Okay so how exactly do I become financially independent? Explain like I’m 5
You came to the right place because that’s just what I will show you!
I’m going to give you the 10,000 foot overview, but will also send you to resources where you can dig into each topic at a much deeper level.
- Spend less than you earn
There are some people in the financial independence community that will take extremes in cutting your expenses. This is commonly referred to as leanFIRE. FIRE (meaning Financial Independence / Retire Early) and “lean” is the act of cutting your expenses to the bone by doing things such as bicycling to work, not having cable TV, living in the smallest and cheapest rental possible, etc. This is certainly one way of accomplishing financial independence, but there are other ways such as increasing your income.
More commonly, you can take a balanced approach by taking an inventory of how much money you spend, eliminating all unnecessary expenses or luxuries, and increasing your income. Do not confuse high income with financial independence. There are plenty of high earning individuals who live pay check to pay check. Don’t worry about keeping up with the Jones’.
- Establish an emergency fund
- Pay down any outstanding debts preferably starting with the highest interest debts first. There is a debate over whether or not to pay off a low interest mortgage, which I will discuss in future post.
- Invest the surplus of your income minus your expenses
- Use the 4% Rule or Safe Withdrawal Rate to determine what your “number” is.