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Are you tired of working?
Maybe you dream of a life where work is optional.
Or your dream is to spend your days doing activities that you love and can earn an income from.
This dream doesn’t have to be a dream.
You can make it a reality and become financially independent.
Financial independence is a term used to describe accumulating enough income or wealth to rely on for the rest of your life.
And many people have decided to change the narrative of getting a job, working 40-plus years, and retiring at age 65.
They want more out of life.
So they live a different way.
They limit spending and prioritize saving, so they can quit the rat race and live on their terms.
In this post, I show you how to become financially independent so you can live the life of your dreams.
Table of Contents
How To Become Financially Independent
What Does Financial Independence Mean?
To become financially independent, you must first fully understand what it means.
At its most basic, you achieve financial independence when you have enough money saved and invested that you can support your lifestyle for the rest of your life without the need to work.
In other words, you have enough cash to pay your monthly expenses and can choose to work if you want.
If you hear people talk about financial freedom or FIRE, they are talking about being financially independent.
On the other hand, if they are talking about financial stability, this is not the same as financial independence.
Financial stability is simply having your income cover your monthly bills and being able to save money every month.
When you are financially stable, your finances are not a stress or worry to you, but you are not yet financially independent or are not interested in attaining that goal.
- Read now: Here is how to become financially stable
Types Of FIRE
Finally, I wanted to touch on the topic of FIRE.
FIRE stands for Financial Independence Retire Early.
You can find many articles and blogs dedicated to teaching this topic.
There are two main types of FIRE, Fat FIRE, and Lean FIRE.
|Lean FIRE||Having less than $1 million saved for retirement.|
|FIRE||Having $1 million to $2 million saved for retirement.|
|Fat Fire||Having more than $2 million saved for retirement.|
Fat FIRE is when you have saved $2 million or more because you don’t want to reduce your living expenses.
Lean FIRE is when you have $1 million or less saved because you are willing to cut your expenses so you can quit working as soon as possible.
These terms will become more relatable as you continue reading the article.
12 Steps To Achieving Financial Independence
Now that you understand financial independence let’s look at how you get there.
Achieving financial independence doesn’t have to be complicated.
Becoming financially independent can be pretty straightforward if you know how to manage your money well.
You need to save a percentage of your monthly income.
But the more income you save, the sooner and easier it will be to attain financial independence.
Many recommend saving at least 50% of your monthly income if you want to FIRE.
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The truth is, you can get there by saving less.
You just have to balance out your goals with your income and expenses.
Here are the best ways to do this.
#1. Choose Achievable Goals
The most critical step in achieving financial independence is to set goals that are not only achievable but also clear and well thought out.
Having goals will make it much easier to reach financial independence.
To set up financial goals, one should consider using the SMART framework.
The SMART framework is specific, measurable, achievable, realistic, and time-bound.
Using this framework will certainly help in setting achievable goals.
Once you have your goals, keep them visible, so you are reminded of them daily.
In our consumer-driven culture, giving in to the temptation to buy things can be easy.
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When you constantly see your goals, it is easier to avoid these temptations.
Also, since goals are different for everyone, there should be little to no stress over whether or not you are doing it right.
Do what is best for you and your goals, not for anyone else.
You might be comfortable saving 30% of your income while others save 60%.
No one is wrong. You have different goals.
However, regardless of your goals, it’s important to set both long-term and short-term goals.
It is critical to set short-term goals.
Saving up a lot of money can sometimes be discouraging because it is such a large number.
But by creating shorter-term, intermediate goals, you can make the process easier.
For example, if you want to have $500,000, set an annual goal of increasing your savings by $20,000.
#2. Make A Budget
Budgeting is helpful no matter what, but especially when pursuing financial freedom.
When it comes to building a monthly budget, you should consider:
- Your income
- Housing (mortgage or rent)
- Household maintenance and upkeep
- Clothing, hygiene, and personal care items
- Groceries and food
- Prescription medication
- Travel expenses
- Entertainment (internet, subscriptions, games, movies, activities, etc.)
- Recurring expenses (debt, bank account fees, utility bills, phone bills, etc.)
It may help to create a separate checking account for your budgeting.
To protect yourself against theft and bank failure, ensure you are an FDIC-insured bank member.
If you want to take budgeting a step further, you can try following the 50/30/20 budget rule.
This rule, or guideline, is supposed to help those who follow it achieve financial independence.
- Read now: See the 50/30/20 rule in action
The approach entails dividing finances into three categories: needs, wants, and savings/paying down debts.
