What is Financial Independence & How can it be Achieved in 10 Steps?
by Ankita Tripathy Finance 07 November 2024
What is financial independence? Is it just about having enough money, or is it something else? Do not worry, as we have all the answers that you need to understand financial independence closely.
In this article, we will be looking at financial independence, the FIRE program, and ten different ways of retiring before 65 or 70. Therefore, follow along if you want the answers to these concepts.
What is Financial Independence?
We all make money in one way or the other. However, only some of us can achieve what is known as financial freedom. Financial freedom is not about earning big bucks. It is a more nuanced subject that needs careful understanding.
Financial freedom is not just about enough wealth for multi-asset investing or saving. It is more about time. Time to pursue other goals and dreams. Therefore, financial freedom is more about having enough wealth to free oneself from the shackles of a deadbeat job or a business.
However, do not misread the explanation and mistake financial independence for not having to work. Subsequently, financial independence is about accumulating enough wealth to switch or change your course without thinking of financial obligation.
Factors Influencing Financial Independence
As you can see, financial independence is not just about the wealth you have. It is also about the mindset. Researchers believe that past childhood experience plays a major role in shaping attitudes, values, and financial behavior.
As a result, in order to effectively understand what is financial independence, you need to understand the basic proponents that dictate financial behavior. This will help you get the fundamentals right.
In this section, we will look at financial behavior and independence from a psychological point of view. Here we go!
Psychology
As we have already stated, many researchers believe that childhood experiences play a key role when it comes to shaping financial behaviors. As a result, the definition of what it means to be financially independent also morphs.
In a way, you can say that financial behavior is a subjective concept and is interpreted by the person practicing it. Therefore, what is financially independent for you might feel illogical to someone.
Therefore, even though finances are cold and hard numbers, they are also influenced by emotions to a great extent.
Financial Behaviors
As per Behavior Portfolio Theory, every investor or spender is a ‘normal’ human being. This means that they would use emotions to dictate their decisions and not logic. As a result, behavioral finances explain that people spend money according to their biases and inhibitions.
Now, multiply this with the current societal landscape, and you get a highly complex net of theory that tries to make sense of a human’s spending pattern. Still, in most cases, subjects show a sense of pattern.
This pattern is evident enough in their social and financial standing. While some classes claim that financial independence has enough money to cover basic expenses, the other class thinks that financial independence means enough money to follow one’s passion without worry.
Therefore, understanding financial behavior and what is financial independence is more about understanding an individual’s spending pattern.
The FIRE Method
Financial Independence is a nuanced concept to understand. However, since we are already on the topic of ‘what is financial independence?’, we need to understand another concept that is very close to this discussion.
Back in the early 90s, a popular book by Vicki Robin and Joe Dominguez named Your Money or Your Life changed the absolute landscape of finances. The book popularized a method known as FIRE. FIRE stands for Financial Independence, and it means Retire Early.
As the name suggests, the program is all about retiring early with the help of financial freedom. This is done with the help of extreme levels of saving, financial forecasting, etc., with a linear goal of retiring early.
The Purpose
The primary purpose of FIRE is to give people some financial discipline. A structure that can help them be in check when it comes to their finances. The FIRE method prioritizes aggressive investment and extreme frugality, all in the name of retiring early.
The FIRE method claims that a person needs to save at least 75% of their yearly income. Subsequently, they keep repeating this cycle till their savings reach approximately 25 times their yearly income. Afterward, they can take early retirement.
Variation of FIRE
Most people on FIRE tend to survive frugally. This allows them to save that much of their assets. However, this is also why the program comes under direct fire from people. Some claim that FIRE is linear or that it has a closed structure that does not keep spaces for emergencies.
However, people criticizing FIRE being closed up usually look at the whole thing from a closed perspective. Here are some of the most prominent variations of FIRE that need to be studied in order to understand ancillary concepts of the ‘what is financial independence?’
Here we go:
- Fat FIRE: This focuses on individuals who hold 9 to 5 jobs. This usually works with a high salary and aggressive savings for it to work out.
- Lean FIRE: This is for people who live minimally and are devoted to extreme savings. This is more for people who are entrepreneurs or have freedom of hours.
- Barista FIRE: This is a new-age FIRE. This is a combination of Fat and Lean FIRE programs. This is for people who want to quit their 9 to 5 job to start a part-time and have some savings to complement their earnings.
All of these variants of FIRE are important and need to be studied in the long run to understand what financial independence is and the ways to go about it.
Steps to Achieve Financial Independence
Achieving financial freedom is something we all dream of. A break from the vicious cycle of earning, spending, tax management, etc. A break from the rat race and chaos. Then again, how many of us truly achieve this goal?
The silence says it all. Financial freedom is a fleeting and evolving concept. As a result, most people seem a little confused about the means to go about it. Thankfully, we are here for you.
In this final section of the article, we will be looking at some of the most important steps that will not just help you understand what financial independence is but achieve it as well.
Let’s go!
Step #1
Step #1 of achieving financial independence is to set goals. A person without an ulterior goal in their head will not be able to achieve financial independence. Sit with a piece of paper and ask yourself the following questions:
- ‘What are my lifestyle requirements?’
- “How much money do I need to sustain those requirements?”
- “What is the deadline age?”
Answering these three questions can help you set your goals.
Step #2
Step #2 is to make a monthly budget. One good way to make a monthly budget is to follow the 50/30/20 Budget Rule. This rule will allow you to follow a structure. However, you can choose other such monthly budget methods for reference and help.
Step #3
Always remember that debt is the biggest enemy of financial stability and freedom. You will not be able to achieve financial stability as long as you have debts to your name. Hence, make a point to pay off all the debts that you have.
Step #4
Another golden rule of saving is to pay yourself first. If you have an employer’s retirement plan, deposit some money over there as soon as you get the paycheck. In fact, you must try to automate the process. This would help you to automate savings.
Step #5
The biggest financial blasphemy is to keep your money idle. No matter what you do, don’t leave your money, OK? This would not help you grow in any way. Therefore, use your money to make more money and start investing aggressively. Pick any investment plan that suits your budget and start.
Step #6
A financially conscious person always needs to have a close eye on their credit score. A credit score is one of the deciding factors when it comes to paying off interest rates. In other words, better credit scores mean lower interest rates and vice versa.
Step #7
Negotiation is the key to staying happy and financially healthy. Most Americans seem all too hesitant to haggle for prices. However, if you want to retire before your old age, you need to be a frugal friend. You need to haggle for prices to bring it to an optimal price that you can afford.
Step #8
Finance is a flowing river that does not stop or take rest in any way whatsoever. There is something or another happening. Therefore, the best way to get ahead of things is to keep an eye out for what’s new. This can help you discover newer ways to achieve financial independence.
Step #9
Mastering a frugal lifestyle is not something everyone can do. However, you need to be someone who can. Therefore, do not worry about pointless notions and be as frugal as possible. This would only pay off in the long run.
Step #10
The final piece of advice we have is to get a financial advisor. A financial advisor can help you identify the problems and weaknesses in your financial plan. Subsequently, they can help you make better financial choices to fix the said situation.
That is the Wrap
In summation, this is our answer to the question of the hour: What is financial independence? Financial independence is a complex subject to discuss. As a result, you need to have the fundamentals clear.
All in all, financial independence is the ability to free yourself from the vicious cycle of earning and spending and move towards a more favorable lifestyle. Therefore, helping people to p[pursue different passions or lifestyles before their retirement or old age.
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