Financial Independence: What Does It Mean, and How Can You Achieve It?

Many people engage in financial planning hoping to build enough wealth to enjoy their later years without financial worries. But achieving “financial freedom” or “financial independence” can mean different things to different people, especially those who don’t see themselves retiring in the traditional sense.

Indeed, not everyone wants to stop working completely. For some, the ideal scenario is to keep working as long as they can because they love what they do and enjoy pursuing new goals. However, this doesn’t mean they want to work because they need the money.

Financial independence enables you to work because you choose to, not because you have to. It gives you the freedom to follow your passions, whether that’s starting a business, setting up a family foundation, or picking up new skills.

So, how can you become financially independent? In this article, we’ll look at what financial independence really means and the steps necessary to achieve it, empowering you to plan a future where you can do what you truly enjoy.

What It Means to Be Financially Independent

For many, reaching financial independence means having the freedom to live life on your own terms. When you’re financially free, your investment earnings and other sources of passive income cover your fixed and discretionary expenses, allowing you to make life and career choices without financial constraints.

Financial independence isn’t necessarily a quantifiable target; rather, it’s a state that depends on your financial obligations and lifestyle goals, which often fluctuate over time. However, the following conditions generally pave the way for financial freedom:

• Sufficient Assets. Central to financial independence is the accumulation of assets—for example, stocks, bonds, real estate, or business investments—that have the potential to produce enough income to cover your expenses long-term.
• Passive Income. The income from these assets is often passive, meaning it doesn’t require daily efforts or traditional employment. Examples include dividends from stocks, rental income from properties, or earnings from business investments.
• Freedom of Choice. Financial independence affords you the freedom to make life choices without worrying about financial limitations. This could mean choosing to work in a more fulfilling but less lucrative career, volunteering, traveling, or pursuing hobbies.
• Financial Security. Financial freedom also implies a level of financial security and resilience, safeguarding your wealth against market fluctuations and financial crises without the need to actively earn a salary.

Factors That Influence Financial Independence

Reaching financial independence is highly personal, often requiring diligent saving, wise investing, and maintaining a lifestyle that makes achieving this goal feasible within a desired timeframe.

In the United States, the average retirement age tends to hover around 65. However, with the rise of movements like FIRE (Financial Independence, Retire Early), some individuals now aim to reach financial independence much earlier, sometimes in their 40s or even 30s.

Whether you’re planning for a traditional retirement or aiming for financial freedom at a younger age, the following factors can influence your timeline and ability to achieve financial independence:

• Income Level. Higher income levels can accelerate the path to financial freedom as it allows for greater savings and investment opportunities.
• Savings Rate. The amount of money you’re able to save is perhaps the most critical factor. Those who maintain a frugal lifestyle and save a significant portion of their income can generally accumulate wealth at a faster rate.
• Investment Returns. Successfully investing in stocks, bonds, real estate, or other assets can help grow your savings, potentially accelerating the journey to financial independence. Conversely, poor investment choices or low returns can delay your progress.
• Living Expenses. Lower living costs can make it easier to save and invest more. Geographic location, lifestyle choices, and personal spending habits all play important roles in determining how quickly you can become financially independent.
• Debt. High levels of debt, especially high-interest debt like credit card debt or certain types of loans, can hinder your ability to save and invest. Eliminating debt is often a critical step toward achieving financial freedom.

In addition to personal financial circumstances and decisions, broader economic factors such as inflation, interest rates, and the overall health of the economy can indirectly impact how quickly you’re able to achieve financial independence.

7 Steps to Work Toward Financial Independence

Achieving financial independence typically involves careful planning, mindful spending, and a disciplined savings and investment approach. The following steps can help set you on a path toward financial freedom:

1.   Set Clear Goals

Define what financial freedom means to you, including how much money you’ll need to live comfortably without working. One approach is to calculate your annual living expenses, so you can estimate how much money you’ll need to generate this amount passively.

2.   Assess Your Current Financial Situation

Evaluate your current financial status, including income, debts, expenses, and savings. Understanding where you stand financially can help you set realistic goals and timelines.

3.   Create a Spending Plan

A spending plan helps ensure you’re spending less than you earn. It also allows you to see where your money goes and redirect non-essential spending toward savings.

4.   Pay Off High-Interest Debt

Before aggressively saving and investing, it’s important to eliminate high-interest debts such as credit card balances, as the interest expense can offset your investment gains.

5.   Build an Emergency Fund

Aim to save at least 3-6 months’ worth of living expenses in a readily accessible account. This fund serves as a buffer against financial setbacks and can prevent the need to withdraw from investments prematurely.

6.   Save Aggressively & Invest Wisely for Financial Independence

The higher your savings rate, the faster you can achieve financial independence. In addition, investing your savings in a diversified portfolio that’s aligned with your goals can help grow your assets and generate reliable returns that can eventually replace your income.

Be sure to take advantage of tax-advantaged accounts, including IRAs, 401(k)s, health savings accounts (HSAs), and 529 plans. These accounts can help reduce your overall tax liability and grow your wealth more efficiently.

7.   Monitor & Adjust

Achieving financial independence often requires patience, resilience, and adaptability. As your financial situation or the economic environment changes, adjusting your spending, savings, and investments accordingly can help keep you on track toward your goals.

SageMint Wealth Is Here to Guide You Toward Financial Independence

Everyone’s path to financial independence is unique. However, with a sound financial plan and an experienced guide, you can navigate the opportunities and challenges that lie ahead with confidence, paving the way for a financially secure future.

SageMint Wealth is a wealth management firm for high-net-worth individuals, families, and business owners that is committed to growing wealth and investing in a better world. Our team can help you develop a personalized financial plan, aligning your financial decisions with the future you envision for yourself. Contact us to learn more and begin your financial journey.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.