There are many different ideas as to what it means to be Financially Independent. Actually, the idea can be broken down into three very different concepts.
Financial stability should be the first financial goal we plan to achieve. It means being having an income, being responsible for our own bills, paying our own daily living expenses and, if we have a family, providing for them.
Bills include monthly expenses like loan payments, electric, gas, water, phone, internet, groceries, food, clothing, insurance, transportation, with money left over for something fun like going to the movies or going out to dinner, buying gifts, and maybe going on vacation.
And we can’t forget “emergency savings” for unexpected expenses. Many financial planners suggest we have three to six months of emergency savings – money we can have saved in case of a medical emergency (for you or your pet), or a need a major car repair, etc.
When we are financially stable, we don’t get stressed out about money, because we know we can cover our bills and unexpected emergencies.
Sounds easy, but is it?
- A recent study reported that 52% of young adults (ages 18-29) are living with a parent.
Then there’s Financial Independence. This is something else entirely.
Financial Independence means we have enough money or assets to pay our own living expenses for the rest of our lives without having to be employed or dependent on others.
In other words, we have been able to replace our earnings from our jobs with what’s called passive income – earnings that come from interest on savings, dividends from stock, income from bonds, rental from investment property.
Financial advisers estimate that we need 25 times our annual expenses to be considered Financially Independent. This is another reason for keeping a budget – to keep track of expenses. So if our monthly expenses are $2,000, or $24,000 annually, we will need to have $600,000 in a mix of investments to be considered Financially Independent. Wow, that’s a big number, but it is achievable.
How long it takes, depends on your life style and your determination to save. Here are seven ideas of how to start:
- Spend less than you earn. A shortcut for budgeting is to use the 50/30/20 rule: This means targeting 50 percent of your income toward needs; 30 percent toward wants; and 20 percent toward savings.
- Have a saving mindset. One great tactic is to pay yourself first by setting up an automatic monthly transfer to your savings account. Make it a habit.
- Create a separate fund for “emergencies.” Try to save enough to cover three-to-six months’ essential expenses. .
- Control debt. Don’t charge more than you can really afford to pay off in full every month.
- Get medical insured. If your employer doesn’t provide it, look into buying a policy through healthcare.gov. If you’re 26 or younger, you’re still able be included on a parent’s policy. If you have a car, you need automobile insurance.
- Think retirement starting now. The sooner you get started, the less you’ll need to save.
- In your 20s, try to save between 10-15 percent of your gross salary between what you and your employer are contributing. If your employer offers a 401(k) match, try to put in enough to get the full match.
- If you start in your 30s, ramp that up to 15-20 percent.
- 40s, make that 20-25 percent.
- Invest. If you’re unsure how to invest in stocks, consider working with a financial advisor who can help you put together a financial plan and show you how to start. You don’t need a lot of money to begin.
In the last ten years, minimalism has become one of the biggest growing movements in the US and around the world
A minimalist tries to live in a smaller house with fewer clothes and less furniture, go out less frequently to dinner or concerts or sports events, and spend time vacations hiking in national parks, enjoying local museums and beaches, or visiting family and friends. They may share living expenses with a roommate.
Many people believe minimalists are happier because they have less worry, stress, and chaos in their lives. To a minimalist, material things are trivial compared to what they value most, which consists of quality time for relationships, time to enjoy the simple pleasures of life, and spiritual health.
On the other hand, a materialists are happiest when they are actively doing things and buying. Possessions are important to them – clothes, cars, electronic equipment, and gadgets. Their homes or apartments reflect their social status (of how they want people to see them). Going out to eat, to the movies, sport events, concerts, and at least one or two vacations away a year.
Regardless of whether you are a minimalist or materialist or somewhere in between, following the 7 rules we went through will put you on the path to Financial Independence.
Achieving financial freedom means we have the ability to live the lifestyle we want.
How much do we need for financial freedom?
Unlike financial stability and financial independence, there is no fixed number we have to hit in your bank account or investment portfolio to achieve financial freedom.
This is because financial freedom is more of a mindset than an actual value. It has a lot to do with the lifestyle we want to live. If we want to own a large property, go on multiple holidays a year, drive a nice car and have a country club membership, the price tag to achieving financial freedom is going to be high.
However, the price tag of financial freedom can also be low. If the lifestyle we want to live is about volunteering our time to give back to society and we are content living a frugal and simple life, then the price tag to financial freedom can actually be the same as our financial independence.