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We have seen that there are many reasons to want to reach Financial Independence (FI). Once you reach FI, you can do what you want without having to worry about money. It is awesome! You only keep working if you wish to work. This state is something most people would want to achieve. For me, my ultimate goal is to reach FI.
There are several ways to achieve Financial Independence. Indeed, there is not a single path to go from where you are now to the point where you are financially independent. Of course, there are some similarities between some of these ways. But they are different enough. Most of the time, you will need to follow several of these ways to reach Financial Independence earlier.
In this post, we are going to see the different paths you can take to become financially independent. There are undoubtedly other ways to reach Financial Independence. But these are the main ways and the ones I know. If you know of another sure way to become financially independent, I would be glad to hear about it.
The basic idea of Financial Independence
First, we must discuss the basic idea of Financial Independence (FI).
You have reached FI when you have reached a point when you can stop working and still cover all your expenses. There are two different methods to achieve this:
- You withdraw some money from your portfolio each month to cover your expenses. For this, you need to calculate precisely how much you need to be able to safely withdraw money from the portfolio each month (or each year). There is an entire theory on how to calculate the withdrawal rate to be safe from exhausting your capital.
- You get enough passive income each month to cover your expenses. Your passive income must be higher than your expenses. You can achieve this with dividends, rental income, or even a pension. If you follow that way, you will never have to touch your principal.
Whether you want to follow method one or method two, you will need to reach a point where you become Financially Independent. And there are several ways to arrive at that state.
Most of these ways are complementary. If you follow them all, you will become FI earlier than if you follow only one of them. But they all take dedication and time. If you are serious about reaching Financial Independence, you should focus on two or three of these ways.
There are many reasons to become Financially Independent. For many people, it is just to be able to retire. But for others, they just want to be safe in case something happens, and they cannot work. Others want to change jobs to do something more meaningful but with little pay.
So, without further ado, let’s see the main ways to become Financially Independence.
1. Be frugal – Reduce your expenses
The most used way to reach Financial Independence (FI) is to be frugal. If you only use a small part of your income, you will be able to reach FI much faster. Moreover, having little monthly expenses will also lower the amount of money you need for being financially independent.
Most people that focus on this strategy save at least 50% of their income each month. And some people are going even further by saving more than 80% of their income, sometimes even 90%. While this sounds difficult, this is not as difficult as it seems. Of course, you need to be dedicated to it and serious. There are two main things you can do to spend less money:
- Spend less on things you need. There are things you cannot remove from your expenses. You need to eat, for instance. But you do not need to eat out every single day. It is quite possible to save a lot on your food budget. You can often reduce some of your expenses without changing their quality. Think of your insurances, for instance. You can probably switch to a cheaper one while still keeping the same coverage. Also, think about your internet and mobile bills. You probably do not need all the bells and whistles. There are many things like this that you can do that will reduce your expenses. You just need to be motivated about it.
- Do not spend money on things you do not need. There are many things on which we are spending money that we do not need. Do you need to have ten different coats? And do you need a second car? Do you need both cable and Netflix? Is that gym membership worth it? There are many more examples. If you do not need a thing, you should not pay for it. Not paying for items you do not need will help you save a lot. Cutting down unnecessary expenses is more important than you think!
If you are serious about saving money and you follow these two rules, you will be able to save much more each month. You need to ask the right questions each time you buy something new and each time you pay a bill.
Reducing our expenses is something we are trying to do ourselves. We are not yet as successful as most people on that account. However, we have been able to reach a 50% savings rate average in the last twelve months. This result is already really good for us. Now, we are aiming for at least a 55% average. We are working hard for it.
Again, there is no right number for this metric. For some people, 10% is already good. You should try to avoid comparing it with others. You should try to beat your own savings rate. This is the best game!
2. Earn More – Grow your income
Another way used to reach Financial Independence is to have a substantial (or very large) income. Having a considerable income will only, of course, help you if you are saving some of that income. A lot of people are falling down the trap of lifestyle inflation. If you can save a large part of a large income, you are on the right path to Financial Independence.
There are several ways to grow your income:
- You can grow your career income. That means you will earn more at your work. There are many ways you can increase your career income. Doing so may not be easy, either. But it is worth it in the end.
- You can also increase your side hustle income. That means you are going to do more work on the side of your primary income. A lot of people are doing a lot on that side. I have seen some bloggers with more than ten side hustles to improve their revenue.
Increasing our income is also something I am going to try to do. I do not think I will focus on side hustles. I believe there is more growth potential in my primary career income. And once I go home, I would not like having to spend all my time making even more income. But if I can make some extra money on the side, I will, of course, do it.
