Financial independence – how to achieve it by 2024

We consider a person to be financially independent when they reach the level where they have enough income to pay their living expenses for the rest of their life.

This is done without the person being dependent on their job or other individuals such as a parent.

Today we’ll cover more information about this type of independence, including the advantages, how much you need and what you should do to achieve total peace of mind.

What is financial independence?

In our article on financial freedom and financial independence, we mentioned that when you are financially independent, you are not protected for a certain period, but for your entire life.

In this way, you have enough resources to support yourself throughout your life, without depending on work.

This is possible because you receive money from other sources of income that don’t require you to be active.

As a result, they can choose whether to work.

So, when we talk about financial freedom and financial independence, note that financial freedom is a step prior to independence.

Financial freedom can be relative because it changes according to each person and their spending.

For example, a teenager may consider that he has financial freedom because he buys what he wants without depending on his family.

Even though he lives with his parents, if he manages to save enough money to maintain his lifestyle for a certain period (e.g. US$10,000), he is financially free.

On the other hand, a couple should take the same into account:

They can consider themselves financially free if they have the resources to support themselves for a certain period.

Let’s say the period is 3 years and the couple’s monthly expenses are US$1,500.

This means that they both need US$54,000 to consider themselves financially free.

Note that the figures are different when comparing the teenager and the couple, but both have financial freedom because they can support themselves for a certain period.

Financial independence and passive income

These two concepts are automatically related, because an individual is financially independent when their assets generate enough income so that they don’t need to work to maintain their standard of living.

This is why financial independence and passive income go hand in hand, as this type of income comes independently of your efforts.

For example, if you own a property and decide to rent it out, the income generated is passive because you don’t have to work every day to receive the money.

Although you have to manage your investments, you don’t have to work to do so.

With a good investment strategy and knowing how to choose the right options, you can make your money work for you.

Advantages 

You’ve probably had the feeling that you’re always chasing money, without ever making the most of it.

That’s exactly what happens when you insist on spending everything you earn and can never take a month off to relax and take that trip to the place you’ve always dreamed of.

It’s the desperation that hits when you’re self-employed, something unforeseen happens, and you just don’t know how you’re going to pay the bills for the month.

Therefore, the first benefit of financial independence is to let go of this feeling and anguish.

You become the master of your money and your time, so that you can choose your way of life and have greater peace of mind.

This means you have the freedom to choose your job, for example.

It’s not common for a financially independent person to simply stop working.

In fact, they can work in a lower-paying job, but one that they love, as this is a matter of choice, not necessity.

For example, Warren Buffett is one of the world’s greatest investors, and yet he continues to work at what he loves.

What’s more, by achieving financial independence, you’ll have more quality to live in retirement.

That way, you don’t have to rely on a public pension system that can lower your standard of living.

Having financial independence means that you are prepared to deal with extra expenses such as health care, while being able to maintain your comfort throughout your life.

In short, it’s worth talking about flexibility in everyday life.

Since you’re not tied to a work schedule, you can enjoy life and have different experiences.

For example, traveling during a non-holiday period in order to better enjoy the place, without too many tourists.

This can bring more satisfaction to everyday life.

How much does it take to be financially independent?

Some experts say that having assets equivalent to 200 times what you spend each month is independence.

For example, if you spend US$3,000 a month, you need US$600,000 to be financially independent.

What should you do to be financially independent?

Financial planning is the first step.

Although independence may seem far away, it all starts with that first effort.

You need to keep your finances in order by putting all your income and expenditure in writing or in a spreadsheet.

From there, your earnings will allow you to live a peaceful life and invest.

If the answer is yes, you’re on your way to achieving financial freedom and then financial independence.

But if you find that the amount you receive each month is not enough to pay your monthly expenses and invest, you need to find a way to solve this problem.

For example, you could look for options to earn extra income.

You should also learn how to cut unnecessary expenses and control your finances.

It’s also important to get rid of your debts.

Pay off all outstanding debts, such as credit card debts.

To do this, you can use strategies such as debt snowball.

In this case, you pay off the minimum of all your debts and use the extra money to pay off the smallest debt.

