Achieving Financial Independence: 5 Steps to Money Freedom

Are you sitting at your desk trying to slog through another day of work? 

A wave of anxiety rushes across you as you stare out the window.  You realize that this could be your weekday experience, every day from Monday to Friday, until you retire in a few decades.    

However, there is a way you can get out of this cycle earlier.  It’s a hard path, though.

It’s called financial independence (FI). 

If you truly want to retire and never work again, then it’s called financial independence retire early (FIRE). 

It’s a relatively new movement and to be successful, you need to change your lifestyle.

This goal is not for everyone, and that’s perfectly fine.  You’ll know if this path is right for you if you finish the article and feel inspired. 

What is Financial Independence?

Financial independence occurs when you have enough money or passive income to cover your annual expenses.  You can do what you want, with whomever you want, whenever you want for the rest of your life.  You are no longer dependent on your employer for a paycheque.  

Financial independence may help you:

  • Realize your lifelong dream of starting a business
  • Pursue a hobby that doesn’t make much money
  • Help the less fortunate
  • Volunteer
  • Traveling
  • Live a life of luxury

There are a group of people who aspire to this at a very early age in life, and they subscribe to FIRE – or Financial Independence Retire Early.

The FIRE movement essentially focuses on two things: having an extremely high savings rate and investing those saved funds.  Some people have achieved financial independence in their thirties or forties. 

You will need to buy income-producing assets that do not require you to work to generate passive cash flow.  This could take the form of a portfolio of ETFs or stocks, a side hustle you created for digital goods, purchasing bonds, or owning real estate.

Once you reach financial independence, you no longer have to trade your time for income.

Financial independence is a long journey where you have to show discipline, determination and focus to build the amount of wealth you need to retire.

Why Achieving Financial Independence is Important

Achieving financial independence is important for a few reasons.

  • It increases your free time. Once you achieve financial independence, you will reclaim all the time you previously devoted to working.  You will save at least forty hours per week by doing this.  How you spend your time is up to you and only you. 
  • It gives you options. If the company is heading in a direction you can’t get on board with, or you don’t like the way your boss is treating you, it’s your call whether you want to stay or go.  You have the option to leave your job, find a new job or just retire. 
  • It gives your family security while reducing stress.  Once you have enough money in your bank account, you can rest easy knowing that your family is secure.  You don’t have to worry about playing the “game” in the corporate world.  You don’t have to worry about the next recession affecting the likelihood of you holding onto your job.  The emotional benefit of this is enormous.

The Ultimate Rule

Spending less than you earn is the golden rule in personal finance.

Having a high income does not mean that you are wealthy.  After all, it is not what you make, it’s how much you keep. 

Of course, if you earn $100,000 or more, you should have an easier time generating savings as opposed to someone who makes $40,000.  However, if your lifestyle consists of buying large houses, expensive cars and cottages by the lake, then you may save nothing.

Remember the two keys to financial independence.  Save a high percentage of your income.  Then, Invest the difference. 

The Five Steps to Achieve Financial Independence

Achieving Financial Independence

To achieve financial independence, there are five things you must do.

  • Reduce your expenses
  • Eliminate your debt
  • Grow your income
  • Save your money
  • Invest

1. Reduce Your Expenses

To save money you can do two things – earn more, or spend less.  People see the word “less” and automatically head for the exits.  Maybe a better way to phrase it is “spend wisely”. 

An old sports refrain is “defence wins championships.”  In the world of your finances, reducing your expenses is like playing defence. 

Many people dread the word “budget”. A budget is a great way to understand your own finances.  You cannot change things if you don’t know where you stand right now.

The first step is to track your expenses every month.  You can choose different budget methods like the Zero Based Budget, or 50/30/20 Budget

To keep everything more organized, list expenses according to the budget categories they fall under.  It is only through budgeting that you can see what your spending patterns are like and make adjustments to reduce your expenses.  You can use a spreadsheet or even a budget app like You Need a Budget (YNAB). 

It is much easier to cut expenses than increase your income in the short term.  It often surprises people when they find out where the money goes.    

Watch out for those super sneaky small but frequent costs that can add up to big amounts over time, like subscription services, food delivery services and weekly dinners out.  

Reducing expenses has the effect of also lowering the amount of money you need for retirement provided you will live the same lifestyle in (semi)-retirement. 

What if you hate budgets, though? 

You can pay yourself first in that case.  Wait…. what?

