Financial independence is a topic that has gained increasing attention in recent years. The ability to live life on your own terms, free from the constraints of financial stress and dependence on others, is something that many people strive for. Add that to an internet full of people living the financially independent dream, or at least pretending to, and the idea that being born rich isn’t the only path to financial independence and you have a sizable movement. But achieving financial independence is not just about having money, it’s about having the freedom to live life on your terms.
How To Achieve Financial Independence
Tl:dr – Live below your means. Invest the difference. Keep doing it until you are financially independent.
The first step in achieving financial independence is to set clear financial goals. This means identifying what you want to achieve financially and creating a plan to get there. Setting financial goals is essential because it gives you something to work towards and helps you stay focused and motivated, not what everyone else is trying to accomplish.
One key goal to consider when working towards financial independence is creating an emergency fund. An emergency fund is a savings account that is set aside for unexpected expenses. It’s important to have an emergency fund because it provides a safety net in case of unexpected expenses such as medical bills, car repairs, or job loss. A good rule of thumb is to have at least three to six months of expenses saved in an emergency fund. Start by filling up a Roth IRA with your maximum contribution limit. Contributions to Roth accounts can be withdrawn at any time without penalty. Once you have more than the annual maximum, start filling up a high-yield savings account.
Debt Blocks Financial Independence
Another important goal to consider is reducing debt. Elevated levels of debt can be a big hindrance to achieving financial independence. Credit card debt, student loans, and car loans can all add up quickly and can be difficult to pay off. By reducing debt, you free up money that can be used to invest or save for other financial goals.
Next, you’re gonna need a budget. A budget is a plan that outlines how much money you have coming in and going out each month. A budget helps you understand where your money is going and where you can make changes to reduce expenses and increase investments. A budget also allows you to prioritize your spending so that you are living the life you want while you wait to become financially independent.
Investing In Financial Independence
Although not often thought of in that way, retirement planning is the same thing as planning for financial independence. It’s just that the government may have some say in when that is exactly. A retirement plan and achieving financial independence both involve having enough money to never have to work again. (You CAN work, you just don’t NEED to.)
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Investing your money allows it to grow over time, which can provide you with a source of passive income that can help you reach your financial goals. Diversification is an important principle of investing. Diversifying your portfolio means investing in a variety of different types of investments. This reduces risk by spreading your money across different types of investments. Often in the economy, when one asset class is falling, another is rising, and vice versa. A diversified portfolio that is periodically reinvested is the key to long-term success.
Early Retirement, or Financial Independence Before 65, whichever one you prefer.
Before you say goodbye to the working world, you also need to figure out how to get healthcare. Retirees 65 and older can use Medicare (if they didn’t vote for politicians who cut it too often). Younger Americans will need to be more creative, especially those with chronic conditions that require ongoing maintenance.
It’s important to start investing early. The earlier you start investing, the more time your money has to grow. The power of compound interest means that the longer you invest, the more your money will grow, but compound interest needs time to have a large enough effect to allow you to stop working.
How do you know when you get there?
Financial independence can mean very different things to different people. For one, living life in an RV, driving around the country, and helping manage campgrounds for a free place to stay, is a dream come true. To someone hoping for a beach house to read away the days while travelling around the world, that same dream might be a nightmare. They require vastly different amounts of assets.
The easiest thumbnail measurement is that when you can withdraw 4% per year and achieve your goals, you have enough money to never run out in your lifetime. Older financially independent people may be able to take a higher annual withdrawal rate, as can those who plan to keep working for whatever reason.
Achieving financial independence is not just about having enough money. It is about having the freedom to live life on your terms. Achieving financial independence is a journey that takes time, patience, and consistency, and you better start now if you are going to get there.
About The Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please note that such material is not updated regularly and some of information may not be current. Consult with your own financial professional when making decisions regarding your financial or investment options.