What is financial independence? This is a question that many people ask, and there is no one simple answer. Financial independence can mean different things to different people. Generally, though, it refers to the state of being able to live comfortably without having to work for money. It’s a dream that many people have, and it’s achievable if you put your mind to it!
In this blog post, we will discuss what financial independence is, and we will also share some tips on how you can achieve it yourself!
Financial independence can be defined as the ability to live without relying on financial resources from employment, financial help from others, or financial aid from the government. It is a state of financial security and stability where one can meet their own financial needs without having to work for money or rely on financial help from others.
Financial independence involves having enough financial assets, investments, savings, and income derived from these to cover all essential expenses such as shelter, food, healthcare, and transportation with minimal effort.
This means that individuals who have achieved financial independence have a large amount of financial control over their lives.
Their [passive/ investment/ rental] income exceeds their expenses.
They are free to make decisions that are beneficial for themselves and their family without having to worry too much about the monetary component and implications.
Financial independence is the ultimate goal for many people. It provides financial security and the freedom to live life on your terms without having to worry about money.
It’s the ultimate way to escape the rat race!
Furthermore, financial independence allows individuals to spend more time doing what they love, whether that be traveling, learning new skills, following their passions, or spending quality time with family and friends.
It also gives them peace of mind knowing that if anything were to happen, they’d have financial resources available to fall back on.
Here’s a list of reasons why I think it might be highly interesting for you to consider pursuing financial independence yourself:
- Retire early
- Time freedom
- Location freedom
- Improve financial health
- Live life on your own terms
- Increase overall quality of life
- Reduce financial stress & worries
- Have financial security and stability
- Live life free of debt and obligations
- Capacity to learn new skills or take risks
- Make more meaningful use of available time
- Create a nest egg for the future generations
- Invest in yourself, your family, and your community
- Have financial resources to pursue passions and hobbies
- Have the financial flexibility to take risks and/ or start a business
- Have financial freedom to make decisions that are beneficial for yourself and your family
- Financial FIRE-power: Improved credit access (should you wish to borrow) as your financial portfolio grows
- Minimalized financial dependence on others, independence from a job, employer or social security/ retirement schemes
Here is my list of the 5 most priceless benefits of Financial Independence.
I’m aware I could add a ton of additional reasons to the above list.
Do you think I missed something crucial?
Let me know in the comments below!
I simply wanted to showcase that people who achieve financial independence gain more than just financial freedom — they will enjoy greater autonomy and flexibility in their lives.
Financial independence allows people the choice of when and how they work — whether it be working part-time or full-time hours around other commitments like raising families or traveling the world — as well as being able to retire earlier than if they were reliant on working for income alone.
For me, Financial Independence is the ultimate life hack!
Achieving financial independence is possible with hard work and dedication. While it’s no rocket science, to become financially independent you will require a certain level of financial literacy, grit, and discipline.
Successfully achieving financial independence is not just about following some rules and having a great investment strategy, it’s a lot about self-management and delaying gratification!
In a nutshell, the path to financial independence is nothing else than shifting from relying on your human capital to relying on your financial capital. And to build up your financial capital you need to start purchasing assets.
The most basic recipe for Financial Independence is:
Earn more, save more and spend less — invest the difference — repeat!
You need to achieve a net-positive cash flow at the end of each month so you can start purchasing assets and building up your financial capital.
Please find hereby an overview of the necessary steps to get you started:
- Increase income: Look for more [financial/ career] opportunities to earn additional money such as a better/ second job, freelancing, side hustles, and investments.
- Reduce expenses: Take the time to review your spending habits and find ways you can reduce your cost of living — focus on the BIG 3 and subscriptions first.
- Build an emergency fund: Establishing an emergency fund with 6–12 months’ worth of living expenses allows you financial freedom when unexpected costs arise without touching your asset build-up.
- Pay off high-yielding/ consumer debt: It is necessary to pay down high-interest debts first which will free up money for savings and investments, having some strategic debts such as mortgages and others against assets might be supporting your journey though.