Paying yourself first is a great way to save money without getting into the nitty-gritty details of a budget. You will not optimize your money using this method, but it is very simple to implement this process. 

Rather than paying your mortgage, utilities and grocery bills first, you would automatically transfer 10-30% of your paycheque into a savings and/or investment account.  Once the money is gone from your chequing account, you’re less likely to spend it, because you don’t see it.   

You will learn to make do and live on the remaining 70-90% of your paycheque.  You don’t have to start at a high percentage like 30%, but you need to get in the 50-70% savings rate range over time to have a real shot at an early FI date. 

Four major spending categories can make or break your quest for FI. They are housing, transportation, food and vacations.   Keep your expenses low in these categories and you have a good shot at achieving FI. 

In North America, if you keep your costs low for housing, then you are giving yourself the best chance to save money.  It may require moving far away to a cheaper city, or maybe you have to rent with a roommate.  Just keep your costs low. 

You cannot save or invest dollars that are spent. Investing is the magic elixir that will help turn your money into more money through compounding, provided you make sensible investments. 

Suppose you buy a house and then spend $100,000 renovating it to your tastes.  Quartz countertops.  Stainless steel appliances.  Hardwood all over.  Upgraded washrooms with massaging jets in the showers. It all looks cool and makes you the talk of your social circle.  What could be better?

Well, a lot, actually.  That $100,000 is now lost savings and lost investment money.  That same $100,000 turns into $331,020 over 20 years, with a 6% return annually.  

Instead, could you compromise and do $20,000 worth of renovations that you would value highly and still invest $80,000?   Now, you can enjoy the present and the future. 

We want to keep pace with our family and friends and so we overspend.  You need to realize that big houses and big cars don’t imply that your friends or neighbours have it made.   They could be in debt for all you know, or simply experiencing lifestyle creep.

There are certain things worth spending money on, and other things that will only offer a temporary mood boost before fading away.  

Does your eight-year-old television still thrill you these days?  Likely not.

One way to combat overspending is to practice delayed gratification.  Nowadays everyone wants everything immediately.  Examples include same-day shipping from Amazon, ordering food from Uber Eats, or watching on-demand movies. If you give yourself a day or two to debate a purchase, you may find that you can survive without the item.  

2. Eliminate Your Debt

You cannot achieve financial independence with large amounts of consumer debt.  

There are two types of debt.  Good debt and bad debt.  

Examples of good debt are borrowings used to purchase income-producing assets like real estate and equities and debts used for education. 

“Bad” debt is consumer or lifestyle debt that is used to fund car purchases, vacations and the latest Yeezy shoes.  

Debt compounds just like your investemnts, just in the opposite direction.  Most credit cards have interest rates of 20% per annum, which makes them huge wealth destroyers. If you don’t get your debt under control, it can turn your financial world upside down in a hurry.  

If you don’t have a debt problem, then someone you know probably does. According to Statistics Canada, Canadian credit card balance debt reached $82 billion in December 2019 before the pandemic and shutdowns curtailed our spending.

Here are a few tips for reducing your debt.

  • Build an emergency fund. An emergency fund helps you avoid paying off unexpected expenses with your credit card.  A fully stocked emergency fund should hold between 3 to 12 months’ worth of monthly expenses.  Keep these funds in a high-interest savings account and do not invest this money.
  • Set up automatic bill payments. Automatic payments help you pay off your rent, utilities and phone bills without you manually doing anything other than setting up the bill payment to reoccur.  This will help you avoid any late payment fees while preserving your credit score.  
     
  • Get rid of your debt as soon as possible, even if it is good debt.  Instead of taking the full 25 years to pay off your mortgage, why not try paying it off in 20 years?   You can then invest the excess cash you will have in the future.

3. Grow Your Income

Despite most of what you see on social media, starting a business may not be for you.  Not everyone dreams of coming up with a business plan, securing funding, and hiring employees.  

Focus on your bread and butter, your 9-to-5 job. 

One way to jumpstart your financial independence quest is to pick industries where there is a strong demand for talent and the willingness of employers to pay well, especially at the beginning of your career. 

I have noticed a lot of engineers can achieve FI or FIRE relatively early (in their thirties). Engineering is a lucrative field, so that makes sense.

Even if you didn’t pick a high-growth industry to work in, you can always nurture your own career. 

