Last Updated on: 27th November 2023, 01:06 am
How Can You Achieve Financial Independence?
Achieving financial independence requires careful planning and dedication. Here are the 4 pillars of FI after laying the financial ground work:
- Increase Income: This can be done by finding a well paying job, good salary/wage negotiation techniques or starting a side hustle, actual business or real estate endeavor.
- Reduce Expenses: Keeping track of your spending and overall finances is crucial for your journey to FI. You can identify the most important areas for reducing expenses by focusing on your biggest spending areas and taking unconventional approaches to reduce them. This will enable you to increase your savings rate. Your savings rate is the percentage of your income that you save each month. Increasing your savings rate can help you build wealth faster and reach financial independence sooner.
- Invest wisely: Investing can be a powerful tool for building wealth and generating passive income. However, it’s important to invest wisely and avoid taking unnecessary risks. Consider working with a financial advisor to develop an investment strategy that aligns with your goals and risk tolerance.
- FI Mindset: This is the first and last step into financial independence. This is where your decision is made to work towards financial independence. But the right mindset is also crucial for staying on the path by knowing your why for pursuing FI. One important step for this is to track your net worth – the difference between your assets (i.e., what you own) and your liabilities (i.e., what you owe). Calculating your net worth can give you a clear picture of your current financial situation and help you to have a tangible target when you will reach FI.
What Is Financial Independence?
Financial independence (FI) is a state of being where you have enough money to support yourself for the rest of your life without having to work for money. This does not mean that you have to stop working altogether, but rather that you have the option to work or not work as you please.
Levels of FI
There are different levels of financial independence, depending on how much money you need and how you want to live. Some common terms that you may encounter are:
- Financial security: This is when you have enough passive income (such as from dividends, interest, or rental income) to cover your basic needs, such as food, shelter, utilities, and health care.
- Financial stability: This is when you have enough passive income to cover your basic needs plus some discretionary spending, such as entertainment, travel, or hobbies.
- Financial freedom: This is when you have enough passive income to cover your basic needs plus your desired lifestyle, whatever that may be for you.
- Financial abundance: This is when you have more than enough passive income to cover your basic needs plus your desired lifestyle, and you can also afford to give generously to others or causes that you care about.
Your FI-Number – Amount needed to achieve Financial independence
The amount of money that you need to achieve financial independence depends on your personal goals, values, and preferences. Some people may need millions of dollars to feel financially independent, while others may be content with a modest amount.
One way to estimate how much money you need for financial independence is to use the 4% rule. This rule states that you can withdraw 4% of your portfolio value each year and expect it to last for at least 30 years. For example, if you have a portfolio of $1 million, you can withdraw $40,000 per year ($1 million x 4%) and live off that amount indefinitely.
However, the 4% rule is not a guarantee and it may not work for everyone. It depends on various factors of the 4 pillars of FI as well as inflation, market returns, taxes and life expectancy. You may need a higher or lower withdrawal rate depending on your situation and risk tolerance.
Another way to estimate how much money you need for financial independence is to use the 25x rule. This rule states that you need 25 times your annual expenses to be financially independent. For example, if you spend $50,000 per year, you need $1.25 million ($50,000 x 25) to be financially independent.
However, the 25x rule is also not a guarantee and it may not work for everyone. It assumes that your expenses will remain constant throughout your life and that you will earn a consistent return on your investments. You may need more or less than 25 times your annual expenses depending on your situation and goals.
The bottom line is that there is no one-size-fits-all formula for financial independence. You need to define what financial independence means to you and how much money you need to make it happen.
Why Is Financial Independence Important?
Financial independence is important because it gives you more control over your life and more options for how you want to live. Here are some of the benefits of achieving financial independence:
- You can pursue your passions and interests without worrying about money
- You can choose when and where you work, or if you want to work at all
- You can spend more time with your family and friends
- You can travel the world and experience different cultures
- You can retire early and enjoy your golden years
- You can give back to your community and support causes that you care about
Financial independence can also help you cope with unexpected events and challenges that may arise in life, such as:
- Losing your job or income
- Facing a health crisis or disability
- Dealing with a divorce or death of a loved one
- Facing a natural disaster or emergency
Having enough money to cover your expenses and lifestyle can give you peace of mind and reduce stress in these situations.
In Conclusion
Financial independence is a powerful concept that can provide you with the freedom, security, and fulfillment that you desire in life. By following the 4 pillars of FI and taking a thoughtful and strategic approach to your finances,
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