Top 10 Ways to Become Financially Independent

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Top 10 Ways to Become Financially Independent

Being financially independent is no longer an option. Nowadays it is practically an obligation, because nobody can assure you that next month you still have work or that when it is time to retire, there is money to pay the pensions. Achieving financial independence in the shortest possible time is one of the greatest challenges for the future.

Pop quiz to define financial independence: To be wealthy is to A) have a handsome salary or B) have absolute control over your time. If you picked A you’re…. wrong. The truly wealthy, those that are truly financially independent, are those who have the ability to do whatever they want whenever they want without having to worry about the consequences.

What is Financial Independence?

Financial independence is, therefore, a term with which you should begin to familiarize yourself. Only people who have assets that provide profitability large enough to not depend on a high-paying job are financially free.

Financial independence can be defined as the status achieved when the income generated by my assets allows me to pay my monthly expenses. In other words, I earn a living without working.

How do You Get to Financial Independence?

The key is to collect assets.

The assets are those things that put money in our pocket. That money is called passive income, since they have been obtained without doing anything. The interests that bonds or deposits report, the dividends of the shares, the rent from a property, the royalties of a book or the online sales of some product are just some examples of passive income with which you can start to be financially Independent.

Notice that it is not the same to work to get money than to work to get assets (which in turn will get us money). The big difference is that if I work to get money this month I will get money only this month. On the other hand, if I work to get assets, these assets will get me money this month, and the next, and so on.

Financial stability is about start investing your money well. When you go to buy something, think that with that money you could buy assets or set up businesses that generate passive income. That is, they report benefits almost effortlessly and without the need to be present.

The sooner you start creating personal capital, the sooner you will have financial independence. However, you must ensure that these revenues exceed the expenses. Therefore, financial freedom is different for each person.

How to Achieve It? Expense Control

The less money you need to cover your expenses, the sooner you will be financially independent.

The main thing to plan financial independence is to identify the expenses we make throughout the year. For this, it is best to keep a detailed control of the expenses, either with a mobile application or with a simple excel that is filled every month.

Keeping track of expenses is the best way to determine what is superfluous and really essential. It is a fundamental tool to know if there are excessive expenses in certain aspects of life that are really neither necessary nor provide true happiness, such as technology or clothing.

In order to reach retirement early, it is necessary to maximize savings. That is why many times the financial independance fits well with minimalism: to be happy you don't need to have many things but simply have free time to enjoy life.

For me it is best to clearly have the expenses identified and, before buying, to think if it is really necessary. For this, it is essential to evaluate the total cost, which is not only the price but also the opportunity cost for not investing the amount spent.

I focus primarily on cost control, although you can save more simply by earning more money. A person can be rich because he earns a lot of money, but if he spends everything he earn, he is not financially independent. He is only an employee with a high salary.

On the other hand, a person who receives a small amount a month without working and arranges to live will not be rich. But he will have financial independence because he will not depend on a salary to cover his expenses.

That is why it is a mistake to think that financial independence can only be achieved by people who have very high salaries.

Related: How Can I Save Money on a Low Income Fast?

2 Steps to be Financially Independent

1. Savings

Budget is the most important factor to calculate. We must consider savings as one more payment. We generally make the mistake of saving what we have left over after expenses, therefore, it is essential to change this paradigm to achieve our financial goals.

Saving should be considered as a payment, and perhaps as the most important. As important as the rent or mortgage. If we do not advance in this sense, it will be very difficult for one day to achieve our goal.

The first step is to allocate a fixed savings item monthly, which must be separated before beginning to pay the bills. If the remuneration for our current job is not sufficient to achieve our objectives, it will be necessary to think about another alternative of employment, or additional income options.

Related: How Will Saving Money Benefit you

2. Invest the money

Once saving capacity has been achieved, You should put your money to work as soon as possible, the next step is investment.

It is true that the profitability of financial products right now is at a minimum, but we are not talking about obtaining short-term interest, but long-term returns. The best strategy is to use index funds, since they allow you to invest without being an expert and with adequate diversification. Because they have lower costs and the most recent studies say that in the long run they make money grow more.

Can't wait for the interest rate to rise? The stock market can also give good dividends if you choose your investment portfolio well. Diversify and bet on long-term investment accounts. There are people who are afraid to invest because of the panic of the stock market falls. But the truth is that in the long term the stock market goes up.

From Working Hard to Not Working

Achieving financial independence is not as complicated as one might think. What it takes is a willingness to embrace the mundane, a long term plan and the ability to stick to that plan. If you have those 3 things you stand a fighting chance of becoming financially independent at some point.

The following are best tips that will help set you on road to wealth accumulation and financial independence.

1) Spend Less Than You Make

Duh! Right? Well, yes and no. It may seem like a no-brainer but you’d be surprised at how many people cannot put this principle into action in their lives which often results in people having to seek debt financial advice. The truth is that if you can’t grasp this one the rest of the tips don’t matter much. It is the cornerstone of any wealth management plan and the only one that is completely non-negotiable.

