Everyone dreams of it. A life where you don’t have to wake up and go to work (or turn on your zoom camera). A time where you are free to take as many trips as you wish, or finally have the time to take up that hobby. What no one talks about though, is what it takes to achieve that dream lifestyle. A life where you have achieved financial independence and have the freedom it buys.
What is Financial Independence?
Financial independence is the philosophy referring to the freedom of having an amount of money that generates enough income through returns to support you for the rest of your life. Although retirement is a benefit of this philosophy, financial independence should not be confused with retirement income. Income is a component of wealth, whereas wealth is your total net worth i.e. the difference between your assets and liabilities.
Do not assume that financial independence is achieved through a high-paying job. Though this type of job makes it easier to amass strong assets, it does not guarantee that when you retire you will have enough money to support yourself and your family for the rest of your life.
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The main factor that determines whether or not you will achieve financial independence is your spending habits. This is what causes a person earning minimum wage to retire with much more money than a person earning millions each month.
Four Ways You Can Achieve Financial Independence
1) Decide what your ideal lifestyle is
The first step towards financial independence is drawing up the lifestyle you hope to achieve. This helps in goal setting as an extravagant lifestyle will require more sacrifices and effort now than a minimalistic lifestyle would.
2) Spend less than you earn
Once you have a goal in mind, you need to work on decreasing the number of expenses you have. A lot of discipline is required when differentiating your absolute needs from your wants and delaying gratification for the sake of your financial goal.
3) Save and invest your money
There are a lot of creative ways that you can save your money and several options for investing. An easy place to start would be a retirement scheme which, through compounded interest will ensure that you have a golden egg by the time you hit retirement age. Other options include stocks, government bonds, and money market schemes.
4) Create a rainy day fund
Going by the pandemic, it is clear that it is important to always have a backup financial fund that can cushion you through emergencies. Work on ensuring your fund has enough money to cover around 3-6 months worth of expenses
To Sum it Up
Financial independence is a state that requires long-term planning and consistency. Not everyone will have the freedom to retire early but financial independence can give you the flexibility to do so whenever you feel ready. Learning some financial basics will put you far ahead in your financial planning and management of money.