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How to Achieve Financial Independence

Being financially independent means your investments and other income sources are sufficient to fund your lifestyle indefinitely, allowing you to live on your terms.

Most people aim for financial retirement after achieving financial security in the financial wellness stages. However, you are not like most people.

You don’t want to wait for the conventional retirement age. You want to retire much sooner than 70. You desire to reach financial independence.

Let me start by saying there really isn’t one definition for financial independence. Some would say financial independence means you have sufficient assets as sources of income to support your lifestyle. I define it as having the “right” amount of wealth to no longer be dependent on a job for income to pay for living expenses.

It sounds like retirement, but the main difference is when you get to live off your wealth.

What is Financial Independence?

Financial independence means having enough income to pay your living expenses indefinitely without the need to work for a paycheck. Many achieve financial independence later in life through traditional retirement using 401(k)s, IRAs, pensions, and Social Security benefits. And some achieve financial independence through an intentional and deliberate saving and investing plan.

Financial independence is reached when you have enough money to cover your basic needs and some luxuries. Expenses are paid from savings accounts, income generated from assets or investments, and some work. Basically, you must have sufficient wealth to live without depending on a job. The sign of financial independence is that working is a choice, not a requirement.

Core Aspects of Financial Independence

  • Strategic asset allocation
  • Effective tax planning
  • Sustainable withdrawal strategies
  • Lifestyle adjustments for long-term sustainability

Achieving financial independence requires preparation and the ability to adapt your financial strategy to changing conditions and personal circumstances.

Assess Your Financial Independence

At this stage, you have answers to:

  • Do you have diverse sources of passive income that can reliably cover your expenses?
  • Have you developed a portfolio that supports both growth and income?
  • Are your financial plans optimized for tax efficiency?
  • How can you maximize returns while minimizing risks in your investment portfolio?
  • Do you know how to manage your expenses to avoid depleting your investments prematurely?
  • What is the safe withdrawal rate from your investments?
  • How can you adjust your lifestyle to ensure your expenses remain within your passive income?

Being financially independent means your investments and other income sources are sufficient to fund your lifestyle indefinitely, allowing you to live on your terms.

Why is Financial Independence Important?

Reaching financial independence is crucial because it offers the ultimate freedom to choose how you spend your time. Whether pursuing passions, volunteering, traveling, or simply enjoying a less stressful life, financial independence allows you to make these choices without financial constraints.

This level of financial autonomy also provides significant psychological benefits, such as reduced stress and increased personal satisfaction, knowing that you are not financially dependent on a job or other external sources.

Whether you retire early because you are financially independent or retire in your 70s, you want to retire well. The steps needed to achieve financial independence are similar to traditional retirement. The only difference is an accelerated timeline and a big lofty goal. With FI, the main areas of focus are expense reduction and extreme savings and strategic investments


Steps to Achieve Financial Independence

Financial independence is for everyone. The path involves several crucial strategies:

Step 1: Calculate Your FI Number

You’ll need to calculate your financial independence number. Your FI number is the amount of money needed to be able to pay for expenses without depleting your savings or investments. Basically, once you have the amount of money saved/invested equal to your financial independence number, you can call yourself financially independent.

How much money do you need to achieve your FI goals?

Use the rule of 25 which states you’re ready to retire when you’ve saved 25 times your planned annual spending. For example, your annual spending is $50,000, then you’ll need $1,250,000 ($50,000×25) saved.

To get your FI number, look at your desired spending, and multiply that by 25.

Financial Independence Number = Yearly Spending x 25

There are some things to consider such as housing which is a big expense for many. Paying off a mortgage or downsizing can lower your FI number.

Step 2: Shift Your Mindset

Mindset is everything. In order to achieve what many believe is impossible, you must shift your thinking about what is possible. There are four key areas:

Challenge your lifestyle choices: Most often, we live lives we don’t want simply because we’ve made unconscious lifestyle choices. It’s time to reassess your purchasing habits and the choices you’ve made so you can choose differently.

Answer the following:

  • Would you make different choices if it meant you could work less?
  • Would you change your lifestyle if it meant you could quit a high-paying job you hate to find a lower-paying one you’d love?
  • Would you go to extreme cost-cutting if it meant you could save and invest more?

Lowering your expenses: There is a dual benefit to lowering your expenses and spending less: 1) the lower your expenses the more money you save and 2) having smaller lifestyle expenses means the money you actually need to save is lower. For example, if your lifestyle costs $100,000 a year, then you’ll need $1,000,000 to be independent for 10 years. If you’re lifestyle costs $50,000, then you have 20 years.

Accepting retirement is a financial number: We’ve been programmed to believe we need to work up until we get our Social Security check. While that has been the norm, you can retire early by achieving financial independence. Once you’ve calculated your FI number, you now have a goal to work towards. And it will take dedication and hustle to reach it sooner rather than later.

Step 2: Have a Safety Net

Achieving financial independence focuses on investing in the stock market. That can mean riding the waves of volatility and keeping yourself from taking money out of the market to cover expenses.

This requires creating a cash reserve, which is 24 months of basic living expenses saved in either high-yield savings account or in certificates of deposits (CDs). You can use CD laddering to earn a bit more while the money sits in the account.