2) Ditch the Credit Cards

A pocket full of credit cards and the fees and interest that go along with them are like an anchor keeping your ship in port. Pay down any outstanding credit card debt then cut the cards up once and for all and redirect your money toward acquiring income generating assets.

3) Speaking of Assets

Sure the fancy car and inground pool might impress the neighbours but how do they help you achieve financial independence? The answer is they don’t. So don’t waste your money on them. Instead buy a car wash, invest in T-bills, open a self-storage business and buy real estate. These are the things that will truly set you free. Financial education is vital so that each person can manage their savings.

4) Work with a Purpose

You can go to work every day just so that you can make your credit card and automobile payments each month. Or you can work in order to save money to purchase income generating assets. One path leads to financial stagnation the other to financial independence. Can you guess which is which?

5) Cut Back

Embrace the notion of short term pain for long term gain. If you’re smart in how you do it that long term gain will be very gainful indeed. Cut back on non-essentials and direct the savings toward investments and assets that will generate income. Whatever you do don’t spend the savings on stuff. You know, stuff. Like huge TVs, sound systems, cars and cruises.

Avoid bad debt. Bad debt is one that can be identified as the capital advance to cover an unnecessary situation. It would be, for example, to ask for a loan to go on vacation or to buy a good that we do not need or whose price is well above our economic capacity. These capital advances usually have a very high APR depending on your credit score, so the capital that we will have to return will be much greater than the capital that we initially requested

6) Reduce Your Tax Burden

People with big salaries but few investments tend to have lots of taxable income while those who have invested in real estate, businesses, tax free retirement accounts and more tend to owe minimal taxes at the end of the year. Invest your money wisely before the government takes it from you.

7) Review Your Situation Regularly

It would be great if we could make a few basic decisions, chart a financial course and put things on auto pilot. However, we live in a world where conditions and situations change at breakneck speed and so it’s important to stay on top of things by reviewing the effectiveness of your strategy at regular intervals. Don’t be afraid to make adjustments when needed.

8) Save, Save, Save

So far we’ve talked a lot about funneling your money toward income generating assets but that won’t be possible if you don’t exercise discipline and save, save, save. The person who can transcend the salary trap and reach financial independence is more of often than not the person who had the funds necessary to make that life-changing purchase or investment when the opportunity arose. And that was only possible because they saved enough money.

9) Don’t Depend on Education

Some people think if they go back to school to enhance their education they’ll wind up financially independent. Few things could be further from the truth. Education can be valuable in giving you a well-rounded world view and higher education is essential for careers in medicine and law, but for most people purchasing a car wash will be a better allocation of funds than going back to school.

10) Marry Wisely

Few things will torpedo a plan to gain financial independence faster than marrying someone who doesn’t see eye to eye on the importance of savings, investments and the purchase of income generating assets. Accumulating wealth is a long term process that requires everyone to buy into the game plan. Otherwise you could come home one day and find your spouse has bought a car with the money you were going to use for a down payment on an investment property.

What Is the F.I.R.E. Movement?

FIRE is a word that is slowly becoming fashionable. It is the acronym for the concept of financial independence, early retirement that advocates accumulating capital based on saving as much as possible and being able to reach retirement as soon as possible living on income. The movement is becoming increasingly important in the United States but it is spreading all over the world.

Retiring at 40, is it an utopia?

The key to the FIRE movement is not to reach retirement at 40 but as soon as possible. To do this you have to make a few calculations and lead some habits of life that helps you to reach the goal as soon as possible.

FIRE is a movement aimed at reducing expenses and increasing investment in order to obtain financial independence and the possibility of retirement at an early age. It is a way of life .

  • Save 50% - 70% of revenue
  • Have a minimalist lifestyle. Live frugally
  • Invest your savings in the medium / long term

Related: Tips for Living a Frugal Lifestyle

It is true that for some, retirement is a trauma, they don't know what to do with their free time. But the reality is that many more people are eager to reach that moment when they will not have to spend 40 hours a week (and many more times) dedicating themselves to tasks that do not satisfy them completely.

Therefore, the FIRE objective is getting ready to retire as soon as possible. Have free time to enjoy the things that really fill us in life, such as family, play sports, devote ourselves to hobbies and live a full and complete existence. This could even include working part-time or on a motivating career.

After leading a life of minimalism and savings, you may arrive at a situation where you have enough capital for retirement. Financial freedom allows you to work but with the advantage of not being obliged to do so. keep in mind that not working means having more free time and there is always the risk of spending more money. Knowing how much to save to get to the FIRE moment must take this situation into account.

Related: Early Retirement Pitfalls

Remember: no asset that generates income is a bad asset. While waste disposal isn’t a glamorous profession everyone needs to have their trash taken care of. Don’t be shy about purchasing or investing in things that aren’t sexy headline grabbers. Your only criteria for deciding whether to invest in a particular business should be “is there money to be made here?”

The road to financial independence dream is paved with discipline and lit with income generating assets and actively managed investments. There are no secrets. No magic spells to conjure and no substitutes for careful planning, smart money management and long term commitment to the goal.

Tagged in: personal finance
Beware of little expenses. A small leak will sink a great ship.


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Guest Tuesday, 23 July 2024