Becoming financially independent is a goal that many people share.
Especially after COVID-19, it is no secret that more and more people are looking for ways to:
- Find security
- Find peace-of-mind
- Find financial freedom
The good news is that you can start your financial independence plan today with my 7 proven strategies.
Let’s dive right in!
What Does Financial Independence Mean?
Financial independence is when you have enough money saved and invested to support your basic living expenses for the rest of your life – without having to work for a living. Achieving financial independence is when you’re able to do whatever you want without worrying about money.
As you can see, achieving financial independence could be synonymous with freedom.
You have the choice to do whatever you want to do – without worrying about how money could impact your plans.
Financial independence could be split into 3 main categories:
- FIRE
- Fat FIRE
- Lean FIRE
Here is a brief example of what each FIRE movement means:
| FIRE Movement | Definition |
|---|---|
|
FIRE |
You’re not spending money on things that don’t matter both during pre-retirement and post-retirement. |
|
Fat FIRE |
Living on a large budget both pre-retirement and post-retirement. |
|
Lean FIRE |
Living on a small budget both pre-retirement and post-retirement. |
Now, take a look at the chart below:
As you can see, the amount of money you need to save to be financially independent totally depends on your lifestyle choices.
However, most people who have joined the FIRE movement would prefer to retire later in life and live more comfortably than retiring earlier and living on less.
Most people aiming to join the FIRE movement, are looking to retire early with assets between $500,000 to $2MM in net worth.
Ultimately, the younger you are when you start investing, the more likely you’ll achieve financial independence early on.
How to Become Financially Independent
Now that you know the definition of financial independence, let’s take a look at the steps you need to take that to become financially independent.
1. Ignore the Joneses
Keeping up with the Joneses is a losing battle.
The proverbial “Joneses” is the family that:
- Drives the latest cars
- Lives in the biggest home
- Takes the nicest vacations
- Buys the hottest tech gadgets
Stop competing and stop trying to buy the most expensive items.
Achieving financial independence has to do with spending less than you earn.
One of the fastest ways to fight the “Jones Syndrome” is to create a budget.
A budget is a millionaire planning tool.
Budgets help make your dream life a reality.
Budgets are awesome planning tools because:
- They help you accomplish your goals
- They shed light on your spending habits
- They improve your money management
- They help you gain control of your money
One of the highest-rated budgeting tools is known as YNAB (aka You Need A Budget) 👇
YNAB is software that’s 100% dedicated to your budget and was actually developed by a CPA (a Certified Public Accountant) for his new family to stay on track with spending.
The YNAB app has become so successful, that it’s helped new YNABers save on average:
- $600 in their first 2 months
- $6,000 in their first year
Take a look at my comprehensive YNAB Review to learn more about the budgeting app.
When you stop competing with the Joneses, you’ll be the winner.
2. Increase Your Savings Rate
An important lesson that I’ve learned is that income does not equal wealth.
Income does not equal wealth.
In fact, I’ve met a couple (a lawyer and his wife) who earn $900,000 per year, are in their late 60’s, and they will have to work for the rest of their lives because they have saved only $100,000 over their lifetime.
On the other hand, I’ve seen assistants earning $50,000 a year who managed to save and invest over $200,000 in just a few years.
To become financially independent, you need to increase your savings rate.
In this case, the average rule of thumb is to save between 10% to 20% of income.
If you want to achieve financial independence, you should aim to save at minimum 50% or more of your income.
In fact, if your savings rate is 50%+, studies suggest that you’re more likely than other groups to become financially independent.
I’m saving (and investing) just over 70% of my income – and I still feel like I can be doing a better job by increasing my savings rate to 80%.
You’ll want to keep about 3 to 6 months’ worth of living expenses in cash in an emergency savings fund like Axos Bank 👇
Axos Bank offers a high-yield savings account, with no monthly maintenance fees and interest rates that are more than 6X higher than the national average.
3. Increase Your Monthly Income
You can save as much as you want, but at some point, you just won’t be able to save more money because you still need to pay for basic living expenses.
How much you can save is limited. How much you can earn is unlimited.
In this case, you’ll want to make more money.
Of course, you could always ask for a pay raise on your job… or you could also consider starting a side hustle.
Side hustles, especially after the COVID-19 pandemic, have peaked in popularity.
