How to Become Financially Independent

How to Become Financially Independent | Do These Two Things

If you want to learn How to Become Financially Independent there's just two things you have to be willing to do; Save More and Spend Less. In this article we are going to dig deeper into just how to do that.  We share _____ ways for you to expedite your journey to Financial Independence.  But first, what does it mean to be financially independent? 

What Does Financial Independence Mean? | Financial Independence Retire Early

Traditionally financial Independence means you have saved or will have enough passive income live on for the rest of your life.   Once you reach your "FI number" you are financially independent.

Traditional calculators put that at about 25 x your expected living expenses at retirement and assumes about an 8% return in your investments. 

So for instance, 25 x $40,000 = $1,000,0000    

Once you have a million dollars saved - you would be considered Financially Independent.

This formula is based upon the 4% Rule, a principle first made popular in The Trinity Study.

Example:   

Begins saving $466 a month at 30 years old until 65.   8% rate of return. 

3% inflation. Life expectancy 85.  

Result: $1,000,000 at age 66

(If you would like to run a  Financial Independence Calculation yourself, we like the one at NerdWallet.)

Now here is the magic of compound interest.  You don't need to save 1,000,000 of your own money.  Time is on your side.  In this example, $196,026 of the total principle and $803,974 is the amount of interest you have earned over time given our assumptions. 

If you believe your annual expenses will be more than $40,000, the formula stays the same - simply plug in that number instead of $40,000.  

Easy, right?

Now for someone who intends to have a traditional retirement age of 65 or longer this may not be such a challenge - assuming you have about a 40 year window to save.  

However, there are a growing number of people who either do not want to wait 40 years to retire or, like us, have started late in life and need to accelerate our savings. 

Save More Money

I know, that for us, saving more money had always been a problem for us.  We were living paycheck-to-paycheck, carrying a TON of debt, and we had no idea of how we could even begin when we needed every dollar in our budget. 

Our mindset changed in early 2017 when we discovered The Fire Movement (which stands for Financial Independence Retire Early).  When we discovered there were "normal" people making "normal" incomes saving 40%, 50% or as high as 70% of their incomes it was a lightbulb moment.  If people were living on so little of their income - they had to be doing something right.  We did a deep dive into FIRE blogs, podcasts and books and began emulating what they were doing. 

Increase Your Savings Rate

Implement as many of the following practices and tools to dramatically increase the percentage of money you are saving. 

  • Increase your contributions at work
  • Incrementally increase your savings goals
  • Optimize the percentage you are earning on investments
  • Decrease your expenses - analyze every expense and either eliminate it or reduce it
  • Use a budget
  • Eliminate debt
  • Live frugally and intentionally with your money
  • Participate actively in monitoring and tracking your finances and progress
  • and perhaps the most important - live with an abundance mindset

Increase Your Income

Increase Regular Income

Another way to expedite reaching FI is to make more money.   Many do this by temporarily working a side-hustle or increasing their hours to save as aggressively as possible for a time. 

EXAMPLE: 

Increase contributions to $1500.00 through a combination of increasing income, saving more and reducing spending.  

Income increased to $60,000 a year up to 55

Monthly Contributions: $1500 (30% of income)

Retirement Age:  55 

Income drawn at retirement: $40,000

Years to Retire Early: 25Amount in Savings at Retirement: 1.72 million

(We have again used our favorite  Financial Independence Calculation at NerdWallet.)

Increase Passive Income

Passive Income is income that you are not actively working to receive. This can greatly impact your ability to get to help you get to financial independence faster because it decreases the gap between how much you need and where you are.

Here are a few of the more popular ways to create passive income: 

  • Rental income
  • Affiliate income
  • Digital sales
  • Dividends
  • Other interest income
  • Business income
  • Become a lender
  • Rent out your vehicles/recreational vehicle

The SECRET way to reach financial independence

The secret sauce that will SUPER-CHARGE all of your efforts and get you to financial independence over all of the strategies listed above....

Employ the Trifecta!

Increase Income + Increased Savings + Multiple Streams of Income = Trifecta 

Multiple Income Streams

By not only saving more money and increasing income, but also creating MULTIPLE STEAMS of income, you shorten the time you need to save and the amount you need to save before you can retire (or not). 

This is how we plan to reach financial independence at 55.   At the time of this writing, just five years from now.

Here's our plan: 

We are saving aggressively in both pre-tax and post tax dollars. 

We are investing in real estate to produce passive income. 

And we are creating multiple streams of income by also growing an online business. 

We hope you have found this article helpful and has ignited your own journey to financial independence.  We release new YouTube videos with tips, helpful information and encouraging stories every week - join us...AND DON'T FOR GET TO LIKE AND SUBSCRIBE!

Love and Prosperity, 

Wendy and Curtis

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