Before we talk about how you can gain financial independence, let us first define financial freedom.
One of the most popular movements that focus on financial independence is the Financial Independence Retire Early Movement, shortly known as the F.I.R.E movement. Members of this group plan to retire in their 30s or 40s by saving at least 50-70% of their salary and investing
How To Gain Your Financial Independence?
Financial independence may mean differently for various people. Still, in essence, financial independence allows you to focus on more critical aspects of your life without worrying about your income.
So, if you want to retire early, here’s how you can gain your financial independence:
Visualize Your Life After You Become Financially Independent
By visualizing your life after you achieve being financially independent, you’re also getting yourself more involved and motivated in your goal. Knowing why you wanted to become financially independent is the first step to get you there.
Get Your Priorities Straight
Of course, the journey won’t be an easy one since there will be temptations along the way. The temptations may be in the form of your family, friends, or yourself. So, setting your priorities straight and staying focused will help you in this journey.
Mingle With People Who Shares Your Vision
Surrounding yourself with people who share the same goal as yours will help you in achieving your goal. These people may be a financial planner, a partner, an online community such as one offered by the FIRE movement, or simply a community of individuals.
I suggest you join a community, may it be online or not, so that you can get tips, tools, help, or just a place to share your frustrations when on your journey. A like-minded partner or at least a supportive partner will, of course, make this goal more attainable.
Think Before You Spend
This might be one of the most challenging steps you’ll take but think of this when you are tempted to splurge. The money that you don’t spend on buying your desires can grow over time.
Take Note of How You Spend Your Money
By tracking how you spend your money, you can see where your money is going, where you need to adjust, and how much money you are saving. To do this easily, I recommend that you use a budgeting app or software or by prepaying your balance sheet where your assets and debts are indicated.
Minimize Your Debt
If you’re keeping your expenses at a minimum, then it makes sense that you keep your debt at a minimum as well. It’s good to have an emergency fund ready not to need to get a loan. Also, if you still have unsettled debts, now is the time to start paying them off.
Save Now
Don’t wait for a particular time or a specific income to come your way before you start saving. If you don’t have spare money to save, you have to make adjustments to increase your revenue or lower your expenses.
Set up an emergency fund. This fund should be in the form of a savings account, money market account, among others. Build your fund slowly until you have six to 12 months’ worth of emergency funds. This way, you’ll have cash ready in case of an emergency.
Increase Your Income and Invest More
Being financially independent means, you have to be aggressive in investing. Invest in stocks, bonds, etc. Also, seek out opportunities where you can increase your income. One way to do this is to advance your career by leveling up your skills and being open to promotion or better opportunities with other companies.
Shortest Path to Financial Independence
According to F.I.R.E, the shortest path to financial independence involves saving 70% of your salary since the higher your savings rate is, the faster you’ll be able to attain financial independence, and the quicker you can retire in exchange for your current lifestyle.
The types of FIRE include FIRE, leanFIRE, and fatFIRE. Lean FIRE refers to those who already saved up to 25 times their annual expenses and currently live on a “lean” budget. Someone who has fatFIRE spends more than the average American budget, while the one with regular FIRE spends around $60 000 per year, which is the average American household budget.
Aside from the said types of FIRE, there is also the Partial FIRE or Barista FIRE, which I will be discussing later in this article.
Does the 4% Rule Work for Early Retirement?
Upon saving approximately 30 times their yearly expenses, FIRE devotees use the 4% rule. You’re probably familiar with the 4% rule, which says that you can withdraw 4% from your retirement account annually and live off with that amount.
So, will the 4% rule work for those who want to retire early?
I’d say it depends if their retirement fund can support their expensive lifestyle in the first years of their retirement. The best step is to keep their expenses at a minimum while continuously maintaining and reallocating their investments.
Partial FIRE: The Solution to Your Problems?
Partial FIRE refers to the point at which you have enough savings and investments. At this point, you can decrease your workload and work part-time. Compared to the normal FIRE, this is a softer approach.
Partial FIRE is a good option for those who want to pursue a career different from what they currently have. This approach is also a good idea for those who wish to balance work and life. If you don’t want to spend decades of your life behind the cubicle, this is the best option for you.
What’s Your Part-Time Number?
So, how much should you save before it’s safe to quit your 9-5 job and pursue part-time jobs instead?
The wise decision is still bulking up your portfolio until you can. Let’s say at 32, and you have $400K in your retirement fund, then if you withdraw 4% of that to fund your first year of retirement, that is $16 000, you can use your income from part-time work to finance your other expenses.
