Financial Independence, How To Plan For This?

What is Financial Independence To You and How Can You Plan For This?

Most people have dreams of throwing in their job at a future retirement date (some wish it was sooner), however a lot have never really given much thought to how this will play out or put much effort into planning this. For many they rely on basic employer contributions to their 401K’s, pensions or superannuation accounts and hope that this (along with whatever government assistance they can get) is going to be enough.  

Then there are a subset of the working population who are resigned to having to work until they are really really old or dead. This shouldn’t have to be this way! 

The earlier you start planning, the quicker you can hit this retirement goal. Hopefully with an early start and quality investing this goal of financial independence can be reached a lot sooner! 

So what is financial independence and how can you get there sooner?

What is financial independence?

Nerd Wallet states that financial independence means “having enough passive income to pay all of your living expenses”.

Essentially it means that your investment (passive) income is providing you with net income equal to or exceeding your current lifestyle expenses, basically eliminating the need to work a job to fund your lifestyle expenses. 

Further to this above definition we’d also make sure that you have your emergency fund in place (at least 12 months of lifestyle expenses) on top of the income stream that you have coming in. 

Now once you’ve reached this point (and before you’ve handed in your notice to your employer) you should have your financial plans in order to make sure any potential contingencies are taken care of (as much as these can be planned for).

Remember financial independence for one person will be totally different to someone else. Don’t compare your goals or life to others, only focus on you and what you want to achieve!

How can you reach financial independence quicker?

Some of the steps to reach financial independence quicker include:

1. Put a plan in place as soon as possible

Sounds simple but how many people are actively involved in their retirement planning? Particularly in their 30’s or 40’s? The sooner you start working on this the quicker you will reach this. Yes that does mean taking an active interest in your 401K, pension or superannuation assets but it also means becoming more savvy with your own personal finances. 

Do you have a budget or more to the point, what monthly amount does it cost to run your life? Once you’ve got an idea for this then you need to find a way to build an investment portfolio that can fund this level of lifestyle expenses. If you have no idea what it costs you to live each month or you haven’t ever prepared a budget, do this as soon as possible. 

If possible break this down into a basic monthly lifestyle cost (made up of shelter, food, basic utilities) which will be the minimum amount needed for your financial independence, then calculate what an ideal monthly lifestyle expense will be and use this figure as the upper end amount of financial independence. 

Once you’ve got these amounts noted and you have set out your budget, let’s start building your personal financial plan. 

Are your finances automated? Are you allocating a portion of your savings towards paying down non tax deductible debt or towards investing? The sooner you pay down all of your non tax deductible debt and build your investments, the more rapid your approach to financial independence will be. 

With investing, time is your biggest friend. We don’t even have to use an example of holding high flying tech stocks such as Amazon or Google to prove this point. If you purchased shares of McDonald’s Corp in the mid 1980’s and held these all the way through to the current day, the current McDonald’s dividend of $5.52 a share is now greater than what a share of McDonald’s Corp cost in the mid 1980’s. 

Start early, invest for the long term and invest in quality.  Even if retirement is 20 to 30 years away, start building up your investments now!

2. Seek quality advice or at least rapidly improve your financial education

Again start this as soon as possible and those of you with children get them educated about their finances and investing as soon as possible. 

Reach out to financial professionals to help improve your financial situation and investment portfolio. Better yet, learn as much as you can about finances and investing as no one is going to be more engaged or invested with your own financial success than you!

If you have little or limited understanding of finances and investing start small, start slowly. Start with your own personal finances, do you have a budget and have you automated your personal finances? If not, set this up and get intimate with your financial service providers, are they providing you with great products and services? Are their fees and rates working for you? If not, research the market and find a better alternative. 

With your investing, start to learn about the stock market. Visit websites such as Cnbc, Bloomberg or even Barron’s. Investopedia is a great resource for all financial terms and definitions. Start to understand investment cycles how the economy can affect business earnings and profits. Look at putting together a test portfolio and track this over a specific time frame and if you are confident in your investment selections make the leap to investing real money. 

Look to expand your investment understanding, even build your own investments such as an online business or website. Once your investments grow you can look to expand by buying other investments and businesses (partial or full ownership) and employ people to run this for you (if this suits your goals and investment style). 

Basically the sky’s the limit for what you can achieve no matter what your investment starting point. Yes, starting younger does help however making sure you start is more important!

3. Utilize your strengths

You might be good with numbers and can analyze a company’s financials or annual report quite easily. Alternatively you might be strong at relationships and build up a solid network to help with your investment portfolio or allow you access to great investment opportunities. Alternatively you might be working with a fantastic company that offers a great employee share program or offers great retirement benefits. 

You might have a great work ethic which could help you bootstrap an investment or company or you may be tech savvy and can build an app or a website as part of your financial independence goal.  Play to these strengths and focus on building on these (at least in the short term). 

Once it comes to diversifying don’t take it for granted that because you had great success in the tech area that you would automatically have great success in the shares or property investing. Reach out to experts or successful investors in fields that you are looking to expand to. Due your due diligence and look at investing in these new asset classes in a smaller way than in the areas that you were previously confident and successful in. 

Don’t be scared of expanding your investment fields, just do your research and due diligence before expanding and whatever your situation, look at what strengths or opportunities you have access to and run with this!

4. Build multiple income streams and leverage these

One of the big key’s for financially successful people is having multiple income streams. This could be several investment properties, several share holdings or even a mixture across various asset classes. In theory you want to have multiple diversified income streams, ideally diversified across several industries or sectors. 

An example of this could be having an investment property, several shares in a portfolio and a positive revenue generating website or online business.  

For example let’s assume you have purchased your first investment property and over the last few years this has appreciated significantly allowing you to build valuable equity for further investments. Building on this property success you have found another great potential investment property you think would be a great additional to your property portfolio

You can leverage the previous success in your last investment property to use this additional equity to help you purchase this new investment property. 

The same thing can be seen in an online business. Let’s say that you have built an online business up from scratch and it is now valued over 6 figures and produces several thousand per month in free cash flow. You could leverage the equity in this business (providing you find a lender in this space) to look to purchase another online business or you could use the free cash flow to put towards another business or to use towards something like a share or managed fund portfolio. 

One point to note is by all means use leverage from your previous investments however don’t bet the farm on risky additional investments and make sure that any additional investments won’t affect the previous investments that you have built up. Do your due diligence, work your numbers and if all looks good then make that investment. 

5. Stick to a routine, stay disciplined and focused

The same thing that works for hitting your goals or reaching a weight or fitness target is the same method that will likely be the main reason for your financial and savings success. Be consistent! As we’ve discussed previously, create a plan and budget, automate your finances, build your knowledge and take action! If something isn’t working, dust yourself off and try something else but stay the course. 

So many talented people struggle financially or don’t achieve the goals they should be achieving as they lack the discipline to stay the course! There may be some days that are a struggle however these aren’t reasons to give up. Grit your teeth, get through the struggle but stay the course. Before long you will be hitting savings and investment goals you only dreamed about and will be well on your way to financial independence.  

Financial independence isn’t easy, nor is it a smooth journey however and work will be needed.  However if you start planning early enough, stay disciplined and take action with investing you will have a big chance to achieve this financial goal. Even if you are a later starter to the financial independence journey there is no reason why you can’t achieve this (assuming your finances are in reasonable shape).  

Keep learning along the way, keep trying new things, don’t be scared of small failures and before you know it you will be knocking on the door to financial success.