Different Paths You Can Take Toward Financial Independence
Financial independence is a term typically used to describe a state where you have sufficient assets to live a certain lifestyle indefinitely without having to work or be employed. Whether your income is derived from interest on savings, investment income, real estate income or something else, it really doesn’t matter. The key is that you’re financially independent. What an incredible goal. Financial independence or financial freedom is something most everyone would admit to desiring. The question becomes how to reach this level of independence. Let’s look at the various paths one might take.
Path #1 – Extreme Frugality
While many would say they would love to not have to work anymore, most would refuse to downsize their current standard of living. Some people, however, are more than willing to trade a standard of living for the ability to be financially independent.
The extreme frugal crowd will typically implement a bare bones lifestyle so that they can sock away massive amounts of money while working. Then, when they have enough money to be able to live on interest from such a sum of money, they simply stop working but keep the frugal lifestyle. After all, they’re already used to it.
Path #2 – Entrepreneurship
This is probably one of the more common approaches to financial freedom. Starting a successful business is a great way to achieve significant levels of wealth and/or financial independence. With that said, most businesses don’t reach such a level, but I would guess that the majority of people who are financially independent actually took the entrepreneurial route.
In a difficult economy with fewer business prospects and tighter lending standards, being an entrepreneur is not easy. The brightest opportunities lay in businesses that innovate and find new methods or technologies to solve problems.
Path #3 – The Successful Investor
The last path to financial independence that I’d like to look at is the concept of generating large investment returns over time. If you work hard at your investing skills and contribute significant portions of your income toward an investment portfolio, you can grow a large portfolio of sound investments over time.
While most people will dismiss the idea of beating the market or trying to do anything other than passive, diversified investing, there are plenty of examples of people beating the market. The key thing to understand is that you don’t have to beat the market by 20 percentage points to grow a portfolio. Beating the market by even a couple percentage points on average will result in massive growth for a portfolio. Obviously, this is easier said than done, but there are ways to hone your investing skills over time so that you can do your best to increase your rate of return.
A large investment portfolio built over years of work and contributions can easily result in financial independence. Many people live off the dividend income from their investments. While you’re building your portfolio, be sure to reinvest dividends in an effort to grow the overall portfolio.
Other Paths
Other routes to financial independence might include real estate or maybe working at a start-up company that hits it big. Do you have any other suggestions or paths to financial independence that you might be pursuing? Add your feedback and comments!
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I believe the most successful road to financial independence is a mix of all three:
Be somewhat frugal, but not overly. Life is too short to worry about nickels and dimes here and there. Learning to limit wasteful spending is the number one way to achieve independence as it allows for more money to go into investing and entrepreneurship.
I would agree that reducing wasteful spending is the most important aspect. For instance, if I have, say 7 shirts, one for each day of the week, and I do laundry once a week, am I really living a bare bones existence compared to a person who has 28 shirts yet still only wear one a day? Do I even have a reduced or deprived standard of living? We both wear the same kind of shirt. Now, suppose I paid twice as much for my shirts as the guy with 28 shirts. The shirts I now wear are certainly better, yet I spend only half as much total. Deprivation? No, I am simply less wasteful. Even better. My shirts likely last twice as long now. This means my budget is back to one quarter. I think this more than anything explains the difference between my spending behavior and that of the average consumer.
It’s something I have been thinking about since I saw a normal budget (to me, my budget has always been fairly normal and I could never see the difference between my lifestyle and others on the surface, but others spend almost $2000 a year on furniture and appliances and I spend practically none). I cured my “upgraditis” by buying the best I would ever want. This also means that most of my stuff is pretty old (by normal standards, that means maybe a decade or so), but because it is well made, it is as functional as new stuff. It simply has “patina” instead of “new car smell”. Secondarily, I simply don’t stuff my closets and garage with stuff I never use.
Also, once the FI crossover point is reached, any money that is “incidentally” earned can either be spent 100% on consumption (for instance, this year I will spend more than the average person on entertainment) or 100% on further savings for a small raise in passive income next year.
i am for a combination of the entrepreneurial route and successful investing. i feel that you are understating the hard work that goes into these two wealth creation and building techniques. one has to work really really hard, shunning any get rich schemes that are so prevalent these days and realising that the only way to get rich is PURE HARD WORK
The only person who can stop you from achieving financial independence is you. Get out of your own way
I used to think that following what everyone else was doing with the 401k, IRA, and diversifying my portfolio was the way to go to prepare for retirement.
But I was wrong…People are losing their retirements today. I don’t want to be one of those people.
I am building my own bank using the infinite banking concept. This concept involves using whole life insurance to finance everything.
We finance everything – by paying interest to banking institutions or giving up the interest we could have earned.
Instead of paying interest to banks and helping them grow their own portfolios, pay yourself through cash value life insurance to capture the money you would otherwise have given to a financial institution while decreasing your tax burden. You do this by borrowing against the cash value in your life insurance policy, and paying it back at the same or higher market interest rate value that you would have paid Citibank or Bank of America.
Banking for yourself has the greatest potential to increase your wealth in a safe, liquid vehicle where you have all the control.