5 Ways to Achieve Financial Independence

Financial independence might sound like a vogue word. But it is true many of us yearn to achieve it. So what is financial independence? In simple terms, financial independence is the ability to generate enough passive income that pays for all your expenses. In an article written by Eric Carter on July 5, 2021 in Forbes from Financial Finesse, “Financial independence is a state of being in which you don’t have to work to pay your living expenses. You may decide to retire or you may choose to work because you want to, not because you have to”. In this post, I will share 5 ways to achieve financial independence.

“Financial independence is the ability to live from the income of your own personal resources.”

~ Jim Rohn

Why Financial Independence?

I come from a very modest background. Having brought up in India, I have seen poverty closely. That is one reason financial independence is so close to my heart. Then the question may be also do we need financial independence?

In the US, most people live paycheck to paycheck. So is it not okay to keep on working to meet your daily living expenses? For sure, if we love the work we do, it is perfectly fine. But if we need to do a work which we brood about daily, then we are likely trading hours for money. Is it where we want to be? That’s something to think about.

We could also say that maybe we don’t need to achieve financial independence if we love doing what we do. But financial independence is a state when we choose to work, not because we have to do it for a living, but we just enjoy doing that work. It is likely that the work we love to do could also pay for our living, but we have a choice to stop doing it when we want to. Does that make sense?

Financial independence also helps one find their purpose in life. Because it helps one get out of the rut of swapping hours for money and earning a livelihood doing what one may not enjoy doing. Read more about why most people don’t find their purpose in life.

5 Ways to Achieve Financial Independence

Achieving financial independence doesn’t mean becoming super rich. Or living an extravagant lifestyle.

So it means you need to afford a mansion or a yacht. What it means is being able to meet your living expenses with your own personal resources. So there are two major components to financial independence.

First, expenses and second, personal resources. So let’s learn about how we can minimize expenses and maximize personal resources. What are the 5 ways to achieve financial independence?

Live Minimalist

Read more about how to lead a minimalist life. So leading a minimalist life not only gives us the happiness of living a simple life but also helps us save money. The money which we can invest to achieve financial freedom.

If it was so great to live a minimalist life, why most people don’t or find it difficult to live it this way? The primary reason is many times to get confused about what we really want from life? What really makes us happy? Because we rarely realize happiness is in small things in life which don’t cost a lot of money.

Read more about the drivers for happiness to learn more.

Save First

Warren Buffett says, “Do not save what is left after spending; instead, spend what it left after saving.” This is epic. And most of the time, we don’t fully appreciate it. Do you? To share with you all this has been pretty much my philosophy.

The reason it is difficult is that there is social pressure and even pressure from family. That what are we going to do with all the money we save? We will not take them with us when we die, then why save so much? To that I often reply I would rather donate and give it away to charity. Then the retort is often, why should we live so frugally and save?

I have been saving about 70% of my income for many years. Of course, I couldn’t save that much when my income wasn’t that much. That might sound extreme, but this is how it has been for me.

Then it gets back to finding happiness in small things and living a simple life. Which is not the way the consumerism world has wired us. So the question should consumerism control our minds or should we control our mind and try to find our what truly brings us joy and happiness?

Invest Wisely

Saving is only enough. We need to save wisely. So what does wisely mean? You could consult a professional like a financial planner for advice. Hence, the disclaimer here is that I am not a certified financial planner and I am sharing my learning based on personal experiences. In a nutshell, invest based on your risk appetite to grow your money for maximum returns which achieves your goals either short term, medium term or long term in the most tax advanced way.

That might sound a bit complicated. Let’s try to break it down and understand more.

Understand Your Risk Appetite

It’s very important to understand your risk appetite. Based on my experience, it might be okay to take some risks but not disproportionate. Investment is like a marathon, not a sprint. There is nothing like quick money. It is your hard earned money, so first protect your capital. Moderate returns are also good. I have lost money when I was greedy. Lessons learned the hard way!

Identify Investments Right For You

Not every investment is right for everyone. It depends on one’s risk appetite and financial goals, which may be short term, medium term or long term. If your horizon is for the long term, then might make sense to leverage more equity based. Also, if I need to save money for my daughter’s higher education needed in a couple of years, I would not invest it in all equity.

There are 529 accounts in USA designed for higher education of children. Depending on when we need the money, these instruments are a blend of equity and debt targeting the year of disbursement.

Leverage Tax Advantaged Instruments

It is important to understand the tax implications of our investments. Suppose, if we are saving in an individual brokerage account and have not maximized on retirement accounts, then we might pay marginal income tax on distributions, which can avoid by first maximizing investing in various retirement accounts. That could include employer sponsored 401k both pre-tax and pot tax, then leverage individual traditional and ROTH retirement accounts.

We will not get into details. Please seek professional help to learn more.

Maximize Passive Income

The key to achieving financial independence is to generate a cash flow of passive income which meets or exceeds your expenses. So the more you maximize the cash flow, the earlier you could achieve financial independence.

The most common sources of passive income are interests, distributions, capital gains, pensions, rental income or social security income.

The less common ones are royalty example from books, or online incomes like YouTube channel, sale of online courses, ad revenues or sponsorship from blogs. There are many ways to make money online. But they take patience and perseverance.

Develop Yourself

The key to achieving financial independence is not only to save more and invest wisely but also to develop continually yourself and gain new skills that are required to do your job better of find higher paying jobs. Read more about 28 skills that can help you find online gigs.

Find New Income Sources

It loops back to the above. First, acquire new skills through continuous learning and then find avenues to increase your income, which could be at your workplace or based on new skills, do side hustle or find additional sources of passive incomes. It is for sure easier said than done. But life is all about trying, even if we fail. Isn’t it?

Conclusion

So what are the 5 ways to achieve financial independence? They are Live Minimalist, Save First, Invest Wisely, Develop Yourself and Find New Sources of Income.

To sum up, achieving financial independence is all about leading a minimalistic life and saving/ investing wisely. It is also about trying to find out what gives you true happiness, what are the small things in life that really matter for you and not succumbing to societal/ family or consumerism pressures.

We get only one life, so no point being so frugal, and not cherishing doing what truly gives you the happiness. Who knows how long we will live? So it’s important we cherish our today over saving for tomorrow.

Life is simple, but many times we make it complicated and as a result not cherish the small things in life that give us genuine joy and happiness. It could be as simple as going to a park with your kid and spending quality time with him or her. Or watching your favorite TV show or movie with family and friends.

What do you think? Please share your thoughts and comments.