There is something fundamental about growing your income. You need to be careful not to fall into the trap of lifestyle inflation. If you earn more but spend more, you will not reach Financial Independence faster.
On the other hand, if you grow your income and keep at the same level of expenses, you will easily reach Financial Independence much faster. That is one of the major differences between growing your income and reducing your expenses.
3. Invest in the stock market
Another way that most people use to reach Financial Independence is by investing their money in the stock market. Indeed, if you let your money in your bank account, it will lose its value over time because of inflation. Every year, your money is worth a bit less.
The best way to fight inflation is to invest your money and not let rot into a bank account. Of course, you should smartly invest your money. Most people trying to reach Financial Independence are investing in low-cost index funds. Investing in individual stocks is often too risky, and nobody can time the market over a long period. You never know if a stock will go up or down. So it makes no sense to invest in a single stock in the hope of profit.
Not only can you fight inflation with investing in the stock market, but you can also increase your net worth. On average, the stock market will return between 5% and 7% every year. This interest will compound year after year, and this can generate a lot of returns. Of course, there will be some years where you lose money. But these years are also a good opportunity to buy cheaper stocks.
With these extra returns and a hedge against inflation, you can reach Financial Independence significantly faster. Many people are doing that.
I am also investing most of my savings into the stock market. I do not try to time the market. It is not a game I can win. Therefore, I only invest in low-fee index funds.
4. Invest in real estate
Another thing that people do to reach Financial Independence is to invest in real estate. You can buy real estate properties and have income by collecting your rent. It is a lot more work than investing in the stock market. But it can sometimes have better returns. First, you can collect rent every month. It means you will directly increase your revenue. But you can also make some returns by an increased valuation of the house or apartment that you own.
Of course, it is not without risk. You could end up not finding renters for your property. Or the real estate market could crash, and the value of your property could crash with it. Or there could be a local reversion of housing value trend in your region. And in some areas, the value of houses does not increase that much year after year.
Moreover, it is also a lot of work if you intend to manage your properties. You could pay a property manager to do it. But in that case, you are going to lose some of the profit to the manager.
But still, it is an excellent way to accumulate enough money to reach FI. And you can invest in real estate while you are still working. It makes real estate a very nice secondary income. Some people even get enough rental income to cover their expenses entirely and retire. Some other people simply use it as a way to reach Financial Independence faster.
I do not invest in real estate yet. I do not think I am going to invest in physical properties. But I may invest in real estate with crowd-funding. While I do not want to make it my main investment, I think it offers some more diversification aside from the stock market.
5. Start your own business
The final way to reach Financial Independence is to start your own business. Generally speaking, there is more revenue income when you are being your boss than when being an employee.
Of course, there is also much more work and risk in starting your own business. Some managers of startups are working twice more per week than regular employees. And your startup may fail. More than 50 percent of startups failed. This fact is something you need to take into account if you want to start your own business.
But as I said, it can bring much higher revenue than a simple career income. Either it can bring you enough income every month to be financially independent, or you can sell your company and have enough money to retire. There are many success stories of managers who sold their companies for a large amount and retired.
Personally, this is not something I want to do. I do not really like managing people, and I do not have an entrepreneur mindset. I am more of a regular employee. And I do not think this is a bad thing. Not everybody is cut for being an entrepreneur or even a boss. But I understand why some people want to be their own boss. It is the same with Financial Independence.
Choose your FI Way
Now, just because some people have reached FI one way does not mean you have to do the same things. There is no such thing as the best way to become Financially Independent.
The best FI way will depend only on you.
Some people will go the extreme frugal way, living in an RV or a tent. There are even some people that will go live in the wilderness and sustain themselves. This is extreme, of course, but this is the only way to bring your expenses to zero.
On the other hand, some people will start a business and try to increase their revenue to very high levels. As long as they do not increase their expenses too much, they should be able to reach FI faster. However, most of these people continue to work after being Financially Independent.
As you can see, there are many ways to achieve Financial Independence (FI). And you can use several of these ways together to reach FI even faster. You can be frugal and also increase your income. You can invest what you save either in the stock market or in real estate. Or you could also invest in both. Or, if you want, you could even start your own business.
If you are serious about becoming financially independent and you follow some of these ways, you will be able to reach it!
We are trying to reduce our expenses to the maximum and investing most of what we can save in the stock market. I also want to try to increase my primary career income to be able to save even more each month. We may start investing in real estate in the future. But I am not yet set on that one. And I do not plan on becoming an entrepreneur myself.
In any case, you should be wary of some examples you find on the web. A lot of so-called retiree bloggers earn a ton of money with their blogs and, as such, are not retiring with the way they preach.
What is your plan to reach Financial Independence? Which of these ways do you follow? Do you follow another way?