What Is Financial Independence and How Do You Achieve It?
- Financial = money = acquiring what is needed
- Independence = not being dependent = freedom
Why do you need money?
- To buy what you need. Secondly,
- If you sell your time for money, to take back control of your time.
Why do you need to be independent?
To relieve yourself from the burden of actively producing money, and free yourself to pursue whatever you desire.
1. Financial Independence: Not black and white.
Financial independence is positive cash flow from a collection of passive assets, which gives you the freedom to pursue other things in life than work.
The higher the cash flow compared to your financial needs, the more financially independent you are.
If you are able to work only 20 hours a week and live the lifestyle you want, then you can consider yourself to be 50% financially independent.
Financial independence is not a fixed target, it is a journey.
There are no rules as to what percentage of your needs your financial independence pays for. For some this can be 200% for others it is 10%. If it is anything above 1%, congrats you have started your financial independence journey
2. Financial Independence: Preparing for your future financial needs
The needs of a 20 year old, are different from those of a 30 year old and 40 year old etc. Different needs mean a different lifestyle, which results in different expenses. Financial independence changes with time, that is why it is a journey rather than a destination.
See also: How to become rich?
3. Financial Independence: Bridging the financial gap between today and your future FI self.
First take stock of your: Skills, Earnings, Potential for side hustles and combine this with the rest of your life; Age, Family commitments, Savings, Assets, Expenses and Social Security benefits.
Considering the above, how will you set out from the FI journey? Where do you want to land and what will it be like there?
Financial independence is a clear destination whose surroundings are most unfamiliar. You might prepare for a particular future but once you get there you might find the tools you have are not the best ones for that context.
A decade ago, few people had the vision to imagine that people will carry computers in their back pocket and electric cars would be an actual consumer product. Today, you can buy any product imaginable and have it delivered in a few days, how many people thought this was likely 20 years ago?
The revolution of fintech has allowed us to exchange value without a middleman and to crowdsource assets, something which was not possible just a few years ago.
On the other hand, 9/11, the financial crisis of 2008, the wars in Iraq, the rise of migration, nationalism, extremist terrorism, the extinction of many animals, insects and plants and swine flu has had a negative impact on your life in some way or the other.
Your Financial independence needs to be flexible to deal with both the good and the bad of the future, where you will practice and enjoy a higher level of FI than you have today.
- Knowing your future self: What will be your needs in the future?
- What will the future look like and how much will it cost to support your lifestyle in it?
Goals to bridge the gap, your FI Journey:
- Creating a reserve fund for 1/2/3/4/5/6 months of expenses
- Reducing expenses
- Getting out of consumer debt
- Generating enough cash flow for 5% of your expenses
- Checking for opportunities and threats to your FI journey
- Maintaining motivation and momentum
- Teaching others around you the value of frugality and FI.
- Health, the longer you live the more powerful will the power of compound interest is.
- Monitoring developments in tech, health, politics and the environment.
- Educating yourself about money
Tools for financial independence:
- Rental real estate
- A nest egg which is sold off little by little.
- Intellectual property royalties.
- Dividend stocks
- Dividend ETFs
- P2P lending
- Bank account interest
- Private Pension
- Social security benefits
- Passive sales from books or electronic products
What is Financial independence?
- Cherishing the values of frugality and self-reliance.
- Financial skills.
- A commitment to the FI journey, both to the fun and challenging paths.
- Understanding your FI potential and exploiting it to its fullest.
- How do you define financial independence?
- Do you agree that it is a spectrum rather than a fixed objective?