Most people dream of living happily without worrying and working for their everyday necessities. It’s the ideal life where we can pursue our passions freely and live our lives to the fullest. This goal many of us are working towards is a life of financial independence.
Understanding What Does FI Mean?
Before we fully explore the dream life of financial independence, let us first ask: What does FI mean?
Being financially independent means having sufficient personal wealth to live the rest of your life without needing to work and earn an active income. That means no need to wake up at 7 AM, head to the office, and work at your desk from 8 to 5. Your personal wealth sustains your lifestyle and living expenses without having to rely on being employed or receiving financial support from others.
Definition of Financial Independence, Retire Early (FIRE)
While financial independence is the first part of the dream life, retiring early is the second. The Financial Independence, Retire Early, or FIRE, movement is all about a lifestyle of making aggressive financial decisions so that we can become financially independent and retire far earlier than the traditional retirement age of 60. Through aggressive savings, investments, and financial planning, we can reach financial independence at a young age and enjoy the freedom of retired life for decades to come.
The FIRE movement became popular after the 1992 best seller, “Your Money or Your Life,” by Vicki Robin and Joe Dominguez, brought attention to its philosophy. The book guides readers through a nine-step program toward the goal of achieving financial independence. It explores how people apply FIRE in their lives and encourages us to rethink our relationship with money in our lives. As Vicki writes in the 2018 edition of their book, “There is a way to approach life so that when asked, ‘Your money or your life?’ you say, ‘I’ll take both, thank you.'”
Purpose and Benefits of Achieving Financial Independence
Financial independence is about having enough money to live our lives comfortably without having to work and earn money eight or however many hours a day. However, this dream life isn’t just about avoiding work. Financial independence gives you freedom in your life to choose what you want to do, whether that’s doing work you’re passionate about, learning new skills that interest you, or pursuing other dreams and goals.
Tyler Seeger, managing director at Retirement Being, said it best in an article about becoming financially independent . He says, “It’s about being free to choose how to live your life and spend your time without worrying about your next paycheck.”
Have you ever had to make the choice between a cushy job that pays well but you don’t enjoy and a job you’re passionate about but isn’t enough to support you? Achieving financial independence means we’re free to choose the job we truly want. It means we can freely follow our passions. Money stops becoming a deciding factor in many of our life choices. With this independence, we can live our lives on our own terms.
The Path to Financial Independence
Tanja Hester, the author of “Work Optional,” says in a Forbes article, “In order to do something like retire early, you’re going to have to go through several financial milestones. It’s understandable why you might see it as a hurdle, but it’s just another thing to figure out, just like figuring out how you’re going to fund your early retirement years, how you’ll fund your traditional retirement years or how you’re going to get health care.”
The path to financial independence is not straight and easy. Understanding our financial health, personal situations, and the current economic trends means we are able to make informed decisions about our financial independence.
Factors That Influence Financial Independence
Each person’s financial situation is unique, and to achieve financial independence, we need to understand the key factors that influence it.
1. Income and Savings Rate
How much we earn from our work affects how much we’re able to save and what we can invest for the future. Connected to income, our savings rate is the percentage of what we earn that we save. The FIRE movement focuses on having a high savings rate of up to 50% to 70% of our income. The higher the rate, the faster we’ll be able to gain financial independence and retire early.
Additionally, reinvesting our earnings creates a great opportunity to increase our wealth. Our investment returns from a diversified portfolio can greatly contribute to our future financial security.
2. Expenses
While our income, savings rate, and investment returns are about how much money we put into our future life, expenses take a look at how much we spend. Food, housing, and daily necessities make up the cost of living. Debt can also become a big hurdle to overcome toward financial independence. However, through effective budgeting and minimizing debt, we can lower our expenses and increase our savings rate.
3. Lifestyle Choices
The lifestyle choices we make can guide us through vital financial decisions on the path to independence. From choosing to live a minimalist lifestyle to taking care of our health and wellness, we can reduce our expenses and save much more effectively.
4. Economic Factors
Economic issues such as inflation, interest rates, and market performance are factors that are outside of our power but can influence our path to independence. It can affect the value of our investments, how much we spend for the cost of living, and more.
7 Steps to Achieve Financial Independence
Achieving financial independence is a goal that can take years to reach. During this journey, we have to make important financial decisions, be proactive about our financial health, and be smart in planning and managing our finances. Here are 7 crucial steps we can take to become financially independent:
1. Set Clear Goals
What does financial independence mean to you? Having a clear definition can guide the choices we will make and shape the future we want to have. Questions like what our desired lifestyle, how much personal wealth is enough to be financially independent, and when do we want to retire, can give us concrete goals we can move towards to.
