According to Investopedia, financial independence refers to an individual’s financial ability to maintain his/her standard of living without having to rely on income earned through employment. It typically occurs when savings and investments generate income that exceeds annual expenses by a large enough margin that the individual can live off the excess income, typically in perpetuity. You may be asking, what does it take to become financially independent? How much money do you need in your bank account? How much time do you need to achieve this goal? Keep reading to learn more about achieving financial independence and how much it really takes!
Know How Much Money You Need
The first step toward financial independence is knowing how much money you need. Experts disagree about what that number should be, but for most people, it’s a far cry from what they have now. If you can live on 80% of your current income and save 20%, you should have a comfortable cushion when retirement rolls around. You’ll likely need more than if you spend all your income and don’t save anything for retirement. You may even find that saving 50% of your income puts you in good financial standing in retirement, although experts are split on whether having an emergency fund with three months’ worth of expenses is necessary or not.
Calculate How Much Income You Need
If you want to find out how much you need to live, there are plenty of calculators online that can help. However, it's much more accurate to calculate how much you can invest per year and do the math. To find out that, you need to make some assumptions firstly, let's say you want a $1 million portfolio and secondly, you're willing to withdraw 4% of that every year. Some planners prefer different withdrawal rates, but for the sake of simplicity, we'll use 4%. If you are withdrawing money at the average rate, you will have around $40,000 of money available to spend each year. After you pay taxes (about 30% of all your taxable income) that leaves $26,800.
Assess Your Current Situation
The important step to becoming financially independent is assessing your current situation. In order to do that, you’ll need a complete view of all your financial accounts and debts. List out all of your assets (savings, investments) and liabilities (loans, credit card debt). Include all sources of income as well as monthly bills. Then, get a clear picture of how much money you are bringing in each month and what you're spending that money on. It's important not only to note fixed expenses like rent or mortgage payments but also variable ones like food, entertainment and gas costs. If there are ways to reduce spending on non-essential items or up your income so you're earning more per month - don't be afraid to take them!
Establish Short-Term Goals
To make a plan for long-term financial independence, you’ll need to first establish some short-term goals. For example, are you saving up for a down payment on a house, or do you want an emergency fund that covers at least six months of expenses? Once you set these goals, then your long-term financial independence will be within reach. While building financial security takes time, it’s far from impossible; follow these steps and create a plan for your future!
Adjust Your Plans Based on Reality
The key is to adjust your plans based on reality. For example, if you’re going to be taking a lower salary in exchange for equity, don’t forget that equity is risky. If things don’t go well at your startup, that equity could quickly become worthless. It might feel good right now to be telling everyone you meet about how you’ll soon be financially independent — but if things fall apart and that money isn’t there when you need it, how long do you think you can wait before talking about something else? It turns out many people who intend for early retirement (whether partial or complete) face difficult situations such as relationship problems or career frustrations.
Use Technology to Make Saving Money Easier
If you're struggling to save money, then don't fight your desires to spend money. Instead, take advantage of digital technology and use an app to help you save. As a personal example, these are three of my favorite apps that make saving money easier: Acorns is an investment app that rounds up your purchase transactions to $1 and then invests any leftover change in exchange-traded funds. It's free and takes less than a minute to set up.
Find Other Ways To Increase Your Income
Those who are looking for other ways to increase their income and become financially independent, start by identifying your sources of income. If you are currently employed, or even self-employed, you can find many methods that help you increase your income. Some businesses have ways of increasing profits and others get boosts in consumer spending by introducing special sales. However, when looking at different avenues that may help grow your business, remember not to spread yourself too thin. You will want to consider each new venture separately so that you don’t end up losing money instead of making it!
Track your Progress Closely – and Don’t Give Up!
Financial independence, or FI as it’s often called, is a lofty goal. Not only will you need a lot of money saved up, but you’ll also need an incredibly disciplined spending habit and an eye on your current expenses—and those that may come your way down the road. It’s hard to imagine pulling together enough resources and keeping your eyes open for all possible expense avenues. But once you know where you stand, taking one small step toward financial independence every day (or month!) can get you there in no time! Just keep in mind that getting financially independent is like any other goal: if you stop caring about getting there, then chances are good that it'll never happen. Track your progress closely and don't give up!
Conclusion
The kind of society we live in today puts pressure on people to make money quickly. Credit card companies, investment firms, and shady get-rich-quick programs constantly bombard us with messages telling us we can be rich, but only if we can muster up the cash. But what if I told you there was a different way?
