Financial Independence: 5 Steps to Achieve It

Imagine waking up every morning with the freedom to pursue your passions, without the looming worry of financial constraints. This isn’t just a pipe dream—it’s the reality of financial independence. Picture a life where your investments work tirelessly for you, providing a steady income that covers your needs, and you have the liberty to work on your terms. This article delves into the true essence of financial independence, debunking myths and offering a clear roadmap to achieve it. Whether you aspire to escape the paycheck-to-paycheck grind or desire a life where you control your time and money, the journey to financial independence begins with a mindset shift and practical steps. Ready to transform your financial future? Let’s dive in.

Definition

By definition financial independence is “a state where you no longer need to work for money and can live comfortably on your investments and savings”

Explanation of Concept and Importance

The definition above needs some clarification before embarking on the journey of financial independence. First and foremost, “no longer need to work” does not mean you will become a couch potato, sitting and watching TV or spending time on social media while considering yourself lucky because your money is working for you. On the contrary, most people who have achieved financial independence never truly retire. A perfect example is Robert Kiyosaki, who retired at the age of 47 but never stopped working.

“No longer need to work” means that a financially independent person has a choice. They can opt not to work if they want, as they have their money working for them. However, because financially independent individuals have worked so hard to attain their current state of financial freedom, they often love to keep going and continue working. The only difference now is that the work they do is of their choice, on their terms, and to their liking. They have little or no fear of losing their job.

The second aspect of this definition is living comfortably. Financially independent people don’t necessarily live lavish lives with big houses, expensive cars, and constant travel. It means not overworking to make end meet, not worrying about financing the basic needs and free from constant worry about money. Its about having a sense of peace and contentment regarding one’s financial situation.

The last aspect of this definition is saving and investment. A person working towards financial independence is well-versed in investment. They understand that no matter how much you earn, it’s not the earnings alone that make you financially independent. It’s the savings, carefully invested, that make the difference between a financially independent person and one who is not financially independent.

Steps to Achieve Financial Independence

Step 1: Change Your Mindset

Let’s debunk a myth right off the bat – achieving financial independence isn’t a far-off dream, it’s a tangible reality. But the journey doesn’t start with crunching numbers or making savvy investments. It begins within you – with a shift in mindset.

I’ve had the privilege of speaking to numerous individuals who’ve tasted the sweet fruit of partial or complete financial independence. When asked what sparked their pursuit of financial freedom, their responses were intriguing. It wasn’t about choosing the right asset class for investment, nor was it about calculating a magic number that would unlock their financial freedom. It was something far more profound – a change in mindset.

There comes a moment in life when you say, ‘Enough is enough.’ The constant cycle of living paycheck to paycheck, the gnawing fear of not having sufficient funds to live the life you’ve always dreamed of, or the dread of not having an emergency fund for unexpected expenses – these experiences compel you to take a hard look at your financial situation.

It’s a desire for change, a yearning for control over personal finances, a wish to break free from the relentless rat race, and above all, a determination to do something about it. That’s the real catalyst for the journey towards financial independence.

Step 2: Determining Your Financial Independence Number

The second step in achieving financial freedom is determining a number that covers all your routine monthly expenses, excluding your emergency fund. Let’s break it down with an example.

Below is a sample breakdown of essential monthly expenses for an average American household:

This number represents the amount you need to achieve financial independence. It’s the amount you work nine to five to earn. If you had this amount at the start of each month, you could focus on things beyond money.

This figure will vary from person to person since everyone’s situation is different. However, some items, such as housing, food, and transportation, will remain constant whether you are married or single. Everyone aiming for financial independence should calculate this number, as all future steps revolve around it.

Remember, this number does not include emergency funds. You can plan for housing, food, transportation, or insurance expenses, but emergencies are unpredictable. Keep your emergency fund separate from this calculation.

Step 3: Choose the Right Asset Class

After reprogramming your mindset for financial independence and carefully estimating your financial independence number, the third crucial step is to select the asset class that will generate your desired monthly income.

The table below shows different asset classes and their potential returns in the U.S.:

For instance, if you need $6,000 per month, you would require about $1.5 million invested in rental real estate or $750,000 in index funds at an 8% annual return.

Step 4: Optimize Your Financial Triangle

Achieving financial independence is akin to mastering the art of balancing a three-sided scale: income, expenses, and savings. These three elements form the cornerstone of what I like to call the ‘Financial Triangle.’ It’s the strategic manipulation of these factors that can lead to the accumulation of an investment nest egg capable of generating returns sufficient to cover your monthly expenses.

There are countless strategies to tweak this triangle to your advantage. Some advocate for a steady income approach, advising you to minimize expenses and maximize savings. Others suggest prioritizing savings, then investing any surplus funds. However, it’s crucial to recognize that wealth accumulation is not a one-size-fits-all journey. Each individual has unique strengths—some excel at generating income, others are adept savers, while some have a knack for cutting costs. Yet, a common thread among those who have achieved financial freedom is their commitment to investing and establishing a passive income stream that liberates them from monetary concerns.

I advocate for what I call a ‘reverse engineering’ approach to financial planning. This method starts with the end goal in mind: investment. To invest, you need savings; and to save, your income must exceed your expenses. Therefore, the most critical step towards saving more is earning more. If you’re currently living paycheck to paycheck with little left over for savings, you’re not alone—many find themselves in this situation. The key question is: are you actively seeking ways to increase your earnings? Whether it’s acquiring new skills or starting a side hustle, taking proactive steps towards enhancing your income is pivotal on the path to financial freedom.

Remember, earning more is just part of the equation; cultivating habits of saving and investing are equally important. If you’re wondering where to begin, my advice is straightforward: focus on increasing your earnings first, then channel those extra funds into savings and smart investments. This approach will set you on a firm course towards achieving your financial goals.

Step 5: Create a Financial Plan

Antoine de Saint-Exupéry famously said, “A goal without a plan is just a wish.” The key to transforming that wish into reality is taking deliberate, strategic action today. If you’re serious about financial independence, take action with these four steps:

1. Project Your Expenses: Estimate your long-term expenses.
2. Determine Your Investment Needs: Identify how much you need to invest to cover those expenses.
3. Choose the Right Assets: Decide which investments align with your risk tolerance and financial goals.
4. Optimize Your Financial Triangle: Balance income, expenses, and savings strategically.

Financial independence is achievable with the right mindset and a solid plan. Don’t wait – start today and take control of your financial future. The sooner you act, the closer you are to financial freedom!