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What is Financial Independence?

Updated on March 20, 2016

Planning Your Finances

Financial independence is a growing trend today. Many people see the dangers of student loan debt, large mortgages, and a declining economy. The good news is that there are several ways to achieve financial independence if you are dedicated and have a solid plan. There are essentially three major parts of financial independence.

  1. Decrease Expenses
  2. Build Assets
  3. Stay Healthy

Decreasing Expenses

A lot of people today struggle with high expenses. There are a lot of things that everyone has to pay for, ranging from insurance to housing expenses. With record levels of student loan debt, many people struggle to simply get by. To achieve financial independence, you have to earn more than spend every month and invest the balance. Over time, this builds your asset base to a level that is always going to be sustainable.

Build Assets

The best way to build your assets over time is to invest. There are people who simply focus on one asset class when trying to achieve financial independence. For example, there are people who only invest in real estate or the stock market. There are plenty of examples of people who have been able to achieve their financial goals by doing both. The larger your income relative to your expenses, the faster you will be able to hit financial independence.

Stay Healthy

Health costs continue to increase across the country and the world. Just one major health issue can really hurt your financial position. Invest money and time into staying healthy. Not only will this make you more productive, but this will also help to save you from financial disaster as you age. One of most common reasons for filing bankruptcy today is health costs. Avoid this by investing in your health.

Financial Independence
Financial Independence

The 4% Rule

The goal of financial independence is to have all of your expenses covered by just your investment income. In a landmark study completed by Trinity University, researchers found that a 4% withdrawal rate is 95% safe when it comes to living off investments over a period of 30 years. That means if you can get your investments 25 times your annual expenses, you are financially independent barring an economic collapse.

How to Lower Expenses

Lowering your expenses is one of the fastest ways to reach financial independence. This is actually a lot easier than many people realize. With every dollar you spend, simply ask yourself if that expense is adding value to your life. Paying hundreds of dollars to your student loans every month is going to make it difficult to achieve your goals. Here are a couple of ways to reduce your monthly expenses.

  • Pay Off Debt
  • Ride a Bike
  • Decrease House Size
  • Cook at Home

There are obviously plenty of other ways to decrease your expenses, but many people can decrease their expenses by 50% or more just by taking on these challenges.

Retirement Planning
Retirement Planning

Building Investments

Knowing what to invest in is an essential part of the process as well. Over time, you want your investments to build up to a point where they are 25 times your annual expenses. This means that if your annual expenses are $40,000, you will need approximately $1,000,000 to retire and live off just investment income.

Investing in Real Estate

A lot of people enjoy investing in real estate. Not only do you get the benefit of appreciating prices over time, but you also enjoy a steady stream of cash flow. It can take a while to get started investing in real estate, but over time it will make a huge difference in the amount of money you make every month.

Investing in the Stock Market

Investing in the stock market is another great way to build up your assets. Over the past 100 years, the stock market has averaged a return of around ten percent. There is a lot of volatility in that number, but that is a good indicator of future performance. Here are a couple of things to remember about investing in the stock market.

  1. Stay Consistent
  2. Don't Panic
  3. Think Long Term
  4. Diversify

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Increasing Your Income

One of the best ways to fast track your financial independence is to increase your income. The more money you bring in every month, the more you will be able to use to build your investments. Over time, making money online through a side gig or freelancing is a great way to speed up the process. If you want to achieve financial independence soon, starter to build your income today.

Making Money Online

The internet is a great place to spend your time researching or looking at funny memes of cats. However, it is also a great business opportunity. Anyone who wants to start an online business can do so through a variety of different avenues. Always make sure to take some time to check out online opportunities to make money. This is often preferred to simply getting a second job. Anyone can start selling their old junk on eBay for a profit!

Starting a Business
Starting a Business

Financial Independence

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