For this budget guideline, 50% of your income should be spent on needs, 30% on wants, and 20% on savings and debts.
It is a simple way to start budgeting and works for many people.
#3. Create An Emergency Fund
As mentioned before, an emergency fund is important, especially when you are financially independent.
An emergency fund will give you peace of mind in case any unexpected expenses arise, such as major house repairs, medical issues, or if you should need a new vehicle.
Experts recommend having three to six months’ worth of monthly expenses set aside in an emergency saving account.
- Read now: Learn how to quickly build a six month emergency fund
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I recommend more of a savings cushion as you never know what life will throw at you and having more money saved is never a bad thing.
#4. Pay Off Debt
You can never be financially independent if you owe other people money.
Plus, for every dollar you are paying on your debt, that is one less dollar you can save and let grow.
For example, let’s say you have $5,000 in debt, and it takes three years to pay it off.
After three years, you now have zero dollars since it went to someone else.
If you didn’t owe this money and invested for those three years, you would have over $6,000 saved.
Because of this, you must pay off your debt as soon as possible.
The good news is there are plenty of ways to go about this.
Here are some options, in no particular order.
And just like with your goals, one is not right for everyone.
Pick what makes the most sense for you and stick to it.
Debt consolidation is taking multiple debts and combining them into one.
For example, if you have high-interest debt on three credit cards, you can consolidate them into one debt and have one monthly payment.
Consolidating makes it easier to pay off since you can focus on one debt, not multiple.
The easiest way to consolidate your debt is to use a personal loan.
They carry a lower interest rate than other debt, but they have a fixed repayment period, so your monthly payments might be higher than your credit cards.
But, if the goal is to become financially independent, this is a good thing as you will become debt-free much faster.
Debt Snowball Method
The debt snowball has you list out your balances from smallest balance to largest.
You make minimum payments on all but the lowest balance and pay as much as possible on that one.
You repeat the process with the next smallest balance when you pay off that one.
This plan has you quickly see progress, but you can pay more money in interest charges.
With the debt avalanche, you organize your debts based on the interest rate.
You put down high-interest debt first, then smaller interest debts follow.
Pay the minimum payments on all but the high-interest debt each month until it is paid off.
Then follow the same plan for the next highest interest debt until you pay it all off.
Your progress will typically be slower using this compared to the snowball method, but you will save on interest charges.
A balance transfer is similar to consolidating your debt.
But instead of taking out a personal loan, you move all your balances to a credit card.
The benefit here is most credit card companies offer a 0% interest promotion, so you can save a lot.
The bad news is once this promo ends, you are looking at interest rates in the high teens or low twenties.
Because of this, a balance transfer is ideal for smaller debts you know you can pay off in a short amount of time.
#5. Cut Costs
Living a frugal lifestyle is a vital part of achieving FIRE.
To begin, you need to review your budget to see where you spend money.
If you don’t have a budget yet, or it doesn’t have a few months’ worth of data, you’ll have to get this information elsewhere.
Your bank statements and credit card statements are obvious choices.
Once you see how you spend, you need to figure out how to lower your costs.
There are endless ways to go about this.
You could buy store brand items when grocery shopping or buy some things used as opposed to new.
- Read now: Here is how to spend less money on groceries
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If you shop online, use cashback sites like Rakuten and Swagbucks, so you earn cash every time you shop.
Want to earn cash back shopping online? Look no further than Rakuten. Earn up to 25% on your online shopping. New users get $30 when you spend $30 in the first 90 days!
For discretionary items, you can simply stop buying them altogether.
A great trick is to reduce an expense category by 50% for a month and save the difference.
Then you can switch categories for the following month.
#6. Understand Needs vs. Wants
Related to the above is understanding the difference between needs and wants.
In recent years, the line between the two has become blurred, and many wants now feel like needs.
Because of the confusion, you have to take some time and determine if you truly need an item or if it is a want.
If it is a want, work to find ways to get it cheaper than full price.
For example, wait for it to go on sale or buy it used.
The more you can separate needs from wants, the more you will be able to save.
#7. Increase Your Savings
When it comes to FIRE, you need to prioritize your savings.
The more you can save, the more compound interest works in your favor, and the less money you need to earn and save.
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For example, if you save $100 a month for 20 years, earning 2% interest, you end up with $29,510.
Of this, you saved $24,000 and earned $5,510 in interest.
If, on the other hand, you saved $500 a month for 20 years, earning 2% interest, you end up with $147,550.
