few people really know the term “financial independence”. And yet, many have dreamed of it.
Who has never dreamed of having the means to be able to retire well before their sixties? Or live your life to the fullest without having to worry about the financial impact of your decisions? To be able to resign overnight without being afraid of not being able to pay your bills?
This idea is only a utopia for many. But for many people who have decided to really take control of their personal finances , it is a reality.
This term is associated with the concept of “early retirement” for a simple reason. Being financially independent means that you have saved enough to maintain your current level of spending throughout your life without needing to earn more money.
In other words, this means that you could, if you wish , retire well before you blow out your sixty-two candles.
In this article, we introduce you to the concept of financial independence …and what it takes to achieve it.
Financial Independence: A Freedom-Centered Movement
With the arrival of millennials in working life and their unique perception of the labor market, more and more of us are attracted to atypical lifestyles, far from the classic 9 a.m. to 5 p.m. spent at the office.
Because before stability, the new generations are above all looking for a way to fulfill themselves in their work. Working just for a paycheck loses meaning for those who want to leave a real impact in the world.
New generations are finding ways to work from home , build their careers online or become self-employed… but also to retire earlier to pursue their dreams instead of having to wait long decades.
And it is precisely here that the fundamental principle of financial independence is found. It’s about putting aside as soon as possible and using your money in the best way to live your life to the fullest , without having to be entirely dependent on a job and a salary.
What does being financially independent look like?
Financial independence is defined as when your investments (including passive income) begin to earn more than your expenses .
It is then that we are truly free to make the right decisions for our future, without being held back by our dependence on a salary.
In concrete terms, financially independent people have assets that generate income for them equal to or greater than their expenses : this is called passive income .
For example, passive income is dividends from stock exchanges, rental of real estate, income that you enjoy through an online activity…
This means that to get started on the FI/RE path, you should, among other things:
- Start setting aside early, and regularly
- Set aside a substantial part of your salary each month (it all depends on the salary but in general, we recommend at least 30%)
- Follow a monthly budget and adopt a minimally frugal lifestyle
- Investing and making your money work so you can generate passive income
- The goal will be, after several years, to have enough passive income to no longer need a salary. The number of years will depend on your savings capacity, your lifestyle, your expenses and your investments…
- Technically, once this goal is reached, you could (if you want) retire without having to worry about your finances.
· And after ?
- If for some “financial independence” rhymes with “early retirement”, it can actually take many forms depending on your own dreams and aspirations.
- For some people, that means living in a van and traveling from country to country to experience new cultures. For others, taking a part-time job so they can enjoy even more time with their family. Or even start your own business and work as a freelancer in order to be your own boss.
- Whatever independence means to you, the goal is the same: to be free to do whatever you want.
The different types of financial independence
The thing about financial independence is that it doesn’t look the same for everyone. In particular because everything depends on the situation, the objectives, and the desires of each one.
But overall, there are 4 major lifestyles within the FIRE movement:
- The Fat FIRE : those who have a lifestyle that remains classic, but who still save more money than the average person (and invest more than the average investor)
- The Lean FIRE : very frugal people, who adhere to a strict minimalist lifestyle and make extreme savings to save as much money as possible (and therefore become financially independent sooner)
- The Barista FIRE : refers to those who have left their traditional full-time job, but who continue to work part-time to cover part of their living expenses and not dip into their savings
- The Coast FIRE : also concerns those who keep a part-time job or a “job passion”, even if they technically could not do it
In reality, these categories are only guides that offer recommendations and advice to achieve financial independence by following a specific method. But you can very well choose to build your experience as you want.
How to achieve financial independence?
Do not think that your financial health is limited to your salary
When little is known about personal finance, it is difficult to understand the importance of this argument.
Many believe that the key to wealth is a large salary. If indeed, it is easier to save money when our salary is substantial, there is a capital error here: you are dependent on one and only way to earn money . But what to do when this source of income disappears?
If you have to work long hours in a position of responsibility after years of study to earn a very attractive salary, unfortunately you will end up with just that: a very attractive salary.
On the other hand, if you set aside enough to start or buy a business, finance a stock and bond portfolio, rent real estate, or do other passive income-generating activities , you may be much more serene.
And for that, no need for a Minister’s pay. When it comes to saving, spending less is actually far more important than earning more .
Regardless of your salary, it is essential to really pay attention to your budget. This will help you learn how to spend better and set aside regularly .
Compound interest is an incredible asset to your personal finances, and the sooner you start investing, the more benefits you will reap.
Diversify your sources of income
In the first situation we presented above, where your only form of income is your salary, you are entirely dependent on your job to be able to live . Which means your financial future is never really yours.
This is one of the main arguments of Robert Kiyosaki, the author of the best-selling Rich Dad Poor Dad .
The fact that salaried employment is seen as the holy grail of financial security. In reality, it is for him quite the opposite. When your income stops at your salary, you become extremely vulnerable to any change. Changes in the job market, a potential loss of work, or even the extremely rapid evolution of professions which today are becoming obsolete more and more quickly are all potential dangers.
Beyond starting your own business, developing a parallel activity is an excellent solution to bring you closer to financial independence while developing your skills.
Having extra income will allow you to save more in less time, save time with a hobby and increase your professional value significantly.
Certainly, in exchange, this requires that you dedicate a few hours of your time per week to our new activity. But when it comes to doing something that excites us and also belongs to us? The task is much less difficult than working for someone else.
The Importance of Investing in Financial Independence
There is no one-size-fits-all solution to making your money grow and on your way to financial independence.
On the other hand, the investment of a part of your capital is extremely important . If you don’t use the money you’ve earned to generate regular returns, it will be difficult to achieve your goals.
Accumulating wealth and becoming financially independent is a slow process that requires a lot of patience. The objective is to let your money work in interesting investments (whether stocks, bonds, real estate…). Over time, your capital will continue to grow.
Investment is not limited to advantageous taxation. It’s when the interest, dividends and capital gains that your money generates are reinvested that you get the most out of your investments.
Live better by living simpler
Certainly, achieving some form of wealth is one of the central goals of financial independence.
But the principle at the heart of this movement remains the adoption of a minimalist lifestyle , against the current model of excessive or compulsive consumption.
Yet many advertisements and marketing operations have as their main objective to make us believe that we must have more (and therefore spend more) in order to be happy.
The vast majority of stories relayed by the media of “rich” people or celebrities generally speak of the acquisition of villas worth several million euros or other exuberant expenses. But what about the thousands of people who have achieved financial independence precisely by limiting unnecessary expenses?
Wanting to become financially independent necessarily involves taking a step back from your expenses and your priorities. In short, it’s about saving now to reap the benefits later.
Attention: it is not a question of stopping living just to save as much as possible , but of finding a good compromise between your short-term desires and your long-term dreams.