If you like your company and you want to earn more income, you will need to get promoted or negotiate a raise.  If you have to work long hours initially, then do it.  You need to stand out to get promoted or earn a raise.  Don’t forget to network so you can quickly move up the company’s ranks. 

You will also likely encounter a low salary offer so you will need to learn to negotiate.  If you just take the amount being offered, you never know how much you are leaving on the table. 

If you sign a contract for $60,000 at a new job and then you find out someone with similar qualifications signed on for $63,000, you won’t feel too good.  If you never switch jobs ever again, that’s $3,000 per year that you lost out on because you did not negotiate. 

You can also look for jobs that offer extra financial or insurance perks that are not salary specific.  Some employers offer RRSP matches.  Other benefits include vision, dental and paramedical coverage up to a prescribed limit.  That means more savings for you.  

How can you get yourself a guaranteed raise?  When you switch companies, of course. 

Even though you might be comfortable where you are, that comfort may hurt you financially.  If you have a job already, you’re playing with house money, so to speak.  You can afford to be bolder and demand a higher wage than you are currently receiving at your current job.  If you don’t get the job you want, no problem, you still have your current job.

Remember, more income allows you to pay down all your debts faster, or invest more into capital markets – whether it be the stock or real estate market. 

You should also invest in yourself.  This means investing in your education, your skills or getting extra professional certifications that will make you invaluable to your employer.

There are other ways of increasing your income, too.  You could work overtime when offered, for instance. 

Other non-regular work ways to earn income include:

  • Tutoring.  If you know a subject deeply, like math or English, you can command $30+ per hour.  Sometimes if you have a unique skill, you can go from pupil to instructor (skating, fitness).
  • Drive for a ride-sharing company.  You can pick up a job with Uber or Lyft. 
  • Freelance.  If you have a graphic design portfolio, you could make money on your own or through apps like Upwork or Fiverr. 
  • Start a side hustle. This includes creating a blog, a dog walking service, or starting a lawn mowing service.  The best part of a side hustle is that you can do it with as little risk as you want.  You don’t have to commit to the idea until you see it can generate money. 
  • Get a part-time job.  The old classic.  The drawback is that you have to exchange your time for money, but it can be perfect if you want to make a few extra hundred dollars a month without taking on enormous responsibilities. 

If you don’t mind being a landlord, then purchasing rental properties will offer you the option of gaining passive income through rental income.  You may even experience price appreciation for the property as well.  You can leverage only putting down 20% to purchase a property yet receive 100% of the capital appreciation gains (before taxes).  The bonus? Your tenants will pay down your mortgage for you. 

Alternatively, if you don’t want to purchase a separate rental property, you can rent out the basement of your own home to make extra income. 

You could also look into purchasing dividend growth stocks, which will normally pay you a dividend every month or every quarter.  The kicker is that high-quality dividend growth stocks will grow their dividends at rates higher than inflation. 

Start a Business

Starting a business is difficult to do even if it is online, but it is not as hard to do as before.  There is also a lot of risk and hard work involved, particularly if the business is brick and mortar.  A lot of businesses don’t make it past three years.  This is definitely a high-risk/high reward endeavour. 

There are many ways to leverage technology.  You can be a drop shipper, a blogger, an influencer, and you can create intellectual assets like courses, ebooks and YouTube “How To” videos.

These types of assets require you to create them once and they can pay you out over years or decades, but you will have to keep the content current. 

Once you have your business up and running, you can start creating processes, hiring freelancers or full-timers and start automating systems to make your business a little more passive for yourself.

If you own a small business corporation and you qualify, BDO Canada states you can sell your business and up to $883,384 of the sale price can qualify for a lifetime capital gains exemption.  That means you won’t have to pay taxes on that amount. 

If you are successful, you can make a lot of money which can service debt, save and build an emergency fund or invest.  This is a way to increase the speed at which you can attain FI. 

Remember, you don’t have to create the next Apple or Microsoft. You can start a side hustle business by dog walking, babysitting or becoming a tutor.

4. Save Your Money

The foundation of any wealth-building plan is savings.  There are many ways to save money. Without savings, you won’t be able to invest.  Without investing, you won’t gain the compound interest that will help you achieve financial independence. 

According to Statista, households in Canada saved an average of $2,482 dollars in 2019.  That is less than half of the Tax-Free Savings Account (TFSA) contribution limit.  So achieving Financial Independence will require you to walk along a different path than most of your peers.   As a country, we aren’t particularly good at saving money.

