Financial independence is a goal for millions of Americans. While some simply save arbitrarily for the future, others focus on stocking away enough to live freely without working for the remainder of life, no matter how long that may be. Financial independence is often intertwined with early retirement and generally requires consistent effort and lifestyle changes in order to adequately prepare.
Bridging the gap between the rat race and true financial freedom can be easier said than done. Here’s what you need to know about achieve financial independence.
Set a Goal
The first step to achieving financial independence requires defining what financial independence means for you. Different people have varying preferences, and what will sustain one person’s lifestyle won’t necessarily sustain another’s. In general, the benchmark goal for financial independence involves a minimum net worth of at least 25x annual expenses, although more is always better. Those seeking a retirement before age 40, for example, are encouraged to have in excess of 30x instead.
The less you spend, the more you save. In order to save enough money to live without working, it’s important to put the bulk of your current income into savings. While many Americans live paycheck to paycheck or spend as needed without strictly tracking income, those pursuing financial independence budget rigidly and forgo virtually all luxury items. This means cutting things like cable packages, dinners out, expensive travel, new clothing, new cars, and other unnecessary items in favor of cooking at home, watching public TV, and commuting by bus.
Plan an Investment Strategy
While there’s always a risk in the market, most financial independence strategies assume strong potential growth in savings. Why invest your income into a low yield savings account when the market can do some of the work for you? With average annual inflation-adjusted returns of 7% over time, there are plenty of advantage in investing wisely.
Those seeking financial independence take early and aggressive steps to save, maxing out 401k and IRA contributions and investing in a standard brokerage account. Following the market isn’t for everyone, so a financial advisor may be a beneficial resource in the planning stages.
Purchase Income Generating Assets
Many assets, like cars and electronics, depreciate over time, leaving you with little to show for your investment. When pursuing financial independence, however, your goal should be to focus on assets that do the opposite. Stocks, for example, are likely to appreciate in value over time. Real property is also considered a strong investment, especially when passive income can be generated through use as a rental property. Robust real estate holdings are often highly desired by those seeking financial independence, adding an extra layer of diversity to a portfolio.
If financial independence is a goal for you and your family, the support you need is just a phone call away. From planning to investing, the Klein Hall CPAs team can help you create a strategy that’s right for you. Contact us today to learn more!