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3 Keys to Financial Independence

Updated on August 17, 2017
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Tyler Walker holds a B.A. in both Accounting and Business from Northwestern College in Orange City, IA and works as a Financial Analyst.

What Is Financial Independence?

In the simplest terms, Financial Independence is the concept that an individual or household can produce enough passive income to cover the basic living expenses such as food, shelter, and clothing. Passive income is income that is derived from sources other than physically working. Some types of passive income include dividends and capital gains from investments, book royalties, gas and mineral rights income, and rental income from real estate that is managed by someone other than the owner.

There are two basic ways to achieve Financial Independence. Financial Independence can be achieved through either increasing passive income or decreasing fixed expenses. For instance, an individual or household can invest a larger principal amount into an investment to produce more annual dividend income. On the other hand, one could pay off their home mortgage in order to reduce their living expenses and in turn require less passive income to cover these fixed expenses.

Why Does it Matter if I am Financially Independent?

Most people strive to become financially independent at some point in their lives because financial independence allows you full control over how you spend your time. There is a strong sense of freedom and fulfillment that comes with financial independence that people find highly important. Without further ado, let’s focus on the 3 keys aspects of achieving financial independence!

1. Reduce and Eliminate All Debts

Personally, I rank debt elimination as the key factor in achieving financial independence because of what debt represents. When we have debt, we have an obligation that must be paid before we are completely free. With debt, more annual income is required to make payments each year. Without debt, the level of passive income needed to cover expenses is significantly less. Let me illustrate with my own financials. I currently have no debt of any kind except my home mortgage payment which is $1,332 a month with a total principal balance of $159,000. My top priority is to pay off this principal balance to reduce the level of passive income needed to achieve financial independence by $1,332 per month. If I can eliminate this debt, my remaining fixed expenses relating to housing and food will be less than $800 a month. All in all, reducing debt is my top focus on the journey towards financial independence, but conducting an expense audit is a very close second.

2. Conduct a Household Expense Audit

You may have never heard the term “expense audit” before, but it is essentially a fancy way of saying to look at all of your expenses on a monthly basis and look for inefficiencies and methods to reduce those monthly expenses. To highlight, lets looks at one specific fixed expense that everyone has that can be significantly reduced. First, most people are paying hundreds more in auto insurance than they should be. To reduce your auto insurance quickly and immediately, simply purchase your insurance “direct” from insurers such as Progressive, Geico, or Mercury Auto. By purchasing direct, you get the absolute lowest price and cut out the middleman, which is the insurance agent. My 6-month premium for a 2002 and 2006 SUV, one with full coverage, is $235. I maintain liability coverage of $250k/$500k to fully protect myself in the event of lawsuit. Please do not hesitate to reach out to me in the comments for additional guidance on how to really cut costs on your auto insurance. In conclusion, this hub, How to Effectively Save Money I and this hub, How to Effectively Save Money II, go into much greater detail on creative ways to cut expenses on things we usually pay monthly without even questioning.

3. Increase Savings Rate Over Time

Finally, in order to truly achieve financial independence, it is important to strive to increase your savings rate to 50% of earned income over time. With a high savings rate, you can make your dollars work for you rather than the other way around. I suggest starting at a 15% savings rate and increasing that percentage rapidly without increasing your lifestyle. It is important to invest the majority of these savings into diversified index funds with low expense ratios. By doing this, a return of 8% annually can easily be expected over the course of a couple decades.

Final Thoughts

I have access to numerous calculators and projection tools to help in projecting when the point of financial independence can be reached based on expenses, income level, and savings rate. I also have numerous debt reduction strategies at my disposal. Please feel free to reach out to me through the comments or a private message, and I will gladly run a quick analysis on your financial situation to help you reach this admirable goal of financial independence in a shorter time than you thought was possible!

Have you ever consulted someone's help on the subject of reducing expenses or debt?

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      suganya 4 weeks ago

      This is the wonderful article . In today life save money is very important factor if people know to save the money there life will be very happy from this article we can learn how to save money & how to create budget these two factors are important for living happy life . This is a so valuable article .

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      Roshan 4 weeks ago

      Good article. Everything is so briefly explained I today's world financial problem are major problem, and it explains everything about saving money.

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      tomsji 4 weeks ago

      Good thoughtful piece of work you have done. In today's world, financial problems is one of the major problem that any human being is been bothered about,

      Your article is thought provoking which we all misses out in taking even the slightest steps especially the paying of principal amount & conducting of household audit

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      Maryam 4 weeks ago

      A lot of this is mere common sense in managing our finances. What is harder is to have the financial discipline over a long period of time t0 achieve these goals.

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      lookingbackward 4 weeks ago

      Great article that really gets me thinking about my own finances and admit to myself that I really need to step it up. I could be increasing the amount of my paychecks that are going into savings. Good stuff in your other article "How to Effectively Save Money" as well.

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      Linda 4 weeks ago

      I wish I was at a point in my life where I could do this. Without a solid job, I'm at subsistence level living, let alone having money to pay anything but the barest essentials.

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      chas 4 weeks ago

      I yearn for financial freedom.

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      Miles 4 weeks ago

      Great article! I define Financial Independence as being able to spend one's time to do anything one wants without worrying that the time must be used on making money

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      Anthony 4 weeks ago

      This article came at the most convenient time for me. I am a college student trying to save money so I can move out directly after graduation. It's nice to see how I can become financially dependent while in school.

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      dalton 4 weeks ago

      This article really touches on being financially independent, very educational piece. The information is really good and easy to understand, keep up the good work.

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      Poopandi Yadhav 4 weeks ago

      Eliminating debt and gaining Financial independence and should be everyone's goal in life. Great article with ways to do just that.

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      Iana Gyln 4 weeks ago

      I really love your article, because it resonates with what I think. Lately I have come to the same conclusions and am striving to reduce my expenses and save up more. It seems like common sense doing these steps, however sometimes common sense is not so common; especially in this age of instant gratification.

      At 25 years of age, I have finally came to realize there is no easy money making scheme, and financial independence requires some degree of sacrifice and definitely a lot of hard work.

      What I also found good for myself, is to set goals which are realistic and achievable (for example to save up an X amount after taking all necessary expenses and some possible extra expenses). I believe setting goals help a lot. What do you think?

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      Tina Shepherd 4 weeks ago

      Eliminating debt and gaining Financial independence and should be everyone's goal in life. Great article with ways to do just that.

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      Arun Pradeep 4 weeks ago

      Financial ideas are very easy to understand . The article is making the debts handling easier. Thank you.