- Invest wisely: Before investing any money, educate yourself to ensure that you understand financial markets and products. Have a certain basic knowledge or consider getting support from a financial advisor or coach.
- Live below your means: Living within or even below your means ensures that there are enough funds available after essential needs such as housing have been taken care of. Stealth Wealth and delayed gratification for the win! Delay your lifestyle inflation for as long as you can.
- Create multiple sources of [passive] income: Creating passive sources of revenue through investments such as stocks, bonds, or real estate will not only speed up your journey to financial independence but provide you income once you no longer wish to work.
- Save/ invest automatically: Set up automatic transfers from each paycheck into designated savings and investment accounts so that saving and investing becomes a default for you.
- Track spending and goals: Regularly tracking financial goals and spending habits will ensure that you always know where your money is going, we do use our net worth and additional passive income added as metrics for this. Map your money and set your compass for financial success!
- Manage yourself: Reaching financial independence requires patience, discipline, and grit. Only when you manage yourself well can you master your money!
By following the above steps, you will be able to become financially independent and retire early if you wish to do so in no time!
Financial independence involves having a financial plan in place that allows you to meet your financial goals. This doesn’t have to be some fancy rocket science plan.
For my own situation, I do like to focus on the following metrics:
Net worth, passive income, and expenses!
I try to keep this process as simple as possible:
- Make sure your net worth grows,
- check the yield your passive income derives from your assets, and
- see that your expenses are more than covered by your passive income –
- adjust when and where necessary,
The 4% rule is an important financial concept that can help you put a portfolio number to your financial independence goal and give you green light for early retirement!
The 4% rule states that to sustain your financial independence indefinitely, you should withdraw no more than 4% of your total portfolio value each year. You can also flip the rule around and say your retirement investment portfolio should be worth 25x your annual expenses.
This simple yet powerful guideline has been used by financial experts for decades as a way to ensure financial security and stability during retirement years.
- If you plan on spending $40,000 per year in retirement, you’ll be needing a $1mio investment portfolio invested in index funds to sustain your annual spending indefinitely.
- In case you like to spend $80,000 per year, you better make sure your portfolio is $2mio.
- If you like to spend $100,000 annually, you got to aim at reaching $2.5mio in your portfolio.
- If you got a $5mio portfolio, you’re cleared to spend $200,000 annually forever
With the right strategy, following the 4% rule can be a foolproof path to financial freedom.
Some financial experts suggest when you retire much earlier you better build in a margin of safety and try to withdraw no more than 3% of your total portfolio value each year, which is a much stricter version of the 4% rule.
By following this path, you will be able to preserve more financial security and stability over time. You might still up your spending in the later years once an initial period has passed.
For my part, I like to be more diversified than simply having everything in an SP500 index portfolio and drawing 4% or so. Hence, I love to look at the actual passive income earned and see if it matches my expenses, my portfolio includes real estate, bonds, and multi-asset funds as well.
You see, if invest in a diversified pool of assets, you can achieve financial freedom in multiple ways. As long as the passive income drawn from your assets exceeds your expenses, you are — by definition — financially independent! With a more diversified approach, you can hedge against market risks at the same time.
The more you diversify your streams of passive income, the more foolproof your financial independence set-up will be!
The bottom line is that financial independence is within reach for anyone who has a plan and follows it with discipline and dedication. Of course like anything else in life, it comes at a cost! Understand the cost and once you’re ready “to pay”, go for it!
By following the 4% rule and diversifying your investments, you can create financial freedom for yourself that will last a lifetime. However, this is not the only way to the promised land!
Do remember that financial independence looks different for everyone.
Some people can achieve financial independence early in their lives while others take a longer path but still succeed.
Remember that diversifying your investments across multiple streams of passive income can provide an extra layer of security against market risks.
Whether you’re looking to retire early or just want financial peace of mind [in retirement years], these principles are sure to be helpful on your journey toward financial independence!
Financially imagineer your dream life!