How to Achieve Financial Independence in 5 Straightforward Steps
When I was 26, I got my second car, a Mercedes roadster. It was the first car though, that I was buying with my own money.
That’s because I first owned a Lancia Delta that my parents had got me when I was 19. At that time I hadn’t even taken the exams to enter university and I was full of doubts if I would manage to focus on succeeding with a new car!
In the end, I did get into the university, but I never finished my studies ending up as a drop-out, while I began making my own money. And the more I made, the more expensive the car that I dreamt of became, convincing myself that I was financially independent at least from my parents.
When I made so much that I could get a Mercedes, I spent three hours in the car dealership before I decided to order one right there. In fact, I still didn’t have the whole amount of money! I was planning on buying it on credit, by making a 50% down payment and paying the rest in 24 installments with zero interest rate! Fortunately, in the three months’ time that took the car to be delivered, I made enough money to cover the difference and pay everything in cash.
And that’s how the first 57 thousand euros that I ever made disappeared!
Even when I was studying chemical engineering, the prospect of an ordinary life discouraged me.
The life purpose of going to school, then university, then working for 40 years, then retirement and death wasn’t in my plans. Well, I suppose I can’t escape death, so that’s still in my plan!
When I discussed that with friends and elder family members, who had followed that plan their whole life, they were doubtful, to say the least. What are you talking about? Hey little Jim, get ahold of yourself. Get your degree, find a job and then we’ll talk again. What? Are you going to drop out of college? Others are trying their best to enter and you want to quit? And to do what? You don’t even know!
And that was the bitter truth. I didn’t know what I wanted to do, like most 20-year-olds. But I knew what I DIDN’T want to do; whatever everyone else was doing. Studies, job, retirement.
All that process seemed to me like a huge waste of time. And the more years I was studying, the more I realized that I am wasting my time. And time at 20 is priceless. That was something that I hadn’t realized yet. And I also hadn’t yet realized the value of money and financial independence.
Reality hits hard
The first time I found out of my financial dependence on others was when I was 20.
I had owned my Lancia for a year, I was in a relationship, it was mid-summer, I was looking forward to my second year as an undergraduate student and my buddies were preparing to spend the weekend at the beach. All that sounds ideal, but that way of living requires something very important to be sustained. Money!
At the time my dad was giving me my pocket money every Monday. I recall it was 50 euros if I recall correctly. Like every other student, I wasn’t managing my money properly, I was living the big student life and I was out of money. I was broke and certainly not calm, since I didn’t want to miss a fun weekend with my buddies.
So, I considered I had every excuse to request my pocket money, two weeks in advance. For the next two weeks you won’t give me any money, I said to my dad, convincing myself that after the upcoming crazy weekend that was about to unravel, I would shut myself in my room.
To my big surprise, his reply was negative and he was unmoved.
I spent the rest of my day sitting down to my room, thinking of what I could do. It didn’t take me long, of course, to realize that I couldn’t do anything. I was broke. The more I thought of ways around it, I always ended up realizing that I needed to make my own money.
With one way or another, I HAD TO make money.
I had to become independent. Financially independent.
On that day I made one of my biggest decisions. I would not allow myself to be in that position ever again.
20 years later, I’m sitting in front of yet another decision. Things aren’t that dramatic obviously, but something has to be done. As a 40-year-old I may no longer be financially dependent on my parents THANKFULLY, but that doesn’t mean I’m financially independent, as that is widely known for.
So something must be done and it must be done now, which I realized as I was walking back and forth at Skyros island. On that porch, I eventually decided to focus on new goals and record my attempt to financial independence in a series of videos.
Killing two birds with one stone kind of thing.
First Step to Financial Independence: Track your Spending
Financial independence requires knowing how much money we need before we can call ourselves financial independents.
A big part of that depends on our lifestyle and the country we are based in since some of us will need less and others more so that we all can continue living the way we are used to. And everyone’s lifestyle has a different cost.
Thus, the first step to financial independence is to set the goal of making as much money as our living expenses without working of course. That is the expenses that guarantee our current lifestyle.
So at first, we have to calculate how much money we currently spend!
There are plenty of solutions for that, the simplest of which is a pen and paper. But we can also track our spending on an Excel spreadsheet or even use sophisticated software that is tailored specifically to spending tracking.
The most difficult part is having the discipline to track our spending continuously and not how we are going to do it. Yet, some solutions will make the process hard and tiresome while others will even encourage us, making tracking our spending simply a pleasant habit. And that should be our goal here; to make spending tracking a habit of ours.
Personally, for years I’ve been using an app called You Need A Budget, or YNAB in short.