Of this, you saved $120,000 and earned $27,550 in interest.
As your savings grows, so does the amount of interest you earn.
The easiest way to save is to set up an automatic savings plan.
Many banks, if not all, will allow you to have an automatic withdrawal taken from your primary account and then placed into an emergency fund or a savings account.
You can set this up to be taken out on whatever day and for however much you choose.
How much you decide to put into your savings will depend on you and your specific financial circumstances.
To save the most money, you must regularly review your savings rate.
First, when you start your journey, then again as you bring in additional income.
Then you will have to review it once you pay off your debt.
You should strive to increase the amount you save annually by 1-5%.
#8. Earn Money With A Side Hustle
Having a side hustle is another excellent way to work towards financial independence.
When you have several income streams or side hustles, you’re bringing in additional cash than you would on your regular 9-5 income.
There are many side hustles that you can consider to supplement your monthly income.
Freelancing is a great starting point from writing to graphic design.
Walking dogs is another great side hustle idea, as well as pet-sitting or babysitting.
Use the extra money you earn for financial independence and financial future.
- Read now: Here are the best ways to make money on the side
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The key here is having a plan for this extra income.
If you are in credit card debt, you should consider putting all this income towards paying it off so you can be debt-free as soon as possible.
If you are not in debt, use your side hustle income to boost your savings.
As great as it is to save your money, you can’t put all of it into a savings account.
You need to invest in the stock market.
If you don’t, you will earn a small return and need to save a lot more.
With investing, you will earn a higher return, making it easier to achieve financial independence.
- Read now: Here are the investing basics to know
Understand that when investing, you can lose money.
But if you stick with it over the long term, you will be OK.
And most people who choose this lifestyle understand this.
According to Blaine Thiederman, MBA, CFP®, of Progress Wealth Management, “the real risk we should all be much more concerned with is running out of money which is something that people who aim for FIRE all understand very well. This is why most people who FIRE don’t invest in target-date funds or bond-heavy portfolios. They understand that their timeframe is 40+ years and invest accordingly.”
The next question is, how do you invest your money?
You can choose to hire an investment professional or invest yourself.
Only you know if you need the help of a financial advisor or if you can go alone.
If you decide to hire a financial advisor, ensure they are a fiduciary, so your needs are put first.
If you want to invest yourself, you have many options to choose from.
My favorites are Betterment and Acorns.
I like Betterment for most investors because they have a solid track record and do everything for you.
You open a free account, set your goals and monthly investment amount, and Betterment does everything else.
Betterment is one of the original robo-advisors out there. And they are still thriving thanks to their belief in always innovating. When you invest with Betterment, you know you are making a smart choice.
For those with a small amount of money, I like Acorns because you can invest for as little as $5.
Plus, they allow you to round up your purchases and invest the spare change.
While it might not sound like it is worth it to invest your change, it does add up over time.
Acorns changed the game when they allowed you to start investing your spare change. With a simple to use app and effortless ways to invest, Acorns is a solid choice for many investors just starting out without a lot of money to invest.
#10. Diversify Your Investments
Usually, diversifying your investments means having a mix of stocks and bonds.
But in this case, I want to discuss financial accounts.
Most people invest in retirement accounts like 401k plans and traditional and Roth IRAs.
This type of retirement planning is perfect for those looking to work until 65 years old.
But if you plan on leaving the workforce sooner to enjoy early retirement, you have different financial needs.
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With most retirement accounts, you can’t access the money before you turn 59 1/2 without incurring penalties.
As a result, you need to understand where your future income will come from.
You need to have money in non-retirement accounts to access before you turn 59 1/2 in retirement accounts.
By having a mixture of investments, you can ensure you have available cash at all times.
#11. Know Your Financial Independence Number
Knowing your financial independence number is critical for success.
In most cases, you must have 25 times your annual living expenses.
So if your living expenses are $100,000, you need $2.5 million.
But if your living expenses are $40,000, you need $1 million.
The bottom line is that the better you can control your spending habits, the less money you need to save, and the sooner you can experience FIRE.
I recommend you start out calculating your number and start to save.
Then, review how you are spending money in a year and if the reduced spending amount is sustainable.
Depending on your answer, you calculate your number again to find the ideal amount you need to save eventually.
#12. Have A Plan For Health Insurance
While achieving financial freedom is great, one greatly overlooked area is health insurance.
Since their employer’s health insurance covers most people, they are in for a shock when getting insurance on their own.
