From financial security to become financially independent. Welcome to Stage 4 on the Financial Wellness Roadmap. Financial independence is when you have the security of assets and income streams to cover your living expenses for a period of time (or the rest of your life) without having to depend on a paycheck.
Stage 4: Financial Independence
Financial independence is reached when you have enough money to cover your basic needs and some luxuries too. Expenses are paid from savings accounts, income generated from assets or investments, and some work. Basically, you must have sufficient wealth to live without depending on a job. The sign of financial independence is when working is a choice and not a requirement.
At stage 4, you can answer questions like: explain the 4% rule? what’s your retirement withdrawal rate? how much money saved? how much is your savings earning? do you factor in inflation?
- control lifestyle inflation;
- holds no debt;
- healthy savings accounts;
- earnings outpace withdrawal;
- passive income streams;
- diversified assets and investment portfolios.
Financially independent people reach this stage through saving and investing for many years or build other sources of income streams making them independent from a single source of income or employer.
One thing to keep in mind is that financial independence isn’t a one size fits all or a specific dollar amount that everyone must reach. Financial independence is quite personal and takes into account your personal lifestyle choices.
Financial Independence for Everyone
Although media coverage focuses on people who retire from work after amassing a sizable nest egg, the truth is financial independence is a matter of lifestyle, income, and math.
To be financially independent means you can cover all your living expenses wants and needs, and unexpected circumstances purely from your savings, investments, assets, or business profits.
Becoming financially independent seems daunting, but it’s not as complicated as it sounds. It starts with calculating your financial independence number.
Challenge Your Lifestyle Choices
After living a certain way, you’ve made financial decisions to cultivate a lifestyle. Many of these decisions are made unconsciously but still impact our finances. Challenge your lifestyle choices by asking yourself:
- would I make different choices if it meant I could work less?
- will I change my lifestyle if it meant I could quit a high paying job I hate for a lower-paying job I’d enjoy?
- would I forgo buying a new car so I can pay off another debt?
There are no right or wrong answers to these questions. It’s a personal choice. And my point is to let you know you have a choice and one that affects your financial wellbeing.
The lower cost of your lifestyle can mean a smaller amount of savings needed to finance that life.
Debt is an obligation. Having debt allocates more of your time to work rather than fun. The goal is for you to lower the cost of borrowing and ultimately eliminate debt.
Sure there are further discussions needed regarding paying off mortgages and using leverage to create wealth. But for the vast majority of people, reducing the amount of debt you’re obligated to can support your financial independence and wellbeing.
Financial Independence from Your Net Worth
Accumulate a big enough nest egg in which you can withdraw money to pay for your living expenses for the rest of your life. Ideally, the nest egg comprises of appreciating assets that can be withdrawn or easily sold for cash. Although you can include your primary home, cars, jewelry, or anything of value in calculating your net worth, it’s more ideal to only use retirement accounts, investable assets (stocks, ETFs, etc), vacation, and rental properties, stakes in business ventures.
Get to know your financial independence number.
Financial Independence Number = Yearly Spending / Safe Withdrawal Rate
Your financial independence number is the amount of money needed to be able to pay for expenses without depleting your money. Basically, once you have the amount of money saved/invested equal to your financial independence number, you can call yourself financially independent.
From Multiple Income Sources
Create enough income streams that cover your living expenses can help you achieve financial independence. It may take you years to achieve your Financial Independence Number, but you can certainly work at creating multiple streams of income.
If your income streams (excluding your work income) cover your living expenses, then your present job is optional and you can consider yourself financially independent. You have enough income to pay for your lifestyle with work being optional.
Why Financial Independence Matters
The result of financial independence is time wealth.
When you’re no longer dependent on a single source for income and can confidently cover all your expenses without working, then you regain control over your time and the things you do within that time.
Being financially independent gives you more time to spend with loved ones, work on passion projects, volunteer, pursue a new profession, or even start a new business.
Next Stage: Financial Freedom