In fact, just over 1 in 3 Americans have a side hustle.
Source: Zapier
Not surprisingly, 31% of side hustlers started their extra gig in 2020.
What’s even better is that 61.1 million Americans plan to start a side hustle in 2021.
A recent survey shares that the average side hustle brings in about $1,122 per month.
Of the survey respondents making over $100 every month:
As you can see from the statistics above, achieving financial independence can be made a reality if you consider starting a side hustle.
Below I’ve compiled a list of side hustles for you:
| Side Hustle | Potential Monthly Income |
|---|---|
|
Blogging |
$1,000+ |
|
Twitter Affiliate Marketer |
$1,000+ |
|
Selling eBooks |
$500+ |
|
Food Delivery |
$600+ |
|
Online Surveys |
$50+ |
Note that while there are some very lucrative side hustle businesses (like blogging or affiliate marketing), you’re probably not going to start earning $1,000+ in month 1.
These side hustles ideas take time to build up before they have the potential to make money while you sleep.
And that’s totally ok.
Make sure you pursue a side hustle because you enjoy it – and not just because of the money.
4. Live a Lean Life
Becoming financially independent means you’ll probably have to sacrifice some of your daily luxuries.
If you’re looking to join the FIRE movement, you should start practicing frugal living habits and consider cutting out expenditures like:
- Eating out
- Buying the latest gadgets
- Traveling to hot vacation spots
- Spending money on high-interest debt
FIRE early retirement is not all roses and butterflies.
In fact, you’ll have to trim the fat and likely live a lean lifestyle.
Although most subscriptions typically don’t cost $100’s, the small, recurring charges can make a significant impact on your wallet at the end of the year.
In fact, forgotten subscriptions could cost you over $1,100 per year.
Forgotten subscriptions could cost you over $1,100 per year.
Source: Insider
The good news is that you can hire a service, known as Truebill, which will negotiate subscription costs on your behalf to a lower price.
The only time you pay is if Truebill successfully lowers your subscription expenses.
Below are some additional steps you can take to achieve financial independence:
- Stick to a budget
- Build a side hustle
- Avoid high-interest debt
- Max out retirement plans
- Invest in the stock market
Remember that the earlier you start pursuing your FIRE goals, the better off you’ll be in the future.
5. Pay off Debt ASAP
If you have high-interest debt, then you’ll want to get rid of that debt ASAP.
The billionaire Mark Cuban said it best:
"If you use a credit card, you don't want to be rich."
I agree with Mark.
If you use a credit card, then you’re essentially robbing your future self.
Although it’s ideal to pay off your credit card balance every month, there are times when you need to take on credit card debt, and paying that off is much easier said than done.
In cases like these, you do have options:
- Consider debt consolidation
- Consider a 0-balance transfer
- Pay off the credit card with the lowest balance first*
- Pay off the credit card with the highest interest rate first*
*While continuing making minimum payments toward your other credit cards, if you have any.
Debt consolidation may be an option for you if you’re struggling to make payments toward your credit card but are disciplined enough to not take on more credit card debt in the future.
The good news is that debt consolidation companies often give you lower interest rates, more favorable terms, and a better loan pay-off schedule than your original debtors.
One of the most popular debt consolidation platforms is called Upgrade 👇
Upgrade gives you a fixed rate and term with a clear pay-off date.
This can translate into savings while eliminating the surprises of high-interest rates that can change at any time.
The faster you pay off your high-interest debt, the faster you’ll reach financial independence.
Related: How to Get Out of Debt Fast
6. Use the Right Tools
If you walk into a professional hairdresser’s shop, you would expect them to use professional tools to cut your hair, right?
You wouldn’t expect a hairdresser to use plastic scissors to cut your hair.
The same goes for achieving financial independence.
The right financial tools can make or break your financial future, and that’s why I compiled a list of some of the best finance tools for you, below:
| Finance Tool | Situation |
|---|---|
|
You’re just starting your investment journey and you don’t have a lot of money to invest – yet |
|
|
You’re somewhat comfortable with investing and can afford to invest $100’s or even $1,000’s |
|
|
You want to receive the best investment advice from investment industry experts |
You can’t expect to become financially independent if you’re using the wrong tools.
7. Diversify Your Portfolio
If you already have:
- An emergency savings fund
- Paid off your high-interest debt
- Set up your investment account
- Invested in your employer-sponsored accounts
…Then you may want to consider investing in alternative investments.
