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How to Achieve Financial Independence in Six Solid Steps

Updated on July 18, 2020
Kshitij Anand profile image

Kshitij has over 10 years of experience in the financial services industry. He has been associated with Axis Bank since its inception.

What is financial independence?

Cut back on your biggest expenses
Cut back on your biggest expenses | Source

Financial independence refers to a state where we have enough resources at our disposal to meet our expenses as well as fulfil our future financial goals."Never having to work again", some might imagine. You don't have to look for hope here. For many US citizens, this "dream" is "automatically" fulfilled when they retire.

It's not as simple as it used to be. Because the pension is no longer as "safe" as a German minister once said bluntly. But life or pension insurance can usually somehow compensate for the pension gap.

And how about before retirement?

The best way to quickly put aside the dream of "never having to work again". Sure it feels great, but can never be guaranteed. Because of the financial crisis and the current corona pandemic should have made the last one clear:

  1. Nobody knows what the future will bring!
  2. Often comes unexpectedly.

What can be guaranteed or achieved with a high degree of certainty?

The closer the future is, the better it can be predicted. A period of 3 to 5 years can usually still be seen reasonably well. Accordingly, financial independence means:

How do you build financial independence?

By learning the difference between “wants” and “needs”. We all have infinite wants in this infinite world. But we can only learn to make do with what we have within the confinement of our very limited resources. By being rational on my purchase. Whenever I feel the impulse to buy something I know I can live without, I will ask myself how much will the item worth 5 years from now. Consistently checking the balance of my savings account. Seeing the numbers grow motivates me to save more and to spend even lesser.

The following tips have proven their worth for me. However, this does not necessarily mean that everyone else can practice them (e.g. due to a different starting point or different living conditions).

1. The 10 percent rule

Transfer 10% of your net income to a separate account per standing order every month. It is important that it is an automatic process. The money must be transferred before you can intervene. This way, you learn very quickly to get by with only 90%. After just one year, this rule saved you one month of financial independence.


Save as much money as you possibly can. Every penny you can. Instead of coffee, drink water. Instead of going to McDonald's, eat Mac and Cheese. Cut up your credit cards.The first step to getting rich is having cash available. You aren't saving for retirement. You are saving for the moment you need cash.

Spend less than you make and invest the difference

2. Live under your circumstances

If you follow rule 1, you are already living under your circumstances. However, it will take 30 years to save a buffer of 3 annual salaries. The dynamic is simply missing.

Real miracles are possible if you automatically transfer at least 50% of every salary increase and bonus to the savings account. The highlight of the matter: You don't have to do without doing anything here. The remaining 50% can be used to slowly increase your standard of living without remorse.

Also, watch out for bargain hunters. Oh, what we are happy about bargains. 70% off today only. Who doesn't like to access? Saving can be that easy.

Offers like this are common. They often lead us to buy things that we don't actually need from an impulse. Saving looks different. But even if you urgently needed the item in question, it is only really saving if you transfer the discount received to your savings account.


3. Do not accept any future liabilities

Avoid any loans, however tempting they may be. Even with 0% offers you should be careful. Such a loan would have no disadvantages on paper. But ... such offers sometimes lead to people buying things that they either do not need or cannot afford at the moment.

Lease a vehicle privately is nothing else. The rates may look low. With a new car, you finance the 50% loss in value of the first 4 years with your rate. Small cattle also make crap. Why not buy a used car right away? It also takes you from A to B and drives almost as well as a new one. Sure, he can break down. But ... for the otherwise co-financed loss of value, you can afford some repairs.

The principle should, therefore, be clear. Buy only what you can currently afford and don't lightly mess up your future. Even if everything looks rosy today, the job can be tomorrow. And how are the loans to be financed?

4. Invest your money yourself

Start as early as you can
Start as early as you can | Source

The world is full of financial experts. At least there are many people who sell themselves as such. However, the monkey is better than humans ... at least when it comes to selecting stocks.

According to the theory, funds should deliver wonderful profits. Unfortunately, it is also a fact that most are below the performance of the market. One wonders what all the expert knowledge is worth and what the highly acclaimed fund managers actually get their money for.

If things are going stupid, then at least I want to be responsible for it myself ... at least that's my motto. If you make mistakes yourself, you can at least learn from them and improve yourself. Declaring a fund manager or financial advisor to be a scapegoat does little for your own destiny.

To invest your money yourself, you will have to deal with the matter (if you are not a player). At least that way you learn what you've gotten yourself into. After a few years of practice, you get a feel for the real opportunities and risks, or what you think makes sense for yourself.

5. Man does not live on bread alone

With all the pursuit of financial independence, one should never forget that everyone is mortal. What is all the striving for financial independence for when everything can be over tomorrow?

Admittedly sounds a little dark. But who does not know the stories of totally disciplined savers who suddenly fell ill and could almost afford the yacht to sail around the world, but suddenly it was no longer health-wise.

Ultimately, financial independence only works if you have learned to live happily ever after. This also includes doing something good every now and then and keeping a healthy amount of savings.

6. The ultimate shortcut

Avoid taking shortcuts
Avoid taking shortcuts | Source

Becoming a millionaire is not difficult at all. I have done this several times within 12 hours. No, I didn't play Monopoly. I had real money on hand, just a few hundred thousand as they are common in Vietnam, for example.

That may sound funny but the path to financial independence is quickly paved if you move to another country. There are numerous countries in which you can live magnificently with 500 EUR per month. In any case, your savings will go much further than in Germany.

If you do it very skillfully, you will find an investment that pays exactly this EUR 500 per month. Financial independence can be that easy.

Bottom line

At some point, almost every human on the planet (with very few exceptions) will have to work a job and trade their time for money. This is so simple and obvious that we tend to forget about it, but it should be on your mind every time you open your wallet.

The key is in the spending habits and to a lesser extent in the “earning habits”. Some other commenters already implicitly or expressly pointed in that direction.

A secure income is, of course, a good foundation. To get there, get decent job skills and working habits. Regardless of whether you run your own business or accept employment. Reliability, dependability, discipline and the other boring old fashioned stuff works in that direction.

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