Maybe financial independence is what you’ve been told since you were small. You learn, work, invest, save, and develop for its achievement.
This vision is closely related to the notion of «freedom.» It is impossible to be free without money. A sufficient amount of money makes it possible not to depend on external circumstances, fluctuations in the market, and unforeseen expenses.
A sufficient amount of money is about different amounts for every person.
Why is there never enough money?
We must say here that human desires and needs far overreach the earth’s resources. It is impossible to express them with a universal equivalent, such as enough money to satisfy them.
An educated consumer can correctly prioritize desires and allocate resources to meet them.
There are necessary expenses and desirable expenses.
You cannot avoid the necessary ones: housing, food, water, and clothing.
The desired expenses abroad are necessary and are created to satisfy additional desires. We can live without such costs.
What is financial independence?
There is no single notion of financial independence. However, what can be said with confidence is that your equity and investment can cover your expenses for at least 25 years. So your passive income should cover the payments.
It is impossible to gain financial independence accidentally. You can achieve it by drawing up and implementing a specific financial plan.
This plan should include the possibility of obtaining additional resources for unforeseen circumstances: disease, epidemic, war, natural disasters, etc.
Some might say that it’s enough for him to have $30,000 in his pocket and have a stable job to live the rest of his life. One can say that a million dollars aren’t enough.
This amount depends very much on the standard of living to which you are accustomed and which you will follow.
Stages of Financial Independence.
You should examine all stages of financial independence in detail and determine which of them you are on and what steps you need to take to move to the next scene.
The following stages of financial independence are distinguished.
Now you can not satisfy even the most basic of your needs. You have to borrow or rely on someone in matters of expenses constantly.
You have to use fake pay stubs to rent a house. Your current income level will not allow you to look solvent in the eyes of the landlord.
Students can often stay at this stage.
If you are not a student and are capable, then it is time to pull yourself together and make an effort to find or create a stable and decent source of funds.
- Capacity to pay.
Your size and the amount of your debt are reduced finally. You can pay the bills and periodically cover the charges by credit card. Basic needs are met. You have accommodation, food, maybe even a car.
But now it is crucial to reduce payments and think about increasing incomes. For example, ask for a raise in wages, a raise at work, and start a business.
Owners of small businesses or independent contractors are usually at this stage. We can still talk about some debt, like mortgages. But income from business allows you to pay mortgage payments and even create some financial cushion confidently.
This process should be automatic, and you should not use such money from a reserve for petty purposes.
There are several principles for creating a financial cushion:
- regular character. Make a habit of saving part of your income every month, whatever it is. It is desirable to do this on the same days as receiving a salary or other income. No matter how much money you get, you will have spent it all by the end of the month unless you put it in reserve.
- immunity. As we have already said, the money from the reserve fund should not be easily available to meet current wishes. You can only use them in the event of any force majeure.
- quick availability. Money should work. Therefore, it is not an option to keep them under the pillow. But if a bank holds your reserve, check to see if you can capitalize your deposit and withdraw your funds without additional interest at any time.
- regeneration. In case of unforeseen situations and severe reduction of the reserve’s size, return to its replenishment immediately as soon as such circumstances have disappeared.
It is the way to prosperity. However, the termination of work or temporary difficulties will still impact your life and are unacceptable.
It is time to consider whether some reserves should be used for investment at this stage.
Now you reasonably manage your income and expenses. The accumulated money will allow you to not work for a long time in case of need. We must seek to ensure that the returns on investment can provide for your needs for the rest of your life.
This amount of money will also allow you to travel and buy what you have long dreamed of.
One can stop at this stage. Only you can understand whether you have reached it, as the desires and needs of everyone are different and the standard of living is also different.
However, we should not forget the existence of the next stage.
Well, here you are. Income levels are several times higher than your needs by more than 30 years in advance.
You do not limit yourself to travel, real estate, and luxury items.
Now you can think about how to dispose of unnecessary things for the benefit of friends, relatives, and society.
For example, you can do charity, further develop your business, and think about distributing your profits among your loved ones, if necessary.
Moving along these stages is possible not only upwards but also downwards if simple rules of investment or capital management are not followed.
It is unimaginable to predict how long it will take you to become financially independent. However, one should strive to implement a financial plan that includes the necessary amount of passive income, which could cover all current expenses and the period during which income should be able to do so.
I think that developing a strategy of own financial independence cannot exist without the help of financial consultants and reading professional and business literature. And remember, the capital that brings you passive income cannot be reduced; it only needs to increase.