Picture this: living your life how you want- not tied to a job. You no longer have to depend on a bi-weekly paycheck to pay your bills. The Monday-Friday nine-to-five grind no longer has a grip on your freedom. You may never experience a bout of the “Sunday Scaries” again. (Click the link to find out more about the Sunday Scaries, trust me) You wake up, breathe, drink some coffee, and then decide what the day ahead holds. You’ve worked in your chosen career for many years, and become an expert. Over a long period of time, you’ve focused on diligently removing debt from your life, saving for retirement, and following a plan. You have arrived.
Without a job deciding how most of your time has to be spent, what would your life look like? It may be hard to imagine, given that a lion’s share of your time is most likely taken up by your career. Take some time and dream a little- what do you daydream about doing but don’t have the time to? I have great news: I can help you make this a reality- start dreaming.
What is Financial Independence?
The concept of Financial Independence is not a new one, but the route to accomplish it has changed over time. The last few generations before us popularized the pension as the main roadmap to Financial Independence. Typically known as retirement, images of grandma and grandpa finally buying that RV they’ve wanted for years to travel the country come to mind. Financial Independence is a much more broad and benevolent definition of the ability to live the life you want, not tied to a job. You have achieved Financial Independence when your investments you have accumulated create more income than your job does. If your investments create more income than your job, then you no longer have to depend on your daily grind to meet your income needs. YOU ARE FREE!
Today’s workforce is dramatically different than it was 50-60 years ago. Back then, the American Dream was rooted in the nuclear idea of working at the same company for 30 years and riding off into your golden years with a gold watch and a pension. It worked for millions, but here are a few things wrong with that picture. By the time you have freedom from the prolific bi-weekly paycheck, your vivacious years are behind you. Do you want to wait until you are grey to take that trip to Greece you’ve always wanted? Next, pension plans cannot be handed down to your offspring. There are survivor benefits that can sustain your spouse for the remainder of his/her life, but once you both pass, the fruits of your years of labor are vaporized. It is immensely difficult to change your family tree when your money does not live beyond your life. Last, pension plans can be mismanaged and funds can be misappropriated, causing the plan to go bankrupt. POOF! Your lifelong financial accomplishment up in smoke.
Enter new-age retirement, or as I prefer to call it, Financial Independence. Workers are no longer staying at the same job for 20-30 years. In fact, the average worker changes jobs 12 times during his or her career. This creates an average job tenure of just over four years between Men and Women. Changing positions may award you a raise of up to 3%. So how did this change? Did the rise and proliferation of tech-based jobs fuel this shift? Availability and transparency of salary information? I believe both of these have had an impact. However, the availability of alternative routes to Financial Independence have made being tied to a single company a thing of the past.
How to Achieve Financial Independence
In order to break the chains that bind you and become Financially Independent, you must accumulate income-producing assets. You can do this in many ways including investing in real estate, aggressively funding your investment accounts, or starting a business that does not require your daily attention and labor. Buying investment properties create income from tenants paying rent to live in them. Whether they be residential or commercial, the concept remains the same. Not only do the properties create income, but they should hopefully appreciate in value.
The second route mentioned, and the route that I espouse, is aggressively funding investment accounts. Examples include Roth IRA, Traditional IRA, and Taxable Brokerage Accounts. Using compound interest, these accounts create income from the companies they are invested in. Over time, through diligent principal contributions and years of interest compounding, it is relatively easy to accumulate millions to sustain you. The most important asset you have in this route is time. The earlier you start stashing money away in these income-producing accounts, the easier it is to achieve Financial Independence.
The final route I discussed is starting a business. This route is labor-intense on the front end, but may be the fastest route to Financial Independence. The most important assets you have in this route are strong work-ethic and a viable business idea. Starting a business that will eventually run itself with little to no input from you is the key to this route as well. The eventual idea is that you would be able to step out of the business and use its profit as your Financial Independence fuel.
How Does Financial Independence Work?
Let’s say for instance you work at a job that pays $60,000 per year. In order to become Financially Independent, you have to have income-producing assets that create $60,000 per year in income. Your real estate portfolio must produce rent to meet this total. Your investment holdings must support distributions of $60,000 per year without diminishing the principal balance. The business you founded must create after-tax profit of $60K after all expenses. Once you have achieved this, you have reached the dream of Financial Independence.
As retirement guru and Dave Ramsey personality Chris Hogan says, “Retirement is no longer an age, it is a financial number.” The route to the life we dreamt about earlier is attainable, and now you know how. Once you are Financially Independent, what are you hoping to do? Not being bound to a weekly work schedule will free you to do whatever you please. You can see the world, work a job that fulfills you, spend time with your family, or all of the above. You are no longer trading precious hours for a specific amount of money. Financial Independence gives you the ultimate prize- time.
About the Author
Contact Bruce Breedlove at iFireFinance for questions or comments about this article! He is our Finance Personality and Registered Nurse at Mayo Clinic in Jacksonville, Florida. Bruce offers Personal Finance Coaching services for clients anywhere in the country! Check him out on Instagram at @iFireFinance. Contact him for a FREE consultation regarding a personalized financial plan!