Take a moment to imagine that you:
- Know exactly what makes you happy and actively work towards experiencing your perfect life
- Love getting up in the morning and can’t wait to start your day
- Are passionate about what you do
- Have full control over how you spend your day
- Don’t feel like you’re missing out on your family and time with your children
- Have financial security and don’t worry about paying the bills or being able to retire
- Have the time, flexibility and finances to travel
Personally, I dream of the day when I can have complete flexibility in how I manage my schedule. I want to fit in fitness, family time including meal prep and creation, gardening and home management, as well as 20+ hours of dedicated work on my own business.
This is what financial independence is. It doesn’t have to mean early retirement, but it can if that is what you want. For me, it would mean decreasing my commute time to zero and work hours from 30-50 hours to just 20 hours a week.
You get to tailor your financial independence to mean anything you want. It is freedom from being required to work that W2 job in order to bring home a paycheck. Once you break free of that cycle, you get to choose how you spend your time. Every day, for the rest of your life.
Why wouldn’t you aim for financial independence?
Contents and Quick Links
Why financial independence is important
First, what is financial independence?
Financial independence and financial freedom are very similar. I think of financial independence as the first step to the full freedom of early retirement. There is a time before your passive income covers all of your living expenses, but you become comfortable enough to be free to make different choices.
Financial independence is freedom from being required to work a job you don’t love. If you quite today and didn’t have a paycheck for a few months, it would be okay. This could be money you have saved and can last for months to years. It could also be passive income streams you have that can be combined with savings to cover living expenses for awhile. Some people call this “F-You money”.
Once you reach this level of security, you get to say “f-you” to situations you don’t want to be in. You can leave the job that’s stressful and taking over your life because you have time to figure out a plan B.
Financial freedom is reached when you have enough in passive income to cover all of your monthly expenses and don’t need to worry about making money at all. This is early retirement.
While you may or may not to set the goal of financial freedom, achieving financial independence has a lot of benefits. Here’s a few:
- Financial independence allows you to pursue your passions.
- You have the freedom to spend time with the people you love
- Your decisions are not centered around finance
- It’s perfectly doable, regardless of whether you earn a low or high income
When financial independence isn’t right for you
With the four reasons alone listed above, why would you not want to set the goal of achieving financial independence? Perhaps if you are already passionate about what you do.
If you love your career so much that you can’t imagine taking time away from it, then you probably already feel like you are financially independent. In this case, all you need to do is save for the things that are important to you and plan for the day you eventually wish to retire.
Financial independence and happiness
I think it’s important to include the relationship between pursuing financial independence and your level of happiness and fulfillment.
Take a moment to do a little exercise:
Write a list of the top 10 things that make you happiest in life and are most important to you. You only get to list 10 things. Take as long as you need to really think it through and define what it is in your life that you want more of and brings you joy.
Were there any material things on your list like a car, boat or designer handbag?
Or is it time; how you spend your time and who you spend it with that is most important to you?
Life often gets in the way, the daily grind of working, commuting and going through the motions of your typical day. And we become stuck in an endless loop of repeating this that we forget to focus on our own happiness. But shouldn’t life be the pursuit of happiness?
Financial independence is tied to happiness because it provides the freedom of time. With more time you can go after the things that mean most to you and your family.
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How to achieve financial independence
While I already have an article on how to achieve financial independence (in just 7 simple steps), here is a quick rundown of the steps you can take to achieve FI.
Increase your savings rate
This is really the main step that will get you to financial independence.
The higher your savings rate, the faster you will achieve FI. In order to increase your savings you have to:
- Lower your monthly expenses
- Increase your income
Typically, your income eventually caps out and you can’t easily earn more money. This means that you need to focus on lowering your expenses.
And the lower your expenses, the less you need to become financially independent.
How to calculate your savings rate
Your savings rate is defined as the amount of money you save as a percentage of your income.
You can calculate your savings rate by dividing the total amount of money you saved last year by your annual income.
If you aren’t sure how much you are saving, or don’t want to count automatic contributions through your work, you can use the amount you have left over after your total expenses.
You can lower your expenses by first tracking your monthly spending and then creating a budget to help lower your expenses and stay on track.
How to Calculate Your Savings Rate – And Why You Need To
How To: Track Your Personal Finances
Pay down your debt
Particularly consumer and student loan debts that have higher interest rates. The faster you can pay these off, the faster you can save and invest to increase your net worth and passive income.
Build an emergency fund
The amount you need will vary by your personal comfort level. If you have a very secure job, or highly marketable skills, you won’t need as much of a financial cushion. Somewhere between 3-6 months is typical.
Save to invest
Once your emergency fund is taken care of and you have peace of mind that if you lost your job tomorrow you won’t be one bill away from financial disaster, it’s time to start saving that money to invest it. This way you can put your money to work for you.
Related reading: Pay Yourself First – The #1 Wealth Building Secret
Invest to generate passive income
There are many forms of investing and you get to choose the method that works best for you. I prefer investing in my own business and real estate, as well as low cost index funds with Vanguard.
Define your future financial goals
An important part of this whole process is to define your future goals and the life you want. Once you know where you’re headed, you can reverse engineer how much money you will need saved in order to achieve your personal version of financial independence. Then you can establish a plan to get there.
How To Define Your 10-Year Goals And Live Your Best Life
Financial independence has the power to free up your life so you can fill it with what is meaningful and important to you and your family. It’s not that difficult to achieve and you don’t need a high income or any special skills.
The gains are priceless: Freedom and independence. Happiness and fulfillment. Why wouldn’t you strive to achieve FI?
- If you haven’t already, start tracking your finances. Visit the Resource Library for a free workbook and worksheet to get started.
- If you don’t already have a budget, now’s the time to create one. Again, you will find the resources you need in the Resource Library and from this post on creating a budget.
- Work on paying off any debt you have. You can create your debt payoff plan here and find more tools in the Resource Library.
- Find ways to increase your savings rate. Try to increase your rate throughout the year and aim to reach a savings rate of 40%. You can find more detailed help on how to calculate your savings rate here.
- Start saving to build up your emergency fund.
- Once you have enough in your emergency fund, start saving to invest. Learn about my favorite method of investing (and how you can get started with very little money) here.
- Then you can put your money to work and start earning passive income.
- Now you are on your way to financial independence!
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