Remember! Make sure your goals are SMART- specific, measurable, attainable, relevant, and time-bound.
2. Assess Your Current Financial Situation
As we set our goals, we have to keep in mind our personal financial situations. This includes keeping track of our income, expenses, debts, savings, investments, and any other assets and liabilities we may have. Understanding where you stand financially can set the foundation for realistic goals toward financial independence.
3. Create a Spending Plan
Budgeting is a crucial part of financial planning. Creating a spending plan makes sure that we’re not going negative, saving enough income despite any expenses we have. Beyond that, a budget helps us keep track of how much we spend and where our money goes. It gives us the opportunity to ask the question, is this an essential expense or an unnecessary bill?
Our spending plan should be designed based on how much we earn and our necessary expenses. Remember to keep your financial goals in mind when deciding how much you should spend and how much you should save.
4. Increase Your Income
Just like we learned earlier, one of the biggest factors of financial independence is how much we earn. A few of the best ways to increase your income include seeking opportunities to grow your career, finding passive income, and starting side hustles for additional earnings.
The greater the income, the more money we have to save and invest. It’s the main source of the wealth we’re building for financial independence.
5. Manage and Minimize Debt
Debt can hold us back from saving more money and take up a big chunk of our budget with its monthly payments. Student debt, credit card debt, and more are a few examples of loans many of us struggle with. We can manage our finances by prioritizing high-interest debt to avoid gaining more interest to pay over time. It’s also crucial to take care and avoid taking on new debts through financial planning and budgeting.
6. Save and Invest Wisely
Savings and investments are another key factor towards financial independence. As such, it’s important to save and invest wisely to increase the money we can set aside for a financially independent future. Let’s learn more about different investment strategies, contributions to retirement accounts and savings accounts to effectively save and invest our money.
It’s also important to set aside an emergency fund for times of crisis. Life isn’t always predictable and an emergency fund can help us avoid unexpectedly spending our savings. Stay on track toward financial independence.
7. Continuously Monitor and Adjust Your Financial Plan
As our lives go on and changes over time, we also have to review and adapt our financial plan to our financial situation. We may find ourselves suddenly earning more, allowing us to put more money toward our savings and speeding up the timeline to financial freedom. On the other hand, losing income may mean having to look for additional income and becoming more mindful and frugal about our spending.
Faced with these changes, our financial plan also has to shift. Reviewing our plan and taking the steps to adapt to these life changes helps us stay on track to meet our financial goals.
Building Wealth for Financial Independence
Sources of Income for Financially Independent Individuals
As we’ve established, financial independence is being able to live without the need to actively work the usual full-time job. Our personal wealth can come from our savings and other sources of income. This includes:
- Passive income,
- Investments,
- Side hustles, and
- Retirement income
Passive income can come from royalties, rentals, interest, and more. One form of passive income are dividends from investments. Investments, on the other hand, can also appreciate in value, exponentially increasing the money you invested over time. These can comes from stocks, bonds, mutual funds, and more.
While financial independence may mean not having to work from 8 AM to 5 PM, we also have the option to comfortably build our wealth with side hustles. Freelancing, flexible work, content creation, and other side hustles allow us to earn money even as we enjoy our financial freedom.
Lastly, retirement income are the rewards we reap from years of work. They’re key sources of income as we live a retired life. Retirement income can come from pension plans, 401(k)s, individual retirement accounts (IRAs), annuities, and more. While we’re still working, contributing to these retirement plans and accounts can benefit us greatly in the future.
Wise Investment and Economic Discipline for Long-Term Wealth
According to the Federal Reserve, 25% of non-retired adults in the United States in 2022 didn’t have any retirement savings, a crucial part of working toward financial independence. Without making smart financial decisions and staying disciplined in our plans, we can’t secure financial independence or enjoy early retirement
A key part of FIRE is aggressively saving, wisely investing our income and frugally minimizing our expenses. Often that means going beyond and investing a large percentage of what we earn than what most people do. However, it’s exactly this principle and philosophy of the movement that allows us to achieve FIRE. As our retirement savings grow and we build our personal wealth, the more likely we’re able to enjoy financial stability and freedom for the years to come.
Becoming Financially Independent: A Journey Worth Taking
A life of financial independence, the freedom to live our lives to the fullest without being held back by money, is the dream life. However, it’s a goal that requires careful financial planning, seriously saving, and disciplined spending to achieve.
What financial independence looks like differs for each of us. We have different situations and goals that we want to achieve, and these often change over time. With a sound financial plan and expert help from a professional, we can take the road toward financial independence. As we enjoy our dream life in the later years, we’ll know that it’s surely a journey worth taking to feel financially independent and secure.
