The financial independence, retire early (FIRE) movement has grown in popularity as more people seek a way to escape the rate race well before normal retirement age. Financial independence can look different to everyone, depending on what it means to you and what kind of lifestyle you’re hoping to achieve. If you’re interested in becoming financially independent, then creating a plan is the first step. If you want hands-on assistance doing so, consider enlisting the help of an expert financial advisor.
Financial Independence, Definition
Though being financially independent can be defined differently for everyone, it generally means not being dependent on a job or anyone else to meet your expenses and maintain your chosen lifestyle.
When you’re financially independent, you have a savings account and investments that you can rely on to meet your expenses which can allow for greater freedom when it comes to things like deciding where to live or how to spend your time.
The FIRE movement, for example, is all about achieving independence at a young age, rather than waiting until your 60s or even 70s to retire. FIRE devotees are interested in accruing enough wealth to allow them to maintain their desired standard of living after retiring in their 30s, 40s or 50s.
How to Achieve Financial Independence
Becoming financially independent typically takes a good bit of planning unless you’re lucky enough to win the lottery or score a large inheritance. Personal financial advisors sometimes recommend that financial goals have five features: specific, measurable, attainable, relevant and time-bound. (These five goals are sometimes abbreviated with the acronym SMART.)
Define what financial independence means to you
The first step in becoming financially independent is deciding what that means for you. This can shape every other decision you make along the way in your financial journey.
For example, you may want to retire at when you’re middle-aged and spend the rest of your life traveling. Or you may want to trade your 9 to 5 for a business or side hustle that generates passive income so you can be financially independent without having to work.
Getting a clear idea of what your vision for financial independence looks like can help with setting actionable goals to reach it.
Create measurable goals
Say your dream is to retire at age 45 with $2 million in the bank. This is a clear goal that you can easily measure your progress against and it has a firm time horizon.
You can then use that goal to create your plan for financial independence. For instance, if you’re starting to invest at age 25, you know you’ve got two decades to invest. Using your current income and $2 million savings target, you can figure out how much you need to save and invest monthly or annually to reach that goal.
Make paying off debt a priority
Financial independence means that you’re in charge of your money and cutting ties with debt is a must. If you’re retiring early but still carrying around credit card debt or student loans, that isn’t true financial freedom. Getting rid of those financial obligations means you have more of a say in what you do with your savings and investments. So if you have debt now but your goal is financial independence, consider what kind of strategic plan can help you pay it off as quickly as possible.
Some people, for example, favor the debt snowball method to pay down debt. This method involves paying off your debts from lowest balance to highest. Others use the debt avalanche, which requires paying off your highest interest debts first. Whichever approach you take, keep in mind that it’s a marathon, not a sprint, so beware of burnout.
Regardless of which one you choose, look at your budget to see how much you’re currently paying toward debt and how much more you could afford to throw at it. But remember to balance that against how much you need to save each month to achieve your financial independence savings goal.
Live below your means
If you want to become financially independent and potentially retire early then you’ll need to get serious about saving. That means taking every possible step to cut your expenses as low as possible to free up money you can save or use to pay down debt.
That starts with reviewing your budget to look for wasteful expenses but you can go a step further and look for more extreme ways to save. Some ideas include:
- Getting rid of your car if possible to save on transportation expenses
- Downsizing your home or taking on one or more roommates to reduce housing expenses
- Moving to a cheaper city that has a lower cost of living to save money
The more you can cut from your budget, the more you can save toward your goal of financial independence. And it may take a lot more than the standard 15% of your income most financial experts suggest for a typical retirement. Instead, you may need to save 40%, 50% or even more of your income to accumulate the money you need. Be sure to track your progress regularly.
In terms of where to save and invest to become financially independent, savings accounts, money market accounts and CDs all have their merits. But don’t overlook tax-advantaged accounts such as your 401(k), an individual retirement account (IRA) or a health savings account (HSA). You can also add a taxable brokerage account into the mix to help diversify your savings.
Create multiple income streams
If you’re planning to become financially independent that probably means you won’t be clocking in at work anymore. But you can still create a steady income to replace those paychecks. The key is to choose things that generate an income passively so you don’t have to work. So, for example, real estate can be a great passive income if you can earn money from it without having to do landlord duties. Real estate crowdfunding, real estate investment trusts and real estate mutual funds are all ways to generate passive income from property without having to own it.
Dividend-paying stocks are another option. Dividend-paying stocks are often value stocks that are established companies. They pay out dividends to shareholders that you can collect as income without any real work involved.
There are other ways to create passive income that may involve more work up front. Setting up an affiliate marketing website or blog, for example, takes some work to get started but once you’re getting consistent traffic you could make money selling affiliate products in your sleep.
The more income streams you have, the easier it may be to maintain financial independence. So if you haven’t already, try brainstorming some ideas for how to make money passively.
The Bottom Line
Financial independence can help you live your dream life but it takes some effort on your part to reach that goal. Having a precise vision and a detailed plan to realize that vision you’re committed to can help keep your goals in reach.
Tips for Investing
- Consider talking to a financial advisor about what you can do to make financial independence a reality. If you don’t have an advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help. By answering a few brief questions online you can get personalized recommendations for advisors in your local area in just minutes. If you’re ready, get started now.
- Remember to keep fees in sight. For example, when working with a financial advisor, be sure to ask whether they’re fee-based or fee-only so you understand how and when they get paid. The former can sometimes be more expensive than the latter.
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