The monthly premiums for health insurance can be double or triple what you are used to paying now.
This increase in pricing can quickly derail any financial plan as your monthly financial needs just increased a lot.
So what are your options?
A few ways are as follows.
- Get a part-time job
- Buy insurance through the healthcare marketplace
- Use health share ministries
All have their pros and cons.
For example, many part-time jobs offer this benefit, but you might have to work 30 hours a week.
A health share ministry is a low-cost option, but not for those who aren’t Christian.
- Read now: Here are the pros and cons of health share plans
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The sooner you look into your options and come up with a plan, the better off you will be.
Frequently Asked Questions
I get asked a lot of questions about the FIRE lifestyle.
Here are the most common ones.
How much money do you need to become financially independent?
The amount you need depends on your goals and how much you spend per month.
If you want to enjoy the finer things in life and not reduce your spending, you will need a lot of savings.
On the other hand, if you’re going to live more frugally, you won’t need as much.
It all comes down to your goals in life.
Does my net worth matter when it comes to financial independence?
Your net worth does not significantly impact whether you achieve FIRE or not.
The most important thing is your savings rate, and get this number as high as possible.
But you can still use your net worth as a guide if you want to see your progress along the way.
- Read now: Here is how to calculate your net worth
What is the 4% rule?
The 4% rule is a withdrawal rate from your investments for income to live on.
If you can successfully withdraw 4% of your savings annually, you should not run out of cash.
For example, if you have a $1 million nest egg, you can withdraw 4% annually or $40,000 to live on.
Do I need good credit to achieve financial independence?
Having good credit is not required for FIRE.
It can help, however, if you are in debt, as a higher credit score can offer you lower interest rates if you decide to consolidate.
You can also get lower interest rates on your mortgage if you decide to downsize or move as part of your FIRE plan.
Since high-interest rates cost you more over the life of the loan, you save considerable amounts of money with a better credit score.
Is it hard to become financially independent?
It is not hard. It just takes time.
You need time to save and let your savings grow.
Some people say it is hard because they need to reduce their spending and put more into savings.
Changing your spending is difficult because they come from the consumer-driven culture we live in, where you spend all the money you earn, and in some cases, more.
Making the switch to buying less stuff can be hard for some people.
How can I be financially smart?
To be financially smart, you need to have a basic financial education.
You don’t need to master all financial terms but have a general understanding of how money works.
The good news is you can do this through online websites, reading newspapers and magazines, listening to podcasts, and reading books.
Having a basic idea about personal finance can significantly improve your financial life.
drawbacks to financial independence
As great as it sounds to quit working early and live life on your terms, know there are potential disadvantages to this lifestyle choice.
Here are a few to think about.
#1. Losing Purpose
The biggest drawback is losing purpose in life.
According to Kevin Lao, CFP®, of ImagineFinancialSecurity.com, “Depression is a real thing in retirement, especially early retirement when you are still in your prime. So, if you do retire early, think about something you can get excited to wake up to every morning. Perhaps it is coaching, or volunteering, or some passion project you’ve always wanted to pursue.”
A lot of people mistakenly think that having unlimited free time will make them happy when in reality it doesn’t.
So before you decide on this lifestyle, have goals for how you want to spend your days.
#2. Missing Out On Life
When you focus in savings as much money as you can, you pass on a lot of things that cost money in life.
This can have a serious impact on your overall happiness.
Alexis Woodward, CFP®, CDAA™, of Blend Wealth says, “You have to give up a lot to join the FIRE movement. On average, those who join the FIRE movement save 50-70% of their income for 10-20 years of their life so that they can retire in their 30s or 40s. So much can change in that time period including your goals and your health. It’s important to make sure you are enjoying your life with your spouse and your family today and not just putting it off for the future. What if you put your life completely on hold to save as much as you can so that you can retire early, but then as soon as you retire, your spouse gets sick or passes away? All of a sudden, your retirement looks completely different and you can’t get the healthy years back.”
Because of this, you need to spend the time thinking through the pros and cons of living the FIRE lifestyle to see if it makes sense for you.
Becoming financially independent is a challenge as you have to change your way of thinking and consuming things.
No longer do you just buy without thinking.
You become intentional about the things you buy and how you earn and save.
As long as you can do this, you can achieve FIRE.
No matter your current financial situation or level of financial education, achieving financial independence is possible if you put in the time, energy, and effort to do so.
Make a financial plan and improve your financial health by earning extra income while reducing expenses and investing the difference, and you’ll be financially independent in no time.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.