How to Become Financially Independent?
When I first embarked on my journey to wealth, I was familiarized with the term financial freedom.
However, as I began to browse through some blogs, I have noticed that many have the goal of financial independence instead. Although these two terms may be likened to the same thing, I have never seen it that way.
To be completely independent from money does not necessarily mean that all your financial dreams would be possible just yet. For me, it was only just a first phase that I knew I had to achieve before I can truly be free from any financial restraints.
In this post, I would like to share my take on how to become financially independent.
Having the Right Financial Mindset
The first and probably the most important step for those interested in financial independence is having the right mindset.
Too many people think that financial independence is nothing more than just a dream and it is something that is unattainable. As a result, they don’t do anything to improve their finances. Instead, they find themselves trapped in the rat race.
For me, having a realistic goal and a detail plan to achieving it makes my financial dreams seem more realistic.
Increasing Financial IQ
Learning from others is the best way to build financial IQ. Whether it is following the blog of those who share similar interests or reading financial books from those who are already financially independent, increasing literacy is vital in achieving financial goals.
It also goes without saying that having the knowledge and not putting it into practice is like not having the knowledge at all.
Start Investing
The next step in becoming financially independent would be to keep an eye out for potential cash flow opportunities and to make good investments.
I have learned that there are 3 types of investments:
- Portfolio: Stocks, bonds & ETFs
- Property: Real estate & Land
- Business: Start Up or Established
Although some of these investments may require a large amount of capital, I have nothing against leveraging loans and line of credits. As long as the opportunity generates positive cash flow, borrowing money for a good investment is always a viable option.
“Borrowing money isn’t risky; it’s what you do with the money that’s risky.” – Robert Kiyosaki
Building Passive Income
The goal for anyone trying to become financially independent should be to build a passive income stream big enough to pay for all their expenses (and maybe a little extra on the side.)
Since I am still living with my parents and my monthly expenses amount to $500, does that mean all I need is a passive income stream of $6000 a year to be considered financially independent?
Well of course, I can’t be smooching off my parents forever. Once I move out on my own, my monthly expenses will be much larger.
At the same time, my financial goal is to achieve “freedom” instead of “independence”. This will require a passive income stream generating much more than just enough to cover my expenses.
Paying Off Debt?
The general approach to debt is to pay it off as quickly as possible. However, there are good debt and bad debt. Good debts are usually low interest loans like mortgage, student loans or a line of credit that is in no rush to be paid off. On the other hand, bad debt should be taken care of immediately. This includes credit cards and high interest personal loans.
Personally, I don’t believe that financial independence requires that all debt to paid off but I know some people who would disagree to that.
Be Committed to the Process
The journey to financial independence is not an easy one, especially when starting from scratch.
From my personal experience, I have had to go through many trial and errors in mapping out my path to get there. I am still in the process of trying to improve on my 7 year plan to one million dollars.
The important thing to remember is that it will take a lot of hard work and at times, progress may even become stagnant for a while. In spite of that, with a little determination and commitment in the equation, I have no doubt that those who truly want financial independence will achieve it.
What are your thoughts? Am I missing anything?
Great article! I wished I had a mentor when I first started learning to invest. It would’ve made things easier and limit my mistakes. I still think borrowing money is risky. But some people are great at it and can negotiate great terms.
You did have a mentor Henry, Warren Buffet! 🙂
I think you hit all the points there. I still feel like in order to get wealthy, you’d still go through the step of leveraging. You need to borrow money to create more wealth. Now, whether the mortgage or loan to be paid off prior or not will depend on the person. But for me, if you treat your Financial Independence account as a business, business need debts, it’s normal. Like you have a credit card, you pay it off at the end of the month, but you’d still “owe” some money.
If you retired with a business whether it’s a rental or restaurant, or whatever it is, if you paid off that rental, that means you “locked” that money forever! yes, you might get a piece of mind that it’s paid off. But what if you get sued? they still can go after you paid off rental property. So having a primary home paid off is one thing, having the rental to paid off is another.
Very interesting view on leverage Vivianne! I agree that leveraging money will definitely help speed up the success to financial independence. In terms of repaying loans, sometimes paying back the full amount of a loan will set back the timeframe because the compounding effect will be lost.
What are your thoughts on Asset Allocation & Diversification, Jeff? If you are young with a long investment horizon, would you justify going all-in on a good deal? How good would that deal have to be for you to consider it?
In an ideal world, Asset allocation would be balanced in all three categories. However, according to my plan, 50% of my net worth would be in property, 15% in business and 35% in portfolio. It also appears that the property market would be less volatile to the economy and will still generate rental positive cash flow in an economic downswing.
I definitely have nothing against going all in on an exceptional deal but it would have to be very good for me to take it. Normally, I don’t like putting all my eggs in the same basket though. Thanks for the comment!
Hi Jeff
I’ve never really seen the difference of financial freedom and financial independence until I saw your article and ponder further.
I used to use the words inter-exchangably but having read this article now, it appears what you say is correct. Financial independence is a subset of financial freedom, which is probably what everyone needs to attain first before the big one. When income exceeds expenses, that’s financial independence there, but when passive income exceeds expenses, that’s the financial freedom everyone is talking about 😀
Hi B! I’ve always had a bias towards financial freedom because I have learned that term before financial freedom. It’s just something that I would love to explore and definitely, passive income is the key to both freedom and independence.
In your situation you probably need to look at future increases in your expense… for example when you move out from home or when you eventually marry someone. Invest through stocks, ETF, and bond is probably the easiest way to start. Real estate is something a lot of people do us well but involves more leverage. Leverage is a funny thing, some people can’t get enough, some tries to avoid it.
Indeed, living with my parents doesn’t exactly classify as independent! I have heard many different views on leverage already and it is either for or against, not many people have a middle point.
Hmm never thought about financial independence vs. financial freedom. I would love to have passive income cover our expenses completely, and although we could keep building our rental properties portfolio aggressively, and invest in the stock market, we’ve decided to venture out into the business world and buy a business. Hopefully more within a year. That’s mainly because I want to quit my job, and while we transition to an income from businesses, I don’t want to invest in passive income. But the ideal is to have income from rentals, stocks, and businesses.
Those are passive income Felix! Any income that you don’t have to work too hard for are considered passive. Buying into businesses are excellent investments for those who have the capital. Unfortunately that is not where I am right now. However, I will be investing in businesses in the future as well.
Well, you’ll be there one day, I’m sure. Will be interesting to follow your progress. I am definitely planning to have more passive income in the future (only 2 rentals now). I know businesses are hard work, but I think that’s what I will enjoy doing in life, and with a little bit of luck and lots of sweat, I hope to make it.
Hi Felix, I have no doubt that you will make it in the business world as long as you put a little hard work into it. It’s the beginning years that are the hardest and once it becomes successful, you can think about hiring someone to manage it for you.