Discover proven strategies for achieving financial independence faster. This guide covers essential steps from budgeting and saving to investing wisely, helping you secure a financially free future.
We’ve all been there before. Imagining a life where you're no longer tied to a 9-to-5, financial worries a thing of the past, and your time is truly your own. That’s financial independence - a goal that many people strive for but few actually achieve.
While you may think that financial freedom is reserved for the elite or those born into wealth, it’s actually more achievable than it appears. In this guide, we'll explore practical steps on how to achieve financial independence that don’t rely on a winning lottery ticket or great uncle’s inheritance. Let’s dig in.
The good news and the bad news: No matter what certain “gurus” say, there’s no single, right way to achieve financial independence. However, there are a set of simple guidelines that you can follow that will set you up for success down the road.
First things first - you need to take stock of your current finances. It’s impossible to know where you’re heading or how to get there if you don’t understand where you are now. Before even setting a budget, take the time to inventory the basics of your financial profile, including your:
Every one of these items impacts your path to financial independence, so it’s important to know where they stand and have the info about them readily available in a single location. Once you fully grasp these aspects of your life, you’ll be able to set an achievable financial independence goal.
The rule of thumb to achieving financial independence is to have a net worth that’s equal to roughly 25 times what you spend in a year. For instance, if you spend, on average, $60,000 each year ($5,000 each month), you would need around $1.5M to cover those expenses ($60,000 * 25 = $1,500,000).
The 25x calculation comes from the 4% Rule, the result of research in the mid-1990s that found that, typically, you can withdraw 4% from your investments in retirement each year and have enough leftover to do so for at least 30 years.
It’s important to note, though, that the above is an extremely simplified version of the rule. Your actual withdrawal rate will vary based on market conditions, your lifestyle, and any other things that life throws your way. For the sake of planning, though, the 4% rule is a good place to start.
One of the most impactful things you can do to accelerate your path to financial independence is to reduce your spending. Reducing your spending has a two-fold benefit.
First, it lowers the net worth goal that you need to reach for financial freedom. Remember the example from earlier? If we cut our annual expenses from $60,000 to $50,000, we would now only need $1,250,000 to become independent.
Additionally, the less you spend, the more you have available to invest. Although the market rises and falls in the short-term, over the long-run, it tends to trend upwards. There are plenty of studies that propose explanations for that trajectory. However, for now, the important thing to note is that because of that historically positive trend, the earlier you start investing, typically, the better.
A common strategy to reduce spending and manage your finances is a 50/30/20 budget. But there are plenty of other options out there as well.
As you continue to save more and more, you want to make sure that the dollars you’re saving are working for you as efficiently as possible. That’s where tax-advantaged accounts, AKA retirement accounts, come into play.
These accounts (think 401(k), IRA, HSA to some extent, etc…) offer tax advantages either on “the way in” or “the way out” depending on the account. They generally enable you to lower your taxable income for the year or grow your investments relatively tax-free.
A word of caution, though: These accounts do have specific contribution and withdrawal rules. That said, when investing for the long-term, you should still generally prioritize maxing out contributions to these types of accounts before shifting funds to a traditional brokerage.
To learn more about some of the differences between retirement accounts, check out our guide on the Roth vs. Traditional IRA.
The final, and arguably, most important tip on how to achieve financial independence is by consistently tracking your money. Once again, there is no perfect tool or process to keep tabs on things. An general schedule, though, looks like the following:
Following the guidelines above, you should be in a place of financial independence by the time that you hit retirement age. However, if you’re itching to get there even sooner, increasing your income is a spectacular way to speed things up.
Growing your income while keeping your spend the same allows you to invest at a more aggressive rate, which as we’ve seen above, can heavily impact your net worth.
Receiving raises at work or starting a side hustle are popular ways to get that income boost. Just make sure you’re not burning yourself out on your journey to financial freedom so that you can still enjoy life on the way.
You now have a framework on how to achieve financial independence. Don’t feel the need to accomplish everything at once, though. When it comes to finances, it’s a journey, not a sprint.
Building good habits takes time. But as long as you start now and continuously get better, you’ll be stress-free, sipping Mai-Tai’s (or your drink of choice) on the beach in no time. For more information, check out our ultimate guide to retire early.
Sign up today to get early access to Steve and start your journey towards an early retirement. We promise not to spam.
Helping you gain financial independence through A.I. coaching and insights