long as you don’t have any prepayment penalties, you can pay off you mortgage loan in much less time. If you get a 30 year, pay 10% of your monthly mortgage payment in principal and reduce your mortgage significantly. You can knock down a 30 year or 40 year down to 20 years or 15 years without problems.My Money Blog has a great post about choosing a fixed rate mortgage term. They even show the difference that extra payments towards principal will make.

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The tax benefits of Exchange Traded Funds (ETF)s are clear once you know. They are an improvement on traditional index funds because they delay capital gains taxes because when the ETF stocks are traded they are not bought and sold over and over. They are instead held in waiting until someone else buys them. So you are not really taxed until the day you actually sell your stocks.

Tax Efficient ETF Investing Benefits

Delayed capital gains taxes – they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end.
In this respect your wealth accumulates a lot quicker then constantly being knocked by capital gains taxes from the start to the end.

Simple Balanced ETF Portfolio for high gains that actually can beat the market can make up your entire investment portfolio. ETFs outperform traditional mutual funds by as much as 33% more in realized wealth gains towards your retirement.

Personally I try to invest about 90% in ETFs and I even invest in ETF Bond Funds such as iShares Lehman Aggregate Bond (AGG). They are well diversified, management costs are dirt cheap and they are capital gains optimized. What more can you ask for in headache free investments?

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Don’t you sometimes which that you had the big wigs at Harvard and Yale to manage your stock portfolio so that you can yield above average returns. Well keep reading and you will finally know how easy it is to yet a monster stock market portfolio like the gurus.

Rich Guys Modified Harvard and Yale Stock Portfolio

45% Domestic equity

• Vanguard Total Stock Market Index Fund ETF (VTI)
• DJ Wilshire Total Market ETF (TMW)

25% Foreign equity

• iShares MSCI EAFE (EFA)

10% Fixed income

• iShares Lehman US Aggregate Bond Fund (AGG)

20% Private equity

• PowerShares Private Equity ETF (PSP)

This of course is my modified alternative to their portfolio that is a little simpler and takes the most advantage of Exchange Traded Portfolios (ETFs).

You can refine and add as you like but this seems to be the best of the mix without needing a substantial amount of money to start up an nice investment.

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Men’s Health gives us four steps to retiring rich. Some of the tips (the first two) come from the author’s discussion with Mr. Warren Buffett.

Here the list:

RULE 1: Instead of trying to time the market, try to tie it. Unless you’re a top sensei yourself, don’t try to beat the market. Instead, cast the widest net possible using index funds. Buy a fund that tracks the S&P 500 or maybe even the entire U.S. stock market. If you’re able to lock in the gains of the market–roughly 10 percent a year, historically–you will have accomplished a vast amount.

RULE 2: When you’re tempted to sell, buy. When stocks are in the tank, your gut will tell you to bail, to move your money into less-volatile investments like bonds or money-market funds. It’s human nature. It’s also a huge mistake. When the market plunges–over days, months, and years–there are opportunities to make real money.

RULE 3: Collect sectors. But you have another best friend, one you don’t spend a whole lot of time thinking about: diversification. You don’t want to be thrown for a huge loss by drops in any one sector. Make sure your holdings cover the entire investment field, so if “energy” collapses, you might be protected by gains in, for example, “financial services” or “health care.” This is another great reason to invest in an S&P 500 index fund: It comprises stocks from virtually every sector.

RULE 4: Invest in yourself (involuntarily). Chances are you’re putting away money for retirement automatically; your employer takes it out of your paycheck, pretax. If you ever want to amass a lot of liquid assets–that is, money you can spend today if you want–you need to set your savings to automatic, as well.

So my Comments on each are:

1. Big thumbs up here because index funds are well diversified and come with no-load fees and very low expense fees.
2. This is also absolutely true because this is where stocks/shares are and will be at there cheapest so in times like this buy as much as you can and save in times of high bubble prices.
3. Yet another beauty of investing in index funds.
4. This way you never forget and it is all done for you.

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The debate is in and it is a very touchy and personal decision.

First let’s talk about the pure proud feeling of knowing that you finished paying off for your house. Another factor would be that you would be reducing your mortgage term significantly. Another factor that you have to include is that all interests that you pay towards your mortgage is tax deductible. Let’s say if you were to enroll yourself in bi-weekly payments and/or if you were to just add an additional 10% of your monthly mortgage payment just to principal you would cut down the term by about 3/5.

Now let’s say that you were to instead invest that extra money into a index fund or better yet an Exchange Traded Fund (ETF) in the stock market. For one point, the 10%-14% that you could have compounded within the years would have been greater then paying down the mortgage of a 5%-7& interest rate.

That is the question that you must ask yourself. Is the interest on your mortgage a comparable rate when compared to the stock market returns of a index fund that is well diversified. If you are looking to gain upwards of 4% and are willing to test the waters and have a good risk tolerance for long investments then by all means then you should invest in the stock market.

You would be able to invest and after say 10 years you would have a great deal more net worth and capital then if you decided to just prepay your mortgage instead.

If this article has intrigued you then please go to Investing Versus Paying Ahead on Your Mortgage: Which Makes More Sense? and Question From a Reader: What to do With My Mortgage?

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A house or real estate property is by far the best investment to make if you can afford to right now.

Benefits of Owning a House or Real Estate Property

1. Forces you to put away money in the form of mortgage payments.
2. Houses generally and mostly do not go up and down as the stock market does.
3. Most of the time a house always continues to build up equity.
4. If you live in the house, you get the added benefit of enjoying it as well.
5. Later on you can sell it and cash in or turn it into a revenue generating cash box.

If you cannot afford one right now, you should save as much as you can on a weekly basis or a paycheck basis. Save like 20%-5% into a secret account in which you pretend to forget about then throw that money into the stock market and the bonds market.

Simply invest 40% into iShares Lehman US Aggregate Bond Fund (AGG) and put the other 60% into SPDR Trust, Series 1 (SPY).

Keep saving and compounding and you will get there.

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