The 3 Proven Steps to Financial Freedom
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Do you want to become financially independent?
Do you want to quit the 9-5 and spend more time with your family?
Financially independent people can spend their days doing what they love.
And in this post, I’m going to explore what it means to be financially independent. And show you how to get there—in three easy steps!
What Is Financial Independence?
Financially independent people generate enough passive income from their investments to cover their living expenses.
Whether that be from stocks, bonds, real estate, a high-yield bank account—or any other source of passive income that they may have.
Why Should I Become Financially Independent?
The goal of financial independence is not to stop working—but to have the choice to stop working.
This gives you more time to do the things you want to do!
That may be sitting on the beach, starting a new business, playing golf, working a full-time job and so on.
What is the first step to achieve financial independence?
1. Set A Goal With The 4% Rule
The first step to achieve financial independence is to determine how much money you need to retire.
We will use the “4 percent rule” to determine how much money you will need to retire comfortably.
The 4 percent rule is a “guideline” used to determine how much you should withdraw from your retirement account annually. To ensure that you never have to work again.
At an annual withdrawal rate of 4% you will have enough money to cover your living expenses for 25 years.
It’s important to consider both your life expectancy and estimated annual expenses when determining your financial independence (FI) number.
By doing this, you’ll know exactly how much money you need to retire in comfort.
How Much Money Do You Need To Retire?
A nest egg of anywhere from $800,000 to $1,600,000 is enough for the average American to retire comfortably. This is based on the average annual salary of $45,000.
This chart will show you how much money you need to cover 25 years of expenses—and retire in comfort!
Also, here is a great early retirement calculator that will determine how long it will take you to retire at your current savings rate.
Play with the calculator for a while until you figure out roughly how much you can afford to save—and what your annual expenses will be when you retire.
Now that you know how to work out your financial independence number—it’s time to work out how to get there!
2. Start Investing
The most effective way to build a significant amount of wealth is to invest your money.
This is the second step towards financial independence.
You can attain your desired retirement number much faster by investing it, than you can by simply leaving it in the bank.
How Much Do I Need To Invest?
Let’s assume that you’re going to invest 20% of your annual income into an S&P 500 index fund, and it will grow at an average of 9.7% annually.
Your Annual income = $45,000 x 0.20 = $9,000—this will be your annual investment contribution.
By going off these figures, you will be able to retire with just over $1,500,000 in 31 years. While earning the average salary in the United States.
This might sound like a long time, but it’s important to remember that this is assuming that you’re going to spend $60,000 a year on expenses during retirement.
You can retire in 24 years if you can manage to live of $30,000 a year—and retire even quicker if you increase your annual income.
If you’d like a passive way to build your wealth I’d recommend M1 Finance. M1 is a company out to change how the world manages money, allowing people from all walks of life to build and easily manage wealth.
Now that you understand the power of investing your money—it’s time to increase your income!
3. Increase Your Income
This is the final step towards achieving financial independence.
Earning more money allows you to increase your investment contributions and ultimately shorten the time it takes you to retire.
Now, how do you increase your income?
How To Increase Your Income
There are many ways to make money today—that are separate from your primary source of income.
Forbes has a great article titled 44 Ways To Make More Money that will show you 44 ways you can make more money today!
Here are some no-brainer ways to increase your income:
- Request a raise
- Change jobs
- Increase your level of education
I highly recommend that you visit the Forbes article if you feel that your income is strongly holding you back!
These are the steps you need to take to achieve financial independence.
No one says it’ll be easy—but imagine what your life will be like knowing that you are financially independent!
Visit this article to find out what the older generations think of the fire movement.