The term “financial independence” screams of freedom from both the daily grind and the stress of divvying up weekly paychecks. Of course what being financially independent really means is your assets provide enough to cover all of your expenses without having to work. What you already have invested and saved or what you generate in new income without a job is enough to live on perpetually.
Here are steps for achieving financial independence, no matter what age you retire.
Have a Plan and Stick to It
Becoming financially independent means you’ll need to have a road map for how to get there. Failing to prepare and simply hoping you’ll get there someday is rarely the path that works out the best.
Having a plan means figuring out how much you’ll need to retire and then determining how you’ll hit that goal on a weekly, monthly, and yearly basis. This means keeping some sort of a budget and tracking where your money goes. Being methodical about how every dollar is spent, saved, or invested is crucial for staying on track.
To determine how much you’ll need in the bank to retire, make some calculations to get at least a rough idea for getting on the right track. A simple calculation based on another expert recommendation puts the sum at roughly 11 times your final salary in the bank.
Start Investing Early
With investments, time is only on your side when you start early. Compounding returns are a powerful part of retirement plans and investments, but you’ll need decades to take the greatest advantage. Just to give an idea:
- An investment of $20,000 at age 30 at a 8% annual return would provide about $296,000 by age 65.
- The same investment at age 40? You’ll only have $137,000 when you’re ready to retire at 65. That’s less than half the amount just by waiting ten years longer!
Simply put: making up for lost time means investing a lot more money. You can test out scenarios for yourself using a simple compound interest calculator to get an idea for your own case.
Choosing the right investment certainly matters, too. While there are lots of different strategies to choose from, an investment option that’s low in fees will help ensure that you’re not tossing money out that could be contributing to your bottom line.
Of course, dividend investing is a popular strategy, too, especially among those who no longer work and choose to live off the dividends from stocks they hold.
Pay Off Debt – And Avoid Taking on More
Avoiding debt whenever possible is crucial for financial independence. While loans can be leveraged to build assets and provide greater wealth-growing potential, going into debt also means buying something we can’t afford to pay cash for.
In typical American life, this is a home, a car, an education, or consumer goods. Sure, some of these things are important to life, but those who become financially independent make sacrifices rather than always seeking more and better stuff to fill their lives with. They buy less house and pay it off in 10 years instead of 30, or they buy a car and drive it until it won’t run anymore a dozen years later. Large purchases all factor in to the big picture.
For many millionaires, being frugal is part of the formula. Despite some misconceptions, it’s not all about living in giant houses and driving fancy cars. There are plenty examples featured in The Millionaire Next Door by William Danko and Thomas Stanley that show how many millionaires achieve their status by avoiding spending the way much of America does.
Taking frugality to the extreme is not out the question. Think decisions like:
- Driving used, paid-off cars, and owning just one car per family
- Living in a smaller home
- Minimizing interest on debt
- Canceling cable TV and cell phone plans
- Avoiding eating out
- Shopping for used clothing
None of these ideas are easy or fun. But to get ahead, you need to stop striving for average, and look at your life and figure out how you can do more. If you’re able to live on less, you’ll potentially become financially independent sooner.
Look to Streams of Income the Wealthy Utilize
A job isn’t the only way to bring in money. Many who become financially independent have other sources of income and oftentimes more than one. These can include:
- Rental properties
- Dividends from stocks
- Interest from bank accounts
- Royalties from books or other creative works
- Business income
Several of these options provide tax benefits over income earned as salary, too.
Focusing on diversifying your income streams means you’ll be able to bring in more, especially if these sources are “passive” and don’t require you to exchange your time for money. The wealthy focus on building real assets that give them a return on their money, not things that simply depreciate over time or provide little return on investment. To really get ahead, it’s about thinking big and factoring everything into the larger picture, even if it means taking a less conventional path to get there.