How to Achieve Financial Independence - NerdWallet (2024)

Rising debt levels and increasing real estate prices have led many Canadians to rethink their long-term plans. Instead of retiring at 65, they’re looking to achieve financial independence in their 40s or even 30s. It may sound like an impossible thing to do, but people have done it, and you can too.

What is financial independence?

In a traditional sense, financial independence means having enough passive income to pay all of your living expenses. Most people who seek out this lifestyle don’t want to rely on being employed or dependent on others. Therefore, passive income is necessary to fund their lifestyle, so generating that income stream is a priority.

While financial independence started off as a way to retire early, the meaning has changed over the years and can mean various things. There are now different types of financial independence that may be suitable for people of any age.

Moving out on your own

You could argue that the original meaning of financial independence referred to kids who moved out of the family home. The idea is that you can now make enough money to get your own place and pay all of your own bills without relying on the support of family or friends.

Breaking the paycheque-to-paycheque cycle

Even if you’re living on your own, you may not feel financially independent if you live paycheque to paycheque. Admittedly, breaking this cycle is not always easy as there are only so many expenses you can cut. You might have to think about starting a side hustle or a part-time job to increase your income.

Financial independence, retire early

“Financial independence, retire early” (FIRE) has become a major goal for some people since it’ll allow them to quit their jobs and live off their income-generating assets.

Of course, getting to this point is not easy. It usually requires that you pay off debt, cut expenses, and save and invest aggressively as soon as possible. It may also require that you move to an area with a lower cost of living to help reduce your expenses.

Barista FIRE

The FIRE movement has adapted quite a bit with one popular version coined Barista FIRE. With this version, you save enough so you only need to work part-time. That job could be something simple, such as being a barista. The main point is that you’ll no longer need to work 40+ hours a week in a corporate office to maintain your lifestyle.

Coast FIRE

Coast FIRE is very similar to Barista FIRE, but the idea is that if you invest early, the power of compounding interest will help you reach your financial goals. Since your investments will take care of any long-term goals, you only need to earn enough money to cover your current expenses. You’re essentially coasting while your investments do their thing, allowing you to work less or do more meaningful work that may pay less.

Steps you can take to become financially independent

Figuring out how to become financially independent will always be the hardest part of reaching your goals. Some people are fortunate to graduate debt-free with high-paying jobs, so reaching financial independence becomes a bit easier. Regardless of your income level, there are a few things you can do to grow your net worth and support your journey to financial independence.

Cut your expenses

If you’re serious about financial independence, you’ll need to cut way more than just your daily coffee. Think of it this way: every dollar you save puts you closer to retirement. Alternatively, every dollar you spend puts you further away from early retirement.

If your goal is FIRE, you need to slash every expense possible and budget accordingly. Your monthly bills are a good way to start. Take a look at your cell phone and internet plans to see if you can renegotiate a lower price. Cooking more meals and not wasting any food is another easy way to cut costs, especially if you’re finding ways to save money on groceries. You could also consider greatly reducing your entertainment budget and focusing on free things to do instead.

Start investing

For any type of FIRE plan, you’re going to need to become familiar with the basics of investing for Canadian beginners so you can start earning income from your investments. Since you’ve already slashed your expenses, you should take that money and invest it into products that can generate income. Learn how to invest in stocks, especially ones that pay dividends, or index funds.

Typically, people invest with the mindset that they’ll retire at 65. If your goal is to retire earlier, you need to know how much you’ll need to retire and ensure that your investments will last longer once you start drawing down on them. That may require you to increase your cash flow and save more or keep investing even after you’ve retired.

Striving for financial independence is not for everyone, but if you can achieve it, you’ll enjoy decades of financially-secure retirement.

About the Author

Barry Choi

Barry Choi is a freelance personal finance and travel expert. His website moneywehave.com is one of Canada's most trusted sites when it comes to all things related to money and…

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Now, let's delve into the concepts mentioned in the article:

  1. Financial Independence: Financial independence is defined as having enough passive income to cover all living expenses, eliminating the need for employment or dependency on others. It has evolved beyond early retirement and can take various forms suitable for people of any age.

  2. Moving out on your own: Original financial independence often referred to individuals who could support themselves without relying on family or friends. This involves making enough money to live independently and cover all expenses.

  3. Breaking the paycheque-to-paycheque cycle: Even if living independently, financial independence may not be achieved if stuck in a paycheque-to-paycheque cycle. Breaking this cycle might involve starting a side hustle or a part-time job to increase income.

  4. Financial Independence, Retire Early (FIRE): FIRE is a major goal where individuals aim to quit their jobs and live off income-generating assets. Achieving FIRE requires paying off debt, cutting expenses, and aggressive saving and investing.

  5. Barista FIRE: A version of FIRE where individuals save enough to work part-time in simpler roles, such as being a barista, allowing a reduced workload while maintaining their lifestyle.

  6. Coast FIRE: Similar to Barista FIRE, but with a focus on early investment. The power of compounding interest helps reach financial goals, allowing individuals to work less and cover current expenses while investments grow.

  7. Steps to become financially independent:

    • Cutting expenses: Slashing every possible expense, including renegotiating bills, cooking at home, and reducing entertainment budgets.
    • Start investing: Learning the basics of investing, especially in dividend-paying stocks or index funds. Investing the money saved from cutting expenses.
  8. Striving for Financial Independence: Financial independence is a challenging goal that involves meticulous budgeting, expense reduction, and strategic investing. While not for everyone, achieving it can lead to decades of financially-secure retirement.

About the Author: Barry Choi is a freelance personal finance and travel expert, known for his trusted website moneywehave.com, covering various aspects related to money in Canada.

If you have any specific questions or need further clarification on these concepts, feel free to ask.

How to Achieve Financial Independence - NerdWallet (2024)
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