A key concept is your savings rate. This is the percentage of your gross income that you can save after all your necessary and discretionary expenses have been paid. 

Savings rate = annual savings / annual gross income

If you have a gross income of $50,000 and you end up saving $5,000 the entire year, then you have a savings rate of 10%. 

Your savings rate is 25% if you make $60,000 and save $15,000 a year.

If you want to reach financial independence really early, then you need to be saving at least 50%-70% of your gross income, unless you make hundreds of thousands of dollars per year. 

Many people increase their spending in tandem with any salary increases, which is known as lifestyle creep.  It could take the form of a nicer car purchase or a bigger television.  However, if you live on close to the same amount of money as you did pre-raise, your savings rate will flourish, enabling you to reach FI earlier. 

5. Invest Your Money

Without saving your money and investing, you cannot achieve financial independence unless you win the lottery or receive a large inheritance. 

If you hold your savings in cash, your money becomes less valuable each year because of inflation.  Inflation is the rate at which the price of items goes up year after year. 

For instance, if you bought eggs and milk last year for $7.00 and this year it’s $7.35, then inflation is equal to 5% ($0.35 price raise on $7.00).

If you stick to a simple strategy of purchasing index Exchange-Traded Funds (ETFs) that are low cost and well diversified, you will find you will outperform most active investment managers. 

If you purchase ETFs monthly in order to dollar cost average, it will ensure your purchase prices are neither too high nor too low over time.  The easiest way to invest regularly is to set up an automatic transfer from your chequing account to your brokerage account.    

Make sure you know your risk tolerance profile before investing and choose asset classes that match your personality and financial situation.  Different asset classes include equities, bonds, real estate, cryptocurrencies, commodities or even collections–like art. 

If you are conservative in nature, then you may want to hold more fixed-income assets like bonds. However, if you want to achieve FI then you’ll need to invest in equities or real estate properties.  Equities carry more risk, but over time, they have paid out higher returns than bonds. 

If you have no desire to be a landlord, then purchasing a real estate investment trust (REIT) will pay you a dividend without having to deal with fixing things, collecting rent, etc. 

If you have excess cash, treat every market correction or crash like a sale and buy heavy into equities if your risk tolerance permits it. 

Investing returns start slowly, but due to compound interest, your wealth building speeds up as your previously invested money makes its own money while you sleep. If you start early enough, you will see your wealth grow exponentially at a younger age than most people. 

Depending on the source, most publications state that the S&P 500 index (which holds the 500 largest companies in America) has returned between 7-10% per year over the last century. 

If you can invest $600 monthly for 25 years with a 7% return on investment, you will have $486,043 in the bank. 

Although past returns are not guaranteed, you should know that as businesses thrive and earn profits, they become more valuable.  Over the long run, stock prices follow earnings.  So if the companies you invest in keep making more profits, then those stocks should increase in price.

Remember, the name of the investing game is to keep purchasing income-producing assets that will provide you with the cash flow you need to retire.  This is what is meant by having different income streams. 

If you own stocks that give you an income from dividends, bonds that give you interest payments, a regular job and a side hustle that pays you, then you have four streams of income. The more streams the better, and the quicker you can achieve FI.

Achieving Financial Independence Conclusion

Never forget that financial independence is a journey in which you need the discipline and determination to build the wealth you need to walk away from work if you want to without any harm to your lifestyle. 

Financial independence gives you the ability to spend time wherever and whenever with whomever you want, and that’s the highest dividend that money can give you.  Money can’t buy you the happiness that you seek, but it can buy you the time you want so that you can pursue things that make you the happiest.  

You need to save at a high rate, and invest in income producing assets. Good luck.

What are some of the tactics that you are using to achieve financial independence?  

Achieving Financial Independence FAQs

What are 5 steps to financial freedom?

If you want to achieve financial freedom the five steps you must follow are: reduce your expenses, eliminate debt, grow your income, save your money and invest.

How much do I need to achieve financial independence?

The general consensus among financial experts is that you need 25 times your annual expenses in order to be considered financially independent.  If your annual expenses are $40,000 then you would need $1,000,000.  However, if you retire very early in life, you would be wise to increase that amount to 30 or 35 times your annual expenses.   A certified financial planner would be ideal to help you figure out your personal number.

Why is achieving financial independence important?

Achieving financial independence is essential because it increases your free time, gives you options and it provides you with security while reducing stress.

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