Financial independence equals freedom.
Financial Independence = Freedom
It is because, if you are financially independent, you can afford to do what you like not what you have to, and work by being motivated by something else than money. People become financially independent usually by saving small amounts of money every month over a long period of time. In the end, they end up with a huge amount of money, so they can retire early.
Achieving financial independence is a journey, not a destination, and the path will look different for everyone depending on their income, expenses, goals, and lifestyle.
Steps to achieve financial independence
However, there are some core principles that can guide you.
1. Define your ‘why’
What does financial independence look like for YOU? Early retirement? Living off passive income? Having security and freedom to pursue your passions? Clarifying your reasons will fuel your motivation and help you make financial decisions aligned with your values.
2. Track your spending:
Knowledge is power! Understand where your money goes by tracking your expenses for a month. Use budgeting apps, spreadsheets, or pen and paper – whatever works for you. Identify areas where you can cut back without compromising your priorities.
Our annual costs are divided into Fixed Costs, Variable Costs and Maintenance Costs of income-generating assets.
- Fixed Costs are the same every month within a 12-month period. They are highly predictable and fairly – account for roughly 90% of our total spending. Our Fixed Costs mainly include Rent, grocery shopping and utility bills.
- Variable Costs are different every month. They can be either 0 or very high – account for 7% of our total spending on average. Our Variable Costs include any hospital visits not covered by our private health insurance, flight tickets or shopping for clothes to name just a few
- Maintenance Costs are only a small fraction of our annual spending and account for no more than 3% of our total spending. They are mostly 0, but sometimes paying for a broken water pipe or painting a wall is necessary.
You can read more about different types of costs here.
3. Tackle debt:
High-interest debt can be a major roadblock. Prioritize paying off credit cards and other high-interest loans. Consider debt consolidation or exploring balance transfer options with lower interest rates.
4. Build an emergency fund
Aim for 3-6 months of living expenses to cover unexpected costs like job loss or medical bills. Having this safety net will prevent you from going back into debt.
5. Increase your income
Look for ways to boost your earnings through career advancement, side hustles, or selling unused items. Every extra dollar saved or earned puts you closer to your goal. Every year in summery is a fantastic time for me because I receive my annual bonus for the last academic year, and some other allowances which teachers at international schools usually are entitled to.
6. Save as much as possible
We save approximately 80% of our Net Income on average every month in 2021 so far. In principle, by maximizing our monthly savings, we strive for financial independence. We have two small babies. With babies it is always difficult to predict what happens, so I am not planning too much.
7. Invest wisely
Time is your greatest asset. Start investing early, even with small amounts, and take advantage of compound interest. Diversify your portfolio across different asset classes to manage risk. Consider seeking professional financial advice if needed.
8. Live below your means
Resist the urge to keep up with the Joneses. Avoid lifestyle inflation as your income increases. Focus on experiences and relationships, not material possessions. Our higher spendings are mainly caused by more frequent grocery shopping or eating out.
9. Automate your finances
Set up automatic transfers to savings and investment accounts to make saving effortless. This removes the temptation to spend and ensures you’re staying on track.
10. Learn continuously
Educate yourself about personal finance. Read books, listen to podcasts, and attend workshops. The more you know, the better equipped you will be to make smart financial decisions.
11. Be patient and consistent
Financial independence takes time and effort. Do not get discouraged by setbacks. Celebrate your milestones, adjust your approach as needed, and stay focused on your long-term goals.
Financial independence achieved! What is next?
The idea of early retirement is very appealing to me. Once you are financially independent, you can retire from your full-time job. When you retire early, it means that you are time rich.
Early Retirement = Being Time Rich
Simply, you can decide how to spend your time. You can shape your own reality instead of reacting to someone else’s arrangements. You can create valuable networks with people based on values and feelings rather than transactions and money. You can abandon your past to make new reality.
As already mentioned, the most important factor that allows people to retire early is that they save a big portion of their salary every month. That is what I have always been trying to do. Once retired, you can, for example, go traveling around the world with your small kids which is a very unique experience your kids could never afford otherwise.
You can read more about financial independence here: https://www.investopedia.com/terms/f/financial-independence-retire-early-fire.asp
Remember, there is no one-size-fits-all approach when it comes to achieving financial independence. Find what works best for you, stay inspired, and keep moving forward on your path to financial freedom!
