Takeaways
- To achieve financial independence start investing and saving early.
- Setting short-term and long-term financial goals help you achieve financial success.
- Financial independence means not having to rely on an income to live the life you want.
- Proponents evangelize benefits like traveling, working on passion projects, and lifestyle design.
- Side hustles and income investing can help to offset miscellaneous expenses.
With increasing real estate prices and the stock market performing at historic highs, many investors have felt the economic tailwinds of financial success. With this economic boom, many investors wonder if they could retire 10 years early or design their lives to be able to leave full-time work for good. The allure of financial independence has repeatedly piqued the interest of investors of all ages. With proper financial planning, it might be closer than you realize.
What is Financial Independence?
Financial independence is having enough money, through savings or passive income, to not have to work full time. The definition of financial independence has evolved recently to mean achieving certain financial milestones. For some, financial independence could mean being able to pay rent without your family’s support, and for others, it could mean only having to work part-time.
In a traditional sense, financial independence is freeing yourself from the necessity of work. It means much more than a well-established slush fund or emergency savings. The allure of financial independence has attracted investors because it offers the ability to live life on your terms, dictating what you want to do daily. Most advocates of financial independence are also proponents of lifestyle design or a way of living that aligns with your dreams, passions, and purpose.
4 Ways to Be Financially Independent
While financial independence can certainly mean never having to work again, it has also metamorphized into new definitions. It can mean various stages of financial maturity, such as being able to rely solely on your salary to survive and leaving the proverbial parents’ nest.
No More Financial Support
One of the first steps to achieving financial independence is living on your own. This means not relying on parents, friends, or family for financial assistance or support. Removing this financial lifeline means getting your apartment, paying for groceries, and funding your lifestyle.
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Become Debt Free
With the bank of Mom and Dad gone, you might think you have achieved financial independence only to realize you are relying on a new funding source, credit cards. At the same time, the weight of paying off student loans or consumer debt becomes readily apparent.
Depending on how well you are budgeting, racking up credit card debt happens quickly. The average credit card balance for a US household is over $5,000. Using credit cards for everyday purchases is now the norm, so you want to make sure you have the best credit card in your wallet.
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Personal finance experts advocate for becoming debt-free so that you can quickly increase your net worth and start investing excess funds that would have otherwise gone toward paying your credit card bills. Becoming debt free can be an inflection point in your personal finance journey and set you up for major financial success.
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Stop Living Paycheck to Paycheck
Whether you have debt or are debt-free, you may be trying to escape the reality of living paycheck to paycheck. It is easy to associate the paycheck-to-paycheck lifestyle with those who struggle to get by financially, but it affects those who earn high incomes too.
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Lifestyle creep, or a proportionate increase in spending associated with increased earnings, can erode your finances. Smart money habits are essential no matter how high your income. You can escape the paycheck-to-paycheck lifestyle by building up an emergency fund, slush fund, and investing in passive income.
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Adopt the FIRE Movement
Financial Independence Retire Early, or FIRE, is a financial community dedicated to living a lifestyle that accelerates financial success. For some, this means paying off debt quickly by slashing your expenses. Once you have accomplished becoming debt-free, the idea is to keep your expenses extremely low to save for early retirement as fast as possible.
There are different flavors of the FIRE movement, some of which advocate for early retirement altogether, others for only part-time employment while retiring from full-time work, and others who believe you can still live in the present with a heavy dose of saving for retirement.
Here are three different FIRE flavors:
- Lean Fire: Advocates follow a highly minimalist lifestyle to save most of their income, more than 50%, to achieve early retirement. You must maintain reduced spending relative to your income to reach lean fire.
- Fat Fire: These investors live a healthy spending lifestyle, enjoying the present, but are still hyper-focused on saving a substantial part of their income for retirement. They are a degree away from the lean FIRE savers.
- Barista Fire: If you were a Barista FIRE advocate, your mantra would be to save as much as you can now so that you only work part-time in the future. While these ultra-savers still have early retirement as their goal, they aim to shed full-time employment and instead work on topics they love to earn income.
