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. This is awesome! You only keep working if you want to. This 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 are you 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 surely 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 main different methods to achieve this:
- You withdraw some money from your portfolio each month to cover your expenses. For this, you need to calculate exactly 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. This could be achieved 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 on reaching Financial Independence, you should focus on two or three of these ways.
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 about it and really 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 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 really need. Do you really need to have ten different coats? And, do you really need a second car? Do you really need the cable and Netflix? Is that gym membership really worth it? There are many more examples. If you do not really need something, you should not pay for it. This will help you save a lot. This 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 good questions each time you buy something new and each time you pay a bill.
This 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 30% average in the last twelve months. This is already really good for us. We are aiming for at least 50% average. We are working hard for it.
2. Earn More – Grow your income
Another way that is used to reach Financial Independence is to have a large (or very large) income. Having a large 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 are able to save a large part of a large income, you are in the good 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 grow your career income. This may not be easy either. But it is really 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 main 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 income.
This is also something I am going to try to do. I do not think I will focus on side hustles. I think there is more growth potential in my main 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 really important 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 main difference 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 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 it let rot into a bank account. Of course, you should invest your money in a smart way. 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 of time. You never know if a stock will go up or down. So it makes no sense to invest in a single stock in 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 really 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. There are many people 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 property 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. Not only can you collect the rent. 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 regions, the value of houses do not increase that much year after year.
Moreover, it is also a lot of work if you intend to manage yourself 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 a very good way to accumulate enough money to reach FI. And you can invest in real estate while you are still working. This makes it a very nice secondary income. Some people even get enough rental income to entirely cover their expenses and retire. Some other people simply use it as a way to reach Financial Independence faster.
Personally, 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 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 own 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. In fact, more than 50 percent of startups failed. This 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 definitely 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. This is the same with Financial Independence.
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 also 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! Personally, we are trying to reduce our expenses to the maximum and investing most of we can save in the stock market. I also want to try to increase my main 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.
What is your plan to reach Financial Independence? Which of these ways do you follow? Do you follow another way?