Why?
Alternative investments could give you:
- Higher returns
- Exposure to other industries
- Potentially achieve financial independence earlier
Just keep in mind that although alternative investments offer high returns, they are also riskier than your traditional investments.
Alternative investments are risky, often volatile, and some may have you lock up your money for a long time.
The returns you receive from alternative investments could be worth the risk.
Below are some examples of proven and popular alternative investments:
| Alternative Investment | What it Does |
|---|---|
|
Invest in real estate for as little as $10 |
|
|
Invest in farmland |
|
|
Play the role of the bank by funding short-term loans |
|
|
Invest in multimillion-dollar paintings |
|
|
Invest in over 30+ cryptocurrencies |
It’s true that you can make a lot more money by investing in alternative assets over investing in the stock market.
Just remember that a high return also usually means there is a lot of risk involved.
If you’re OK taking more risk, then alternative investments may be the right next step for you.
Why is Financial Independence Important?
The goal of financial independence is to be in control of your finances and not live paycheck to paycheck.
You live life on your own terms, you don’t worry about money, and you escaped the proverbial 9 to 5 rat race.
Financial independence is when you have enough money to afford basic living expenses for the rest of your life.
The recent COVID-19 pandemic and the Great Recession of 2008 should have been blinding examples as to why you shouldn’t put all your income eggs in 1 basket (aka your job).
Companies will ruthlessly be watching their bottom line – and if that means they need to let you go to save money, then there’s a high chance you’ll be gone before you know it.
That’s why you owe it to yourself to build passive income streams today to secure your future income.
Financial Independence FAQs
How much money does it take to achieve financial independence?
For most people, achieving financial independence depends on how much money you’re planning to spend when you’re financially independent.
The typical Financial Independence number is between $500,000 to $2 million in net worth.
There is no right or wrong answer when it comes to which number is “the” financial independence number.
How do you get financial independence?
Below are the steps on how to achieve financial independence:
- Ignore the Joneses
- Increase your savings rate
- Increase your income with side hustles
- Live a Lean Life
- Pay off Debt ASAP
- Use the Right Finance Tools
- Diversify Your Income
Achieving financial independence depends on whether you’re willing to make the necessary sacrifices now to enjoy a better life down the road, tomorrow.
How can I be financially independent in 5 years?
There are several steps you can take today to achieve financial independence and join the FIRE movement in just 5 years:
- Pay off all debt
- Increase your income
- Save as much as possible
- Spend less than you earn
- Trim the excess spending
- Invest as much as possible
To join the FIRE early retirement movement and to achieve financial independence in 5 years is going to take a lot of hard work.
The journey won’t be easy and there will be times where you’ll want to throw in the towel and walk away from such a frugal lifestyle.
Stay focused on your long-term goal, and you’ll see the results soon enough.
How do you get financial independence at 18?
Achieving financial independence at 18 won’t be easy, but it’s doable if you follow some of the steps outlined below:
- Stick to a budget
- Manage your money
- Pay off all debt ASAP
- Get a good paying job
- Stay focused in school
- Develop excellent habits
- Spend less than you earn
- Invest as early as possible
- Network with your teachers
- Build an emergency savings fund
It’s not easy to achieve financial independence at 18, and you’ll have to sacrifice a lot to get there – and you’ll probably be mocked or made fun of by your peers.
Just remember that if you take the necessary steps today, you’ll be living the life of your dreams tomorrow – and joining the FIRE movement may not be too far out of your reach.
Closing Thoughts
Becoming financially independent is not easy and it certainly will take a lot of patience.
Financial Independence is living a few years like most people won’t so you can live like other people can’t.
Achieving financial independence will take:
- Sacrifice
- Discipline
- Determination
- A long-term mindset
You’ll probably have to give up several luxuries in life – like buying cool clothes, going on fancy vacations, or buying luxury cars.
But once you have achieved financial independence, you’ll no longer have to:
- Work a job you hate
- Work with people you hate
- Constantly worry about money
If living a life without money worries sounds like the ideal life for you, then you’ll know that the sacrifice you make today will be worth it.
Start today, because your bank accounts will thank me tomorrow.
Do you plan on becoming financially independent? Let me know your thoughts in the comments section below!