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7 Steps to Become Financially Independent
Not planning for financial success will impede you from reaching your money goals. While you might enjoy the concept of investing for early retirement, you must put pen to paper and analyze how to reach your goals.
Everyone has a different starting point. Some investors don’t have to worry about credit card debt. Others have already paid off their student loans. No matter where you are in your financial journey, achieving financial independence is about growing your net worth and building income streams to support your lifestyle.
Here are seven steps to help you become financially independent:
1. Define Success
Knowing where you want to go is essential for financial success. Each person’s financial situation is different. Only you can define your financial success. What does financial independence look like to you?
Here are common financial goals:
- Financially supporting myself
- Become debt free
- Save a Slush Fund
- Work only part-time
- Live off passive income
- Retire by 57 years old
With the idea of what financial independence means to you, begin working backward to establish mini goals to bridge you to your larger financial goal.
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2. Set A Date
When working toward any financial goal, it is important to establish a target date for achieving your goal.
For example, if you want to start living exclusively off your passive income, you need to determine how much of your income you need to replace with a passive income stream. Then set a date to accomplish your goal. To help you reach your macro goal, break up your macro goals into micro goals.
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Let's look at a specific example. If you want to replace 70% of your disposable income with passive income, start building a portfolio that supplements 10% of your discretionary income. Set a timeframe to accomplish this micro goal (say three years). Once you accomplish this goal, build upon that goal, and set a goal of replacing 70% within ten years.
3. Create A Plan
Armored with your definition of financial independence, and when you want to achieve that success, the next step is to create a financial roadmap. Think strategically through what items you need to accomplish and in what order to align your actions with your financial goals.
Financial plans are malleable, so do not be too rigid in your approach. Knowing when to adjust your plan due to unexpected events will keep you on the right path in good and bad times. Whether an investment doesn’t work out or you 10X your investment funds, preserving on the right financial course only increases your odds of success.
4. Get Rid of Debt
One of the fastest ways to increase your net worth is to eliminate debt from your financial ecosystem. Making monthly debt payments eats away at the cash flow you could be saving and investing. If you rely on credit cards too much, you need to find a budget that works for your lifestyle.
Eliminating credit card debt, student loans, and other types of consumer debt may take some time. Becoming debt-free could even be the first domino in the series of micro goals on your path to achieving financial independence.
5. Cut Expenses
Every dollar matters. That is the mantra of someone trying to achieve financial independence. If you want to reach financial independence, you need to cut all your ancillary expenses and focus on saving and investing to reach financial freedom.
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Of course, simply cutting out your daily Starbucks is not going to get you there. Instead, you need to budget for success and allocate a job to every dollar coming in the door. Find creative ways to decrease your expenses and invest more money. Increasing your income can also help drive you to financial success. With more monthly cash flow, you can accelerate paying off debt, saving, and investing.
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6. Start Investing
To achieve financial independence, you must learn to invest in assets that can produce passive income streams, such as high-yielding dividend stocks, REITs, or multifamily real estate.
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Once you begin investing, it’s critical to understand when you want to achieve financial independence and how much you will need to retire. Whether your goal is to save a certain amount of money or produce an income stream to offset your income, knowing how much you can spend in retirement is equally important.
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7. Remain Persistent
There is a reason that most people don’t achieve financial independence early. You must plan for financial success and then lead a life dedicated to achieving your goals. While it is not for everyone, with persistence, diligence, and commitment, anyone can achieve financial independence.
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Most savers never reach financial independence simply because they didn’t start with that goal in mind. The commitment to live your life in pursuit of this accomplishment requires a high degree of conviction. If you are like most super savers, the challenge to achieve financial independence is worth the price of admission.
Smart Summary
Achieving financial independence is a long-term goal that can help you adopt smart money habits. With the right amount of determination, planning, and patience, anyone can achieve financial independence. With a side hustle or two, you can supplement your income and only take on projects you love and enjoy. The beauty of financial independence is that it represents the on-ramp to financial freedom.
