How the power of habit can help you retire before your parents do

Rob Berger, author of “Retire Before Mom and Dad: The Simple Numbers Behind a Lifetime of Financial Freedom” (Glenbrook Press, 2019) had already achieved the status of partner in a Washington, D.C. law firm when he decided the pressure-cooker, high-profile lifestyle wasn’t right for him.

He found a more satisfying position, but it meant a six-figure salary cut. He and his wife began simplifying their lives and focusing on paying down debt. Berger started a financial blog (doughroller.net) and a related podcast.

By age 49, Berger had achieved financial independence — the ability to forgo work for the remainder of his life — and retired from the law. He sold both the blog and the podcast and took a job as personal finance editor for Forbes magazine, not because it was financially necessary, but because he loves the work.

We spoke with Berger recently to glean some of his insights into financial independence and how to achieve it.

Why is it valuable financially to develop good basic habits?

In his book, “The Power of Habit,” author Charles Duhigg identifies core habits that help us develop good secondary habits in other areas of our lives. Research has shown that when you develop a basic, or keystone, habit in one area of your life, it will affect other areas of your life.

Regular exercise, for example, is one of these habits. If you begin to exercise regularly, you are less likely to get into debt, because exercise seems to be one of those formative habits that trigger positive changes.

In terms of finances, it’s so important to be aware of the habits we develop, because a lot of the money we spend is done out of routine and habit, but it may not really make us happy.

I suggest that we examine some of our habitual spending and experiment; see if you can survive for 21 days without spending money on something you routinely want — but don’t need — such as daily lunches out. At first, it will be painful, but soon, it may not be as important to you as you originally thought.

As humans, we have the remarkable ability to adjust and we have far more control over what makes us happy than we think.

What do investing and Nike have in common?

The slogan, Just Do It, applies to both. Part of the goal of my book is to get anyone who reads it to start investing now.

One of the currently popular money gurus advises people not to invest until they pay off their nonmortgage debt and I can’t think of a worse piece of advice. A big function of wealth has to do with time. The sooner you begin investing, the sooner you’ll see the benefits. Your ultimate goal is financial freedom, which I define as being able to live off your savings and investments without the need to work — and debt is only a part of that.

You’ll always be tackling multiple financial goals — such as saving for your child’s education and paying off your mortgage — and you have to get used to it. You want to build those saving and investing muscles; it forces you to think about where you put your money and to understand markets.

What if I don’t start investing early? Compound interest reaps benefits if you start at age 20, but what about at 60?

Everyone’s situation is unique, and it’s never too late to start investing. You won’t build the same wealth as you would have if you’d begun at 20, but if you save a few hundred dollars a month at 60, that’s great, too. You can be 65 with $ 5,000 saved or 65 and dead broke.

Whatever age you are, you might look back at the past with regret, but you need to consider the best financial decisions you can make going forward.

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You mention the “slingshot effect” in your book. How does that work?

Every dollar we don’t spend increases our savings — but it also decreases how much we need in our personal Freedom Fund to reach financial freedom.

Say that you save 10 per cent of your earnings and spend 90 per cent. Now, increase that by one per cent, decreasing your spending by the same. A one per cent change may not seem like a lot, but you’ll achieve financial freedom faster if you spend less and save and invest more each year. If you define financial freedom as having 25 times your annual expenses saved, you can really see the difference over time.

Why do I need to understand the various types of mutual funds out there and the fees involved? I leave that all to my financial adviser and I’m making money.

There will also be times when you’re losing money, given the performance of the markets, and you’ll wonder why your portfolio is down 20 per cent. It’s hard to understand that without a basic knowledge of how mutual funds work. There’s no need to be a Wall Street whiz kid to learn the basics; it’s not complicated.

When it comes to the fees involved in investing, the standard fee for someone to manage your money is one per cent. That probably seems insignificant, but over your lifetime, you’ll be paying hundreds of thousands of dollars in fees. In addition, there will be the missed opportunity of putting those extra dollars to work for you. These losses can be a significant percentage of your overall wealth.

Do you consider yourself part of the FIRE (Financial Independence, Retire Early) movement?

No, although I know a number of people who are very involved in it. However, I was financially independent before the term FIRE came along.

FIRE is portrayed as drastic, as people who insist on saving 70 per cent of their income, but I know plenty of people in the movement who are saving 20 to 30 per cent as well. Most of us should be saving 20 per cent of our income, so perhaps that does put us in the FIRE community.

I don’t think you need to have a drastic approach to retiring early. If you save 30 per cent of your income beginning when you’re just out of college or university, you should be able to retire in your 50s.

This interview has been edited and condensed.

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