It’s rather funny how I ended up using it. As a passionate video gamer, I have a Steam account, where, as an adult Alpha male, I can find all sorts of games to play. Among thousands of games, you can also find software that helps you make videos, make music, make your own games and software that… make you a responsible human being by tracking your finances! I am not joking, I found this particular app in my recommended list and it was on a 75% sale!
The algorithm was of course correct. After doing the usual brief research that I always do before spending my money, I ended up buying it for 12 euros. For a one-time payment. No subscriptions. No monthly recurring payment. Nada. Pay and forget. Haven’t we all missed that payment model?
4 years later I haven’t missed a day that I haven’t updated the app. 99% of the time I update it is during the time of transaction. Did I just buy bread from the bakery? Updated. Buying meat from the butcher’s shop? Updated. Parents giving me something extra? Updated! Come on, that’s what are parents for! And no, I have no shame!
By the end of the month, I know exactly the family’s expenses, where we spend the most and where we are out of control. I compare the expenses of previous months or even years and I can better plan when we can afford a trip.
It has helped me so much that I am now using it to track the finances of my own company. Revenue, costs, what comes in, what goes out, what’s my net profit every month, how sales went this year, where there is room for improvement and so many other valuable info. And at the end of every year, all that data is going directly to my accounting team electronically, without me needing to count my beans.
The app is nowadays following the trend and is sold on a subscription-based model. Yet, I’m still using the original standalone version that I bought for 12 euros. That’s priceless.
So, given we track our spending, we are well-informed of how much money we need to have as a goal.
Yet, we need to know about our annual expenses and not just our monthly ones. Costs fluctuate on a monthly basis. The months we pay our taxes, the car insurance, and our kids’ tuition are inevitably much more costly than the months with regular, household bills.
Therefore, if we spend 10 grand a year, that’s our goal. For someone else that spends 20 grand a year, the goal is obviously different. Our intention at this point shouldn’t be to lower the quality of our life, by cutting down the costs, so that we have an easier goal to aim for.
The whole point is to keep the same lifestyle, while enjoying the financial freedom that financial independence guarantees. So be honest about your spending.
Step 2: Next step in Financial Independence: Saving Money
That certainly doesn’t mean to overspend and neglect to save the money we don’t spend.
Theoretically, our salary should increase on a yearly basis, even for just a little. Otherwise, we don’t grow and that’s a necessity in self-improvement. As our finances are improving, excess money should be saved and not spent. Not only that, but it’s advisable to try spending less each year.
No, that’s not stinginess, it’s living frugally with proper financial planning.
By saving and putting money on the side, we improve our odds to become financially independent and bring that goal even closer time-wise.
Step 3: Financial Independence requires Starting a Business
At the same time, it’s not bad to start something new while we are still keeping our main job and we WILL find endless excuses not to.
From not having the time, raising a family, and working too much already to what’s the point, as if I am going to succeed, I don’t know how to do anything else and what my friends would think of me. Well, all these are just that, excuses.
I’m sure you can find many examples of successful people who seemed to not stand a chance initially. I admit that we never hear of people’s failures that tried to go down this path. But just think for a second how much failure costs and how much success is worth. If you fail and people even HEAR of your failure, no one will remember it in a year or so, while if you succeed, EVERY YEAR they will be talking of you!
Now, what kind of side-business can we start?
WHATEVER we believe can bring revenue. Don’t overthink it.
And if you need motivation, here’s the bitter truth: our regular day-job will NEVER make us financially independent. No matter how many years we are going to work for, by making exactly the amount of money we spend, we will never become financially independent. Thus, we MUST start something by ourselves. That something is the vehicle that will get us to financial independence.
Step 4: The Final Step to Financial Independence
So, since our day-job is providing us with income, our side-business(es) creates more income streams and we are saving money at the same time, what is missing is to invest that money.
Let’s not be scared by the term investing. We won’t become Warren Buffet overnight. No need to become one after all! We will be spending most of our time in our job and side business. We won’t have the time to keep an eye on world markets and stock exchanges.
That’s why by investing our money we simply mean following the simplest investing strategy on the planet. The Buy & Hold strategy.
Personally I’ll be buying stocks. Usually of very big corporations. These are difficult to lose all of their value. Imagine Apple’s stock price hitting rock bottom. Yet, my goal isn’t profiting from speculation rather than from the dividends these companies pay out almost every year, like Coca Cola. I’m also buying index funds. In other words, I’m investing in a country’s economy. When I buy the SP500 index, I’m betting on the US economy to advance.
