HOME LOANS

First retire, and then have kids

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Forget retirement at age 65; a frugal group of thirty-somethings are retiring, relatively wealthy, to the envy of their peers.

It's a far-out idea for a generation of Australians working hard, possibly renting and maybe even saving towards a down payment on their first home or planning to start a family. For many there may be a student loan still kicking around, and then a car loan and others will be saddled with a credit card debt; hardly ideal circumstances for an early retirement.

But for US-based blogger, known as "Mr Money Mustache" [sic], retiring at age 30 — right around the time his friends were still recovering from debt — became reality, and he's now helping others to follow in his path.

His advice for people entering the workforce is this: live on about $15,000 to $25,000 of take-home pay per year, unless you're part of a couple, in which case you should be spending up to $35,000 annually.

"The rest — and I mean all the rest, regardless of how much you earn, goes into your early retirement fund," he said.

He recommends making the maximum contributions into superannuation and beyond that contributing to "more low-churn growth investments that don't generate taxable gains".

A plan like this might sound tricky if you're currently stuck in the consumer mindset. It may be tougher still if you're repaying the average Australian home loan of around $300,000.

At the benchmark standard variable rate — the average of the big four banks' standard variable rates — of 7.39 percent (at the time of writing), a $300,000 home loan repaid over 25 years will set you back $2196 per month or $26,352 annually. Under Mr Money's plan, this leaves little remaining to live off. By comparing home loans and switching to a cheaper rate of say 6.23 percent would free up an extra $221 per month and save you almost $3000 per year and more than $66,000 over the life of the loan.

As someone who followed this exact path, Mr Money insists that it is possible to enjoy some of life's luxuries: "I still owned houses and reliable cars and a nice bike, and did a reasonable amount of restaurant eating and travel through the whole process".

What separates him from his indebted thirty-something peers? He is much more careful about considering each purchase to avoid wasteful ones, and he is adamant about never borrowing for anything other than a house.

"The ultimate reward for us came with the birth of our baby boy in 2006. We had already retired from our real jobs and could share the joy and pain of parenthood together, with none of the compromised career-juggling lifestyle," he said.