I can remember starting my first real job out of college. It was an exciting time. I had a nice salary, benefits, and pride! But something was lacking …
I didn’t feel “rich”. I knew that one layoff or accident could easily lead to financial disaster.
At the same time, I also understood that trading my time for compensation was an arrangement that I neither wanted nor would be able to keep up with forever. At some point, I’d like to happily retire, spend more time with my family, and pursue other passions. And I’d like to be able to do all of that sooner rather than later!
That’s when I learned about the concept of financial independence. Here’s what it meant for me and how it can change your life too.
What is Financial Independence?
Financial independence is a point you have the means to take care of all of your living expenses for the foreseeable future.
Instead of working for your money, you put money to work for you. That means you replace your employment income with the earnings you’re making off of your investments and assets. This in turn frees you up to start doing whatever it is that you want to do with your time because you’re no longer tied to a 9-5 job.
When I discovered this concept, it was as if the secret of building wealth was finally revealed to me. Here was a proven way to ensure financial security, and it could be constructed so that I could theoretically achieve it at any age I wanted.
I started reading nearly every book or blog post I could about it, and here’s what I learned.
How You Achieve Financial Independence
There are so many different ways to build up your investments and live off of your assets. The three that I found to be the most helpful were these:
Building Up Your Nest Egg
Retirement plans are great for more than just retirement. Your 401k and IRA can also be very useful in achieving financial independence, even if it’s before age 59-1/2 (when the IRS says you’re allowed to make withdrawals).
This is because retirement plans offer tax deferment that lets you avoid paying taxes on your contributions. In short: you’ll be able to save 100% of every dollar as opposed to only being able to save roughly 75% of it in an after-tax account.
On top of that, most employers will also kick in as much as one dollar for every dollar you contribute to your plan. That’s like literally receiving free money for just being smart about how you save.
When I sat down and ran the numbers, I was floored by what I found out. If I just found a way to max out all of my retirement accounts each year, then I would be able to retire by the time I was in my 40s!
But saving that much money every year wasn’t going to come easy. To do this, I’d need a way to supplement my income. That led me to try out various side hustles.
Earning More Money with Side Hustles
If you really want to accelerate your way towards financial independence, then you’ll want to take on some side hustles.
Side hustles are jobs, activities, and even business ventures that you can do outside of your job to produce income. In some cases, they may even eventually grow into something that can replace your employment income altogether.
Here are a few common ones:
- Freelancing: writing, editing, designing, consulting, etc.
- Receiving payments from dividend stocks and REITs
- Owning rental properties
- Receiving advertising income from a blog or YouTube channel
- Sales from an ebook or e-course you created
- Selling print on demand or drop-shipping products online
I’ve been very lucky with many different side hustles over the years:
- I started my own personal finance blog back in 2011.
- I built and sold several smaller websites.
- I published several ebooks of Amazon.
- I’ve become a freelance writer offering my services to other publishers
Sometimes they’ve resulted in a few hundred extra dollars per month. But other times they’ve added several thousands of dollars to my monthly income. It’s amazing how much you can get out of them the more you keep at them.
Living Below Your Means
When you’re trying to accumulate enough money to cover your living expenses, remember that this is a two-way street. Not only can you work on the “saving” part, but you can also work on the “how much you need” part as well by doing one simple thing: Needing less.
One fascinating example of this strategy in action comes from Jacob Lund Fisker, the writer behind the book and popular blog Early Retirement Extreme. He was able to retire before the age of 30 after cutting his expenses down to just $7,000 per year. This meant he only needed approximately $250,000 to reach financial independence.
Don’t get me wrong – I could personally never live on $7,000 per year. But I have done several things to keep the cost of my lifestyle in check:
- Buying used cars instead of new
- Cooking at home over eating out whenever I can
- Picking one expense every few months and trying to find creative ways to reduce it
- Shopping only for the things I need rather than want
- Using travel rewards for vacation instead of paying out of pocket
The goal is clear: The lower you can get your living expenses to be, the less money you’ll need your nest egg or side hustles to produce, and the sooner you’ll be able to reach financial independence.
Why You Should Want to Achieve Financial Independence
For me, financial independence shouldn’t be about quitting some job or escaping the 9-to-5 grind. It’s about getting control over your life and having the ability to use your time in a way that can be more fulfilling. Here’s what I mean by this:
You’ll Take Control of Your Future
Being able to shave years off of your working career means you’ll finally have all the time you need to do whatever it is that you want to do. Your future doesn’t have to be determined by the demands of your employer. You’re in control and can decide what to do every morning you wake up.
You Can Start Living Your Best Life
There are so many things I can’t wait to do once I retire: travel the world, learn a new hobby, join a social group, volunteer to help others. I’ve even got passion projects like writing more books, starting a business, and creating a nonprofit. The possibilities are endless.
There’s More at Stake Than Just Money
Let’s face it: No one knows what the future holds for any of us. And most will realize that time was a luxury that we squandered.
If there’s anything I want to do with my financial independence, it’s spending more time with the people that actually matter. That means being involved in my children’s lives, caring for my parents, reconnecting with old friends, and most important deepening my relationship with my wife. If I’m working at a job for 8 hours a day for the next 20 years, I lose that time with my family.
Financial freedom really isn’t about money. It’s about how you can spend your human capital once you stop trading it for money.
When I think about my decision to save as much of my income as possible, I have no regrets. I know that being able to retire early and reach financial independence is what’s important to me.
Through using my retirement plans to avoid taxes, earning additional income with side hustles, and living below our means, we’re on the fast pass to success. That means having more free time to do whatever we want and pursuing the activities and relationships that will truly bring joy to our lives.