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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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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While consulting a tax adviser I was given some pointers on some common tax deductions that can be made but sometimes are over looked. Some need to be itemized while others do not need to be itemized.

Common Federal Tax Deductions that needn’t be itemized

1. Capital losses which are realized losses that can offset unlimited capital gains or $3,000 in income.
2. Retirement contributions such as Traditional or SEP-IRA, 401(k), etc.
3. Student loan interest that are up to $2,500 per year and only on qualified student loans.
4. Business expenses which are for business owners and employees with certain un-reimbursed expenses.

Common Federal Tax Deductions that need to be itemized

1. Home equity loan deduction in which you can deduct interest paid during the whole year.
2. Home mortgage deduction in which you can deduct interest paid during the whole year.
3. Medical expenses where you can deduct those in excess of 7.5% of your AGI and I recommend getting help on this one.
4. State and local taxes or sales tax.
5. Charitable contributions such as cash and property donated to qualified organizations.
6. Personal casualty and theft losses where you deduct your loss minus insurance payments.

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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.

Popularity: 40% [?]

There was a great post today at Get Rich Slowly that answers how investing in low fee index funds generates up to 33% more in savings.

Using a comparison between low fee index funds with no-load versus class-A mutual funds that do have load fees plus management fees tied to them. You lose up to 33% in fees right off the top every single time that you purchase more stock.

This not only beats down your potential for high returns but also lowers the amount of money that you can withdraw yearly by drastic amounts.

To fully see the drastic change in compounded wealth that is subtracted you have to check Get Rich Slowly “How Lower Fees and Expenses with Index Funds Could Mean 33% More to Spend in Retirement.”

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Being frugal should always be top on your list in order to be retire early.

Steps for early retirement

• Be very Frugal. Live below your means and don’t pay for anything that you don’t have to.
  • Use coupons for everything.
  • Ride a bike to your destination or car pool.
  • Send your child/children to public school instead of private school. Major money saver here.
  • Use credit cards with cash back rewards like Citibank, Chase and CapitalOne.
• Save at least 20% of every paycheck. After five paychecks you already have saved a whole paycheck without thinking about it. If 20% sounds like too much, then by all means start by 10% or even 5%.
• Learn how to get multiple streams of income. Get another job, start blogging, fix computers or cars in your spare time. Start somewhere and then that whole paycheck can become 100% saved.
• Invest for the long term in the stock market and always buy low. Try hassle free methods like investing in Mutual Funds and Exchange Traded Funds (ETF). These help you because you don’t need to buy individual stocks and they are well diversified.

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To become financially independent you will first need a road map that will help you attain that level of independence. I have been playing around with some methods and I found that these were some good methods to help me out. A good road map should help you get out of debt, invest, budget and plan for retirement.

Making Money Methods

• Set Goals – What do you want to do? Make money, attack debt or plan for retirement. Hopefully you will like to do all of these things at once. I planned to set my goal to increase wealth and in that respect to increase wealth.
• Read Personal Finance – Read every web article, book and subscribe to personal finance magazines.
• Track Spending – Track all of your expenses so you can see where your money is going. I realized that I spent about $60 per week at Duane Reade. You know that was cut later on.
• Cut Expenses – This goes hand in hand with tracking expenses. You then analyze where you spend too much and then trim them out of your budget.
• Decrease Debt – Start cutting down credit card debt. Start with the smallest debt then work your way up to the big ones. Shop around better interest rates then call up your current credit card and tell them to rate you can get and see if they will negotiate. If they do fine but if not then transfer the debt to the new one and close the old credit card immediately. Cut your total credit cards down to 2 maximum cards.
• Extra Income – Look into alternate streams of income. I use dividend stocks, Google Adsense, web advertisement, regular 9 to 5 job, high yield money market account for liquid money, rent house/apartment.
• Purchase Stock – I would say to purchase dividend stock because they increase per share and they still function as stock.
• Purchase Property -By purchasing a property, you increase your wealth automatically and fast. You force yourself to save and properties increase with inflation.

This simple but highly effective methods are so simple when you think about it, but highly effective. These cover making money, removing credit card debt, gaining extra income, cutting expenses with a tighter budget and planning for retirement by learning steps to increase wealth.

Popularity: 64% [?]