Remember, a cash reserve is your safety net. It’s your “much bigger” emergency fund that will help you cover living expenses when the stock market is down. While some “gurus” will tell you how foolish it is to have 24 months of living expenses sitting in a savings account, the goal isn’t to maximize returns on this cash reserve. It’s to give you peace of mind.

Step 3: Eliminate Debt

Your path to FI requires debt elimination. Why? Debt is an obligation. Having debt allocates more of your time to work rather than fun. The goal is to decrease monthly expenses by eliminating monthly debt payments. Sure there are further discussions needed regarding paying off mortgages and using leverage to create wealth. But for the vast majority of people, reducing the amount of debt fast tracks your progress.

Step 4: Diversify and Multiply Your Income Streams

Having multiple income streams can support financial wellbeing. It’s essential to have diversified income so you’re not dependent on one source. Cultivate various sources of passive income such as dividends, rental properties, or side businesses to ensure a steady flow of income without active work.

You can certainly achieve financial independence with your investments, but ideally, a variety of sources will give you more freedom.

If your income streams (excluding your work income) cover your living expenses, then you can consider yourself financially independent because your choosing to work. You’ve made work optiona. A great book to understand this concept is Work Optional by Tanja Hester (get on Amazon | listen on Audible).

Step 5: Invest Strategically

Create a robust investment portfolio that balances growth with income, focusing on long-term returns and capital preservation.

Buy appreciating and income-generating assets: The stock market has a historically long-term track record of growth and is used by many financially independent people to build wealth. Use every dollar towards buying these assets. Learn how to invest in the stock market.

Passively invest in index funds: Choosing index funds may be the better option for most people. Index funds or exchange-traded funds (ETFs) allow you to purchase many companies trading in the stock market in a single transaction. You don’t have to figure out which individual stock to buy.

Take advantage of employer benefits: If you work for a publicly traded company, inquire with your HR about employee benefits such as stock purchase programs, stock options, and RSUs. These allow you to own stocks at discounted prices.

Stay consistent and keep investing: It can be challenging to invest when the market is down but often that can be a time for buying at a discount. When you automate investing and remain consistent you can benefit from dollar-cost averaging and accumulate wealth long term.

Use your employer-sponsored retirement plan: Participate in your company’s 401(k) or similar plans. Many offer matching dollars which is extra money that adds to reaching your FI number.

Step 6: Minimize Taxes

Structure your investments and withdrawals to minimize tax liabilities, maximizing the money available for your use.

You won’t escape taxes so plan to minimize your tax liability. Factor taxes into your financial independence planning. Use tax-advantaged accounts available with Roth IRAs being the better alternative. There are IRS limits to tax-advantaged accounts but if eligible should be part of your plan.

Since you don’t take a tax deduction for Roth IRA contributions (after-tax income), those contributions and their investment earnings grow tax-free. In fact, the IRS gets no cut when you take your contributions back out, and you can do that at any time, at any age. This is especially important for people reaching financial independence before 59½, the typical age for accessing retirement accounts without a penalty.

Step 7: Know How Much You Can Withdraw

Once you’ve reached your FI number, you’ll need to know how much you can safely withdraw.

Get to know the 4% rule which says you can safely withdraw 4% of the value of your investments during your first year of financial independence. During the following years, you can withdraw the same dollar amount adjusted for inflation.

Financial Independence Number x Safe Withdrawal Rate = Annual Safe Withdrawal Amount

For example, if your FI Number is $1,000,000, then you’d multiply that by 4% or 0.04.

$1,000,000 x 0.04 = $40,000

In this example, you can safely withdraw $40,000 annually and feel secure that your investments will last you indefinitely. Now, if you need more to live on, your FI Number needs to be higher.

Step 8: Lifestyle Management

Adjust your spending habits and lifestyle choices to align with your passive income, ensuring that you live within your means without compromising the quality of life.

One thing you’ll experience once you’ve reached FI is your perspective on living. Sometimes it means you need less or you might find yourself wanting a bit more.

Remain mindful of lifestyle creep and lifestyle inflation while living financially independent. You don’t want to risk losing your independence because your lifestyle has inflated.

Something to keep in mind: Just because you’ve reached FI doesn’t mean you need to stop working or it means never earning income. There are many FI people who continue to earn money so they can keep contributing to their investments and also spend a bit more.

Conclusion

I want to add that anything can happen. Financial independence is a great goal but life priorities shift and the world changes. Be flexible with yourself and continue to assess your values. I know of FI people who ran out of money through no fault of their own. These things happen. You can plan all you want but there are some things you can’t control. The important thing I’ve learned is to continue to grow your skills, learn new things, have better experiences, continue to grow your network, and be open to earning income with the right opportunities.

Continuing Your Financial Education

Financial education is vital for remaining financially independent.

  1. Continue reading our articles.
  2. Grab a copy of the financial wellness books.
  3. Enroll in the free 7-day financial wellness kickstart email series.

Do you need access to online brokerages and money apps? Visit the financial marketplace to discover the right financial tools.

What steps will you take next to ensure your financial independence remains secure?

Next Stage: Financial Freedom

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