To find your Partial FIRE number, here are steps you can do:
- Take note of your annual expenses. For example, $40 000
- Calculate your FIRE number. Let’s say $ 1 Million=25 X (Yearly Expenses)
- Note your estimated part-time salary. For example, $30 000
- Subtract part-time salary from yearly expenses
- Barista or Partial FIRE number=25 X (Supplemental income needed)
Therefore, Partial FIRE number= 25 X ($ 40000-$30000)=$250000. Thus, this is the amount you have to have on your retirement fund before you can quit your 9-5 job and start your part-time job.
If you still find your job satisfying, it makes sense to stay and build your retirement fund. However, if you hate it, then leaving sooner is the best option. To attain complete financial independence, you have to choose a part-time job that does not limit your earning potential.
Some part-time jobs that pay you well include being a tutor, barista, offering delivery services, and many more.
Financial Independence and Career Choices
It is possible to attain financial independence through your career choice. However, there are career choices wherein it’ll be easy to gain financial independence because there is a limit on how much you can earn. Such careers include teaching, accounting, government jobs, among others.
In contrast, here are careers wherein you can reach your goal quicker:
- Self-directing careers such as entrepreneurship
- Jobs that give you an earning potential that is not limited
- Professions that are not limited in terms of compensation
- Occupations that are in demand
- Careers that are essential to society
- Jobs that require high technical skills
So, if you’re seriously considering achieving financial independence early, I recommend that you think hard about your career choice. If you have entrepreneurial skills, why not bring it out? If your career right now can potentially provide you with lots of opportunities, including earning potential, then it might be worth it to invest in strengthening your skills so that you can climb that ladder one day.
The Wisdom of Financial Independence Without Retiring Early
While other people retire as soon as they achieve their goal of being financially independent, other people who love their job choose to keep working even after being economically independent. Of course, they can do this since the goal is financial independence and not early retirement at the end of the day.
However, even if you don’t plan on retiring early, it is still best to prepare for the future by bulking up your retirement fund. This way, when there’s an emergency or your work is no longer satisfying, you can quit without worrying where you’ll get money to support your family and yourself. In short, financial independence gives you the freedom and flexibility to do whatever you want.
Do You Need Financial Independence to Retire Early?
Some people gain financial independence and decide to retire early. However, even after they gained independence, it doesn’t mean that there won’t be any risk of their savings running out, especially if they decided to spend more than what they should during the first years of their retirement. Early retirees are also at risk of outliving their retirement funds.
So, do you need financial independence to retire early? Your retirement should not depend on your age but rather whether you achieved your desired retirement fund. Thus, financial independence before retirement is a must. If you have about 80% of your target retirement fund, you can opt to work part-time to have freedom and flexibility.
After you attain financial independence, you should still save money and continuously monitor your investments. I want to reiterate that your primary goal should be attaining financial freedom and not early retirement. Meaning, if you’re going to retire early, then you have to achieve financial independence first. Even after retirement, you can still choose to work part-time to keep the money coming.
How to Protect your Financial Independence?
One way to protect your hard-earned financial independence is by purchasing an insurance policy, particularly life insurance.
Most people can handle financial emergencies because they have enough assets to see them through, but others don’t. That’s where insurance comes in. Insurance protects your assets from disastrous situations that you can’t handle.
Before you decide to buy an insurance policy, make sure you’ve done your research. One of the many kinds of insurance is life insurance. Life insurance, as you’ve probably heard, aims to provide for your family’s financial needs after you pass on.
Life insurance is a must when you have a family-a partner and children who depend primarily on your income for their financial needs. Aside from this reason, there are other factors to consider why you should get life insurance even if you are already financially independent:
Estate’s Value Is Above or Below Taxation Limit
Whether your estate’s value is above or below the taxation limit, anything you give to your heir might have high property taxes and maintenance costs, which are more than they can handle.
Provide Liquidity
It might take a long time for your stocks, bonds, real estate, etc., to liquefy. By having life insurance, you get to vary your mode of giving.
You Still Need to Pay Your Debt
If you are financially independent on paper but still have considerable debt you have to pay off, then you should get life insurance. Life insurance will also come in handy when you have assets you want to keep due to sentimental reasons.
Cheaper Life Insurance
As a financially independent person, paying premiums will be more manageable for you and should be relatively “cheaper.” Consider getting life insurance as an investment for your loved ones.
Best books on F.I.R.E (Financial Independence, Retire Early)
If you want to learn more about FIRE then checkout these books.
https://coverclan.com/best-books-on-f-i-r-e-financial-independence-retire-early-for-2020/
Conclusion
Whether you attain financial independence earlier or not, getting life insurance should be one of your priorities. This way, you’re ready for unexpected circumstances until the day comes wherein you’re prepared to insure yourself.
Reference