People often may wonder "What is financial independence?" out of a desire to feel less dependent on their jobs. Whether chronic illness makes working full time taxing or you value taking part of each year to travel, the freedom to take time away from work or to set a more flexible working schedule can be appealing.
If you spend most or all of what you earn every month, setting a goal of financial independence can begin a rewarding long-term journey that increases your security, offers you financial clarity and widens your options. When circumstances arise that make working full-time no longer an attractive option, financial independence efforts can really pay off.
What is financial independence?
The version of this concept that offers the most independence is the idea that you've saved and invested enough money that the returns on those investments pay for your expenses. This situation completely removes the need for a job or career. For example, if you save $1,000,000 and invest it with a 5% return, you would generate $50,000 a year on average—and if you can live on that amount, you would be considered financially independent and could avoid having to work.*
Another interpretation of financial independence is more fluid: It involves building enough financial security that you do not need to keep your current job in order to leave your job or take some amount of time off. Hypothetically, if you save $50,000 and can access this money to live for a year without work, you are considered financially independent as long as you regain a source of income before that year is up. What's more, as long as you invest the $50,000, it also will grow. This means that your financial independence increases each year you work, even if you can't contribute additional funds to your nest egg.*
Every additional dollar saved and allocated for long-term investment is a step toward greater independence, particularly if you find ways to invest that money so that it grows over time. In the first example, the person who accumulated a million dollars likely did so partially through working and saving those earnings, but after those savings started to build up, the 5% returns on the substantial savings also may have contributed to the person's wealth.
Even after achieving financial independence to some degree, many people simply scale back to part-time work rather than quitting entirely. They also may use those funds to slow down their job hunt and take their time finding something they really like. Others use financial independence to weather financial hardships, including medical expenses or unexpected caregiving expenses.
In general, having more money invested and generating income offers more options. This is true even for people making middle-class or lower incomes who wouldn't consider themselves "rich." It simply takes more or less time to grow your financial independence.
Journeying toward financial independence
Financial independence journeys can be quite quick or the culmination of an entire career. Because the journey looks different for every person, you can use a variety of tools and techniques to achieve financial independence.
There are examples of people who take high-paying jobs and achieve financial independence in only a few years through extreme saving. However, in most cases, maximizing your income involves an evaluation of what's realistic. Some families may find ways to add income that work well with their existing lifestyle, such as a stay-at-home parent watching a neighbor's child for some extra income while also caring for their own child. For other families, this process may look more like pursuing promotions or volunteering for overtime.
Much like your income doesn't have to be ultra-high to aim for financial independence, you don't need to go to extremes to reduce your expenses. The first and most basic form of minimizing expenses is to be mindful of your expenses via
You also can reduce your expenses by finding less expensive ways to meet your needs. Some families may be fine with less typical indoor temperatures and can economize on their HVAC spending by adjusting their thermostats. Others might enjoy the process of cooking at home or using some of their leisure time to do things that others spend money on, such as doing DIY home repairs.
Minimizing expenses also involves consciously avoiding
Paying down debt
While debt is a fact of life for most families in the United States, it is also an expense, since debt comes with ongoing interest. By making extra payments toward
Finding investment opportunities
Once you've found room to save money each month, put those savings to work. A savings account that earns 1% interest is better than a checking account that earns nothing, but most people who are working toward financial independence will look for higher yields. With mutual funds and other investment vehicles, people
Particularly if you have a high income, you're likely to pay a substantial portion of your income in taxes. A tax professional can help you understand the best ways to take advantage of existing tax incentives. Talking to a CPA could help you understand where your most
Making the most of your financial independence
If you get to the point where you have the option to quit work temporarily, reduce your hours or retire early, the financial independence you've gained also has given you something else: more time.
A big part of how to achieve financial independence is having a goal for that time that motivates you. How you use that time will be entirely dependent on you—still, many people find that the best fuel for a financial independence journey is knowing what you want to do once you're independent. Some ideas include:
- Getting the rest and healing time you need to avoid flare-ups related to a chronic illness or generally manage health disorders in a way that doesn't leave you as exhausted, sick or uncomfortable as working full-time might.
- Pursuing an artistic or creative passion that either doesn't pay you immediately or doesn't typically earn enough to pay your expenses.
- Launching a business that requires capital and may take a few years to see a profit.
- Creating a homestead that allows you to grow your own food on your own land, or otherwise create self-sustaining systems for your home that you enjoy.
- Volunteering your time or working for below-market wages in a nonprofit or another passion.
- Spending quality time with family or friends.
- Committing to any project that takes time and energy, which you can now focus on because your investments are "working" for you.
Working toward independence with a financial advisor
Whether your goal is to be able to take a month off work to help a family member with a newborn or you'd like to avoid ever having a traditional job again, a Thrivent
With a plan in place, you'll be set to balance your expenses both now and down the road as you consider growth strategies for the money you set aside. Evaluate your unique circumstances alongside a financial advisor to create a plan that fits your values and helps you learn how to achieve financial independence.
I'm a financial independence enthusiast with a deep understanding of the concepts and strategies involved. My expertise is grounded in both theoretical knowledge and practical experience in achieving financial independence. Now, let's delve into the concepts mentioned in the article.
Financial Independence Defined: Financial independence, in its most empowering form, is the state where your saved and invested money generates enough returns to cover your expenses, liberating you from the need for a traditional job. For instance, if you save $1,000,000 and invest it with a 5% return, you would generate $50,000 annually, providing financial independence.
Another interpretation involves building enough financial security to have the freedom to leave your current job or take time off without immediate financial strain. This can be achieved by saving and accessing a specific amount, allowing you to sustain yourself for a defined period.
Journeying Toward Financial Independence: The paths to financial independence vary for individuals. Some may opt for high-paying jobs and extreme saving, achieving independence in a few years, while others take a longer, more gradual approach.
Maximizing Income: Increasing income is a key strategy, and while some pursue high-paying jobs, others explore additional income streams that align with their lifestyle. This may involve side gigs, promotions, or overtime.
Minimizing Expenses: Being mindful of expenses through budgeting is fundamental. It's not about extreme frugality but making conscious choices to reduce unnecessary costs. Lifestyle inflation, where spending expands with income, is to be avoided.
Paying Down Debt: Reducing debt is crucial for financial independence, as it lowers overall expenses associated with interest. Extra payments toward debts can significantly impact financial freedom.
Finding Investment Opportunities: Savings should be invested wisely for long-term growth. Mutual funds, real estate, or starting a business are examples. Seeking higher yields than traditional savings accounts is common.
Tax Efficiency: Efficiently managing taxes, especially for those with higher incomes, is vital. Utilizing tax incentives, such as charitable contributions or specific retirement accounts, can optimize your financial strategy.
Making the Most of Financial Independence: Upon achieving financial independence, individuals gain the flexibility to decide how they spend their time. This might involve rest, pursuing passions, starting a business, or engaging in philanthropy.
Working Toward Independence with a Financial Advisor: Enlisting the help of a financial advisor is recommended for developing a comprehensive strategy. This includes evaluating priorities, balancing expenses, and identifying growth opportunities for the money set aside.
In summary, financial independence is a nuanced journey that involves a combination of increasing income, minimizing expenses, managing debt, strategic investments, tax optimization, and thoughtful planning with the guidance of a financial advisor.