How To Become Financially Independent: 5 Practical Ways
You are probably here because you have read many articles on how to become financially independent but all of them seem impossible to follow through.
There’s no rocket science on gaining financial independence and early retirement. It all just comes down to one thing: Can you manage your money? Its not always about how much you’re making, it’s about how much you’re saving.
True meaning of financial independence
Financial independence is the status of having enough money in your financial reservoir for your living expenses so that you don’t need to be employed or dependent on others.
With effective financial planning and budgeting, some people have been able to attain financial independence as early as in their late twenties.
5 ways to become financially independent
1. Change your lifestyle
I have an activity for you. Sit down and think about how you want your future to be. Think about a day when you don’t have an alarm ringing over your head reminding you to go to work. You don’t have to work to live!
All you’ll have to do is enjoy your life. How amazing it feels to just think about that kind of life. Now think how amazing it would actually feel.
Anyway, coming back to reality. The more lavish life you want for yourself, the more frugally you’ll have to live right now.
So, CHANGE YOUR LIFESTYLE. Stop spending blindly on leisurely shopping. Here are few effective tips to save money without having to skip on things that make you happy. Remember to live below your means if you want to have an extravagant lifestyle in the future. The more frugally you’ll live now, the more lavishly you’ll be able to live in the future.
2. Get a financial independence calculator
Just imagining it in your head that if you save a hundred bucks now and keep doing so, won’t help you become financially independent. You need to do the math. This financial independence calculator will save you ton of time. It’ll help you get an estimate on this:
“With what you have today, and what it costs you to live, can you retire and maintain the same lifestyle?”
These calculators don’t predict the future. They aren’t crystal balls. They predict what can’t happen. You have to put in some values and they’ll tell how much you can save with the same lifestyle you have right now.
I won’t go into the technicalities of it but the answer to how to become financially independent is this. These calculators are free and no, you don’t have to be savvy to use them.
Networthify has an excellent and easy to use financial independence calculator. If you want to gain financial independence and early retirement, start using these right now and get one step closer to your dream life.
3. Understand the difference between income and wealth
Your income isn’t your wealth. Everyone needs to understand this. Your job, even if it’s a high paying job, isn’t key to become financially independent.
Yes, with more income, you’ll have more money to invest in assets. But if you’re just spending that money buying liabilities, that high paying job isn’t going to make any difference to your financial independence plan.
One of the most important things on how to become financially independent is SPEND LESS THAN YOU EARN.
If you’re a billionaire with bad spending habits, you can go bankrupt in a blink of an eye. And if you’re a driver with good investment plans and spending habits, you can retire as a millionaire.
Income is the total money you’re making. But wealth is your net worth, the money you are saving.
Wealth is your assets minus the liabilities.
To gain financial independence and retire early, invest in assets as much as you can.
4. Indulge in long term thinking
Your goal of achieving financial independence would be fulfilled only if you believe in long term thinking. Don’t run for short term happiness. The Dior Bag you have your eyes on right now wouldn’t give you as much return as would putting that money in Fixed Deposit or Mutual Funds. I’m not asking you to just stop buying everything and live like a homeless person. But you need to really understand what things are worth buying.
Living paycheck to paycheck and spending all the money in living expenses wouldn’t help you achieve financial freedom and early retirement.
Working hard to get a promotion, investing major part of your income and most importantly, spending less than you earn can help you retire early. Side hustling, private investments help you generate long term wealth and take you closer to your goal of financial independence.
5. Look at your taxes
Taxes matter A LOT, more than you think. The place and how you’re holding your assets can make a huge difference to you being rich and exceptionally rich.
Financially independent people generate a lot of passive income through real estate, unrealized capital gains and profits made through tax free accounts like 401K. You could be making $200,000 a year and probably paying $80,000 of that sum in taxes. Hurts right?
That’s where you need to know how you can reduce your taxable income. If you had earned the same amount from within a pension plan, your money wouldn’t have been taxed.
Although any tax-deferred income eventually will be taxed but by the time you retire, you’ll probably fall in low tax bracket and will have to pay much lower tax than before.
So find ways to reduce the amount of tax you’re paying.
I hope now found your answer on how to become financially independent. Although it can differ a little with each person but the gist remains the same. Focus on your goals, be prepared to live frugally and try to invest as much as you can. If you do these things religiously, you could see yourself retiring at an age of 27!