Simultaneously, I will invest some money into precious metals, like gold. No, I won’t hide gold bars at home. I’m simply investing in gold’s value, in gold’s price, while a large chunk of my money will go into the most generous savings account, so that I benefit from the tiny interest rate, compared to the non-existent rate of current accounts.
And let’s put a disclaimer here that this is not investment advice, I’m not a professional advisor and I’m saying all these for purely entertainment purposes only. Having said that, I will NEVER close these positions. I am investing with the money I save every one or two months, scattering it to all the markets I mentioned. Finally, if I manage to get hold of a large amount of money, I would look into investing in real estate by buying a small office space or studio.
By doing all that, I diversify my investments’ risk and I make money work for me. Sharks die if they don’t move. That’s why I must move the money that I can save.
Step 5: How Investments lead to Financial Independence and Early Retirement
Now, the ultimate goal of my financial independence plan is for my investment gains to cover my annual expenses. Let’s see how that’s calculated.
Investment growth is expected to be annually at 7%. Some investments will lose me money, while others will outperform. In the end, I expect the value of my investment portfolio to increase by 7% on average. That means every year my investments are expected to grow their value by around 1/15.
Taking into account the inflation, my capital’s preservation and other factors, once I become financially independent I’ll assume I am allowed to withdraw 2% of my investment capital every year.
For example, if I need 20K per year to live and my total investments amount to 300K, I’m not yet financially free. I’ll become financially independent when my investments are worth a million, so that 2% of that equals to 20K, which is my annual expenses.
From that point, if I decide to pull the plug and quit everything, I will be able to live off of my investments. Forever. Without ever needing to work or worry about money again, as long as I NEVER stick my hand into the investment jar! I’ll leave the investments alone to grow by 4% after inflation and costs, with me spending 2%.
What’s next as a Financial Independent?
So, we reached the point of financial independence via our work and business.
But, we must really hate money to quit everything we built for that is now generating us money. Thus, no one should expect from us to quit and dry up every income stream when we reach our goal. We’ll simply cut down our work and we will gain TIME.
Most probably a financially independent will have quit their day job long before that, as their business is making a lot more than expected. Since they won’t need to become independent any more, they will no longer need to be so active in their businesses.
What if their business makes half of what it used to, while they enjoy the sunlight at the beach? They won’t need to chase their tails any more, it’d be the time to enjoy the fruits of their labor. They’ll slow down everywhere, but only a few will really feel the need for quitting everything.
Thus, at this point, I’ll be able to take a bigger risk with the money that will keep coming and I will no longer need.
It will be the time to invest in cryptocurrency or other business ideas and startups. The risk in those investments is obviously a lot more significant, hence why I would avoid these investments if I were to start from the beginning. Yet, there’s a chance of hitting a jackpot and experience a once-in-a-lifetime windfall of cash influx, skyrocketing my net worth. Such events are the IPO of a startup we invested years ago or the 1000% price increase of a cryptocurrency.
This kind of events can catapult our net worth. And that’s because catapulting a 1-million net worth is another million. Not a mere gain of 20,000. This sort of reward can only come by willingly accepting more risk.
Having the security of financial independence, I am not scared of anything and in fact, I am expected to make more risky decisions. Have you heard of always be afraid of people who stand to lose nothing? As a financially independent, not only will I have nothing to lose, but I will already have everything!
Financial Independence is Achievable!
This is the plan for financial independence and the freedom it creates.
So, can someone not follow the common path and not live their lives as most other people do? Of course yes! In fact, that’s the ONLY way for someone to achieve financial independence.
At first, it will feel like climbing a mountain, much like to anything new we face. Yet, day by day, tiny fractions of success and failure that we’ll experience will make the mountain’s slope less steep. We’ll begin seeing the peak closer every time. And by the time we reach the peak, we will hardly make out those who questioned us and were doubtful when we began climbing that mountain.
Are you Disciplined Enough to follow the Financial Independence Plan?
Still, to climb any mountain we’ll definitely need a plan.
Have you ever seen mountain climbers without a plan, climbing to random rocks and not having a specific path to follow? Likewise, we also need a plan right from the start to reach the destination of financial independence.
Everything we said here can act as a blueprint, as a draft plan, where anyone can add their own details.
Everyone is different, has different needs and skills and lives a different lifestyle. Thus, I can’t be specific about what everyone needs individually. Some are good in math, some in arts, some are creative and some others have an edge in communication skills and are good at managing people. Everyone must find their strengths and build their own empire around them, following the steps we talked about here.
Then, all we have to do is be disciplined enough to stay on course and follow the financial independence plan. We can succeed in turning our vision into reality only by looking at the goal far ahead, in spite of the huge obstacles between us and that goal. Good luck!