Shedding the “rat race” – the life-sucking cycle of just working to keep up and stay in the rat race – is keeping tens of millions of people stuck in dead-end jobs and living paycheck to paycheck. You can escape by achieving financial independence (FI), which is when the money you already have is enough to fund your lifestyle and living expenses. Here’s how to do it:
1. Decide what FI means to you. It’s not one-size-fits-all.
You might want to retire early, or you might just want the flexibility to pursue totally new career paths or do part-time work in a field you absolutely adore.It’s not one-size-fits-all.
First and foremost, clearly define what FI means to you so that you know how much to save and by when.
2. Become a financial detective.
What can’t be measured, can’t be managed or improved upon.
So spend a full month meticulously tracking your every expense.
I guarantee you’ll be astonished by how quickly every little purchase can add up over a month-long period.
3. Calculate your FI number.
A generally accepted rule of thumb is to take the total of your annual living expenses and multiply it by 25.
This will give you a roughly accurate estimate of how much you will need in your investment account to be considered financially independent, based on a safe withdrawal rate of 4 percent.
Keep this number in front of you.
4. Ramp up your savings rate.
It has far more of an impact than your income.Someone earning an average salary but saving half of it will achieve FI far sooner than a high earner saving 10 percent.
Cut anything you can from your budget and throw every dollar you save directly into investments.
5. Skyrocket your income.
There is only so much that you can cut.One of the fastest ways to speed up your FI timeline is to significantly increase your income.
Ask for a raise, learn new, well-paying skills, take on freelance gigs, start a side business, and then invest the difference!
6. Invest like crazy.
Money that is sitting in a checking or savings account is slowly losing purchasing power because of inflation.
Don’t let that happen. Invest strategically in low-cost index funds, retirement accounts, real estate (if it suits you and you’re willing to accept the risk) or just about anything that will pay you back with real returns over time. Most professionals advocate for passive investing in low-cost index funds over “timing the market.”
7. Resist lifestyle inflation.
As you increase your income and save more, it will be tempting to raise your lifestyle to match your salary by buying a more expensive car or a larger home.
Fight the urge for “lifestyle inflation,” a phenomenon that has a tendency to keep people locked into a life they’re not truly satisfied with.
When you maintain your expenses while your income increases, your savings percentage goes up.
8. Generate multiple streams of income.
If you rely solely on a single source of income, then achieving financial independence could be years further away than you’d like. Look to invest in dividend-paying stocks, rental property, royalties, or even start your own business to boost your income.
9. Obliterate high-interest debt.
If you’re paying interest on credit cards and high-interest loans, this debt is essentially putting the brakes on your FI journey. The guaranteed returns from paying down these loans far outweigh even the best of market investments.
10. Reevaluate annually.
Life changes, so your plan should change too.Each year (at least), go over your budget, check your investments and your FI progress.Each year (at least), go over your budget, check your investments and your FI progress.
The financial plan you’ve created now will inevitably change with new job opportunities, new responsibilities and life’s inevitable curves. In essence, financial independence is just the logical result of conscious decision-making; save more than you spend,
spend more on things that add value to your life, and eventually, you will gain freedom.
Thanks