Once you’ve paid off this debt, you simply use the extra money to pay off the next smallest debt.

This is done until all debts are paid off.

Remember that debt is the opposite of financial independence, because instead of enjoying your money freely, you’ll be stuck with charges and even interest rates.

So try to buy less and pay off your debts. This will increase your chances of investing money every month.

Debts are not just debts that have fallen due

Debts represent any financial obligation, even if you’re paying for everything on time.

For example, if you use your credit card to pay in installments and over the next 5 months you have to pay for a certain product, you have a debt.

Even if you’ve used the card to pay next month and haven’t worked for the money yet, you’re getting into debt.

Other examples are:

You have the mortgage on your property to pay every month or the installment on your car.

These are all debts that you should plan to pay off as soon as possible.

Emergency fund for financial independence

Imagine that a person is self-employed and, due to a health problem, is unable to work for four months.

If they don’t have any money saved, they will certainly get into debt, such as taking out a loan to pay for their expenses during this period.

But if they have an emergency fund, they can deal with the situation more calmly because they have the money they need to get by.

Some say that an emergency fund is made up of 6 months of your cost of living.

So, if you spend US$2,000 a month, you need US$12,000 saved.

However, in the case of a family where more people can contribute to the emergency fund, there is the possibility of structuring a larger fund.

For example, a fund that would cover the family for a period of 1 year, in case of unforeseen events.

Note that, just like financial independence, when we talk about the fund, there is no one-size-fits-all amount.

You need to define the time you would like to be financially secure (between 6 and 12 months) and analyze how much you need to support yourself during that period.

See more information on emergency funds.

Financial planning, debt-free living and emergency funds are basic concepts that you’re tired of hearing, even though they’re essential.

Once you know the importance of each of the above concepts, let’s move on to something that will certainly ensure your independence:

Investing in passive income to gain financial independence

As mentioned above, passive income and financial independence are closely linked.

This is because those who have enough passive income to support themselves throughout their lives are independent.

Therefore, in this topic we’ll look at excellent investment options that generate passive income:

Firstly, you can invest in dividend stocks, which distribute part of the company’s profits to investors on a regular basis.

For example, every quarter you receive a certain amount.

Good dividend stock options increase your payout over time.

As a result, this also increases your income.

Another plus point is that dividend stocks are less volatile than growth stocks.

This ensures that your investment portfolio remains stable and that you achieve financial independence.

Investors can also choose to reinvest the dividends in the shares, potentially increasing their investment if the shares perform well.

Secondly, we can talk about bonds and bond index funds.

Rather than buying an equity stake in a company, this is a form of investing in which you lend money to a company.

In addition, the money is lent to the local, state and federal government, so that income is generated through interest.

Compared to shares, this alternative is safer, although the return on investment is lower.

For this reason, financial experts recommend that you invest part of your portfolio in bonds.

Other investment options 

It is also worth mentioning the possibility of investing in dividend index funds and exchange-traded funds, which hold shares with dividends.

This is done to achieve financial independence, avoiding the purchase of individual shares.

It serves as a passive investment alternative for those who prefer a more hands-on approach.

On the other hand, CDs are also good options.

The acronym stands for certificate of deposit, and is a type of savings account used for a fixed period of time.

For example, you can deposit funds in a CD for 4 years and receive a fixed interest rate for the period.

Usually the interest rate is higher, which means you get more money at the end of the term.

However, it’s important to be aware that you pay a penalty if you want to withdraw the funds before the end of the period.

Finally, invest in private equity for financial independence.

This is a way of financing a private company that you believe has the opportunity to generate income in the future.

For high net worth individuals, this means investing in private equity funds.

This is why it is only available to accredited investors who meet certain net worth or income requirements.

Otherwise, you can back a trusted person to help finance the business with an agreement to earn returns on any future profits.

As a tip, remember to diversify your investments.

Investing in a single business is an inherently risky and long-term bet. Never invest more than you can afford to lose.

Also, get to know other alternatives for financial independence, such as:

High-yield savings accounts, rental properties, real estate investment funds, and money market funds.

Daniel 29 de April de 2024