What is Financial Independence?
Financial independence, defined as simply as possible, might be described as: Paying your bills and having a few dollars left over.
Maybe it’s a little more complicated than that, maybe you need more than “a few dollars” to really claim financial independence. But that definition expresses the basic principle of it rather well. If you have a million dollars in the bank and a million and ten left to pay on your mortgage, you’re not financial independent. You need to figure out where you’re going to come up with that last ten dollars, and how you’re going to retire once you’ve spent your savings on the mortgage.
Wealth is not the trappings of wealth, wealth is not the speedboat and the glass balcony and the fancy dinner parties. No amount of money will ever make you rich if it’s less money than you need. Financial independence is simply being able to quit your dayjob without worrying about how you’re going to pay your rent or stock your fridge.
Less is More
The most important principle of becoming financially independent: Less is more. Studies have shown that as we age, we get better and better at getting by on less. We learn which expenditures are worth it and which aren’t, we learn how to save money at the grocery store, and we place less value on status symbols and more value on living comfortably and within our means.
When you see a retiree on vacation, don’t they seem a lot more relaxed than younger people on the same vacation? A 26 year old is wondering how they’re going to eat the costs of this trip. A 62 year old wouldn’t be taking this trip if they hadn’t already worked that out.
So the first step is: spend less and you’ll have more. Sounds obvious, but most of us don’t figure it out until our forties.
Invest in Your Future
Three important things you need to invest in:
- Your health
- Your home
- Your income
Starting from the top: The earlier you have your routine tests done, the better. If your doctor can spot a problem right now, it’s going to be cheaper and easier to deal with than it will be in another five years. Stay in shape, quit your bad habits, and get regular checkups. It is because health problems get more expensive the older you grow.
Next: Your home. Be realistic about where you’re going to live. Do you need a three bedroom apartment when it’s just you and your spouse with no kids? A home office is a nice luxury, but couldn’t you convert a closet in a studio apartment for the same purpose?
When you’re ready, you should make the jump from renter to owner as soon as possible. Look at starter homes, prefabs, trailers, suburban and rural one and two-bedrooms. Mortgage payments tend to be smaller than rent payments just on a month to month basis, and once it’s paid off, all you have to worry about is utilities and property tax.
Finally, your income: Saving up for retirement is fine, but you’ll be better off if you have a steady stream of income even once you’re all done working. Royalties, savings accounts, stocks, crypto currency, real estate, put your time and effort into something that will keep paying off for years to come so that you’re not pushing for every dollar ten, twenty years from now.
Capitalism rewards the crafty investor. If you’re going to put money into real estate, for instance, learn everything there is to know about the neighborhood where you’re investing, recent market upturns and downturns, new business developments, etc. If you want to start a side business, then you want to learn everything there is to know about that industry. If you’re selling coffee beans, what kind of beans do people like? Are you going to be selling mostly to home consumers or mostly to coffee shops? If you’re going to invest one dollar or five minutes of your time, become an expert on the subject, or pass on it for something on which you can become an expert. Don’t make a blind leap into any investment, learn everything, and then make your move.
Hard work alone won’t make you rich. But coupled with an eagerness to keep learning, it’s a slow and steady path to financial independence.