What is financial independence? Well, it has a different meaning for everyone. The Wikipedia definition is; Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. I tend to agree with this definition. There is the F.I.R.E. (Financially Independent Retire Early) movement. They separate the two. Financial independence is when you become work-optional. Or even a part-capable worker. Retire Early means you can completely stop working and have enough income coming in from investments. Also, they say to have 6-12 months of income in cash as well.
For this article, I am going to with a modified definition. Financially independence is having enough passive and portfolio income to cover one’s (or families) living expenses plus entertainment. This basically means covers housing, bills, car, insurance, food, and entertainment. It is sort of like a bear bones retirement. The good part of being financially independent is that you can still work full-time or even work part-time. You can start a small (or large) business. Your life is really up to you.
How do you become financially independent? Using your earned income (from your job), you slowly purchase assets such as stock, bonds, and real estate. These assets will produce income. When you have enough passive income (real estate) or portfolio income (stocks and bonds), then you will become financially independent. You will also want to have a year’s worth of income on hand as well, most likely in a high yield savings account.
How do you calculate your financial independence number? Take a look at your current expenses, and then predict what you will require in the future. You can make it as large a number as you can. I would caution on making it too small, however. This may lead to disaster. Let’s do an example.
Let’s say I need $1,200 for housing, $1,200 for bills and expenses, and $1,200 for food and miscellaneous. That would be $3,600 a month I would need. For me, I would round that number up to $4,500 a month. I like to be cautious. From there I would start investing in dividend-paying stocks, bonds, and real estate. My plan would look something like this: 2 rental houses paying $1,500 each and $1,500 of investment income. At this point, you would call yourself financially independent. You can even sweeten the deal by starting a small business, consulting, or working part-time. The important thing is that you have many more options then if you were working just for earned income.
So, again, what is your financial independence number?
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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