Financial independence is a situation where your assets, which you have created during your life, generate regular so-called passive income, which will cover your costs. So you have enough money to pay for everything you need without having to go to work or rely on a state pension. You have your annuity, and your standard of living does not fall significantly.
Every person how much money is needed for such an annuity and how much money needs to be invested. Now, let’s find out how much does financial independence cost and how much money is needed to create financial independence.
The path to financial independence is not easy. It’s like a marathon. You train hard every day to succeed. To do this, you need to find enough motivation and believe that you can do it and that you will persevere on that path. Believe that it is possible to achieve financial independence even with an employee’s salary.
Just as a marathon runner aims to win the Olympics in 4 years, so you must decide when you want to achieve financial independence and how much income you want to have in it. That is, how high an annuity you want to receive and how long you want to receive it. These three factors are key to setting your finances on the path to financial independence. Think about it and realistically determine when you want to become financially independent. In 15 years? In 20 years? The amount of annuity should match your current average monthly expenses.
You may want a higher annuity or an earlier one, but in that case, you would have to save quite a bit of your current income at the expense of a normal life. There are a lot of Americans who want to be financially independent at the age of 40 and to invest up to 70% of their income.
Analyze the current state
Prepare an overview of all your financial goals that you have in front of you (apart from financial independence it can be, for example, the acquisition of new housing, money for children’s studies, etc.), find out when you want these goals and achieve and how much money will cost. Prioritize which goal is most important to you. Make a list of assets that you already have today to meet your goals (in the bank – current account, savings account, term deposit, in building savings, in supplementary pension insurance, in mutual funds, etc.).
The most difficult task is to analyze the family cash flow. Compare your average monthly expenses (remember not only regular expenses but also irregular payments of insurance policies, vacations, etc.) with income, and the plus result is what you can invest to meet your goals. If you get a number with a negative sign, you need to think about the structure of expenses. To achieve financial independence, you must be able to defer at least 10% of your income each month.
Make a financial plan
Thanks to the previous analysis, you now know everything important about yourself, your assets, your debts, and your goals. Now you need to find out two things: Is meeting your financial goals realistic? How can these goals be achieved?
You will get the answers from the financial plan, which will evaluate whether you are currently able to achieve the financial goals, or in what amount. People will also find out how much money and where to invest or how much to borrow to achieve your goals.
Secure yourself and your property
Make sure that your income and your property are not endangered in the event of an emergency. Reinsurance can take the form of either a financial reserve (to ensure a short-term loss of income and smaller one-off expenses) or an insurance policy.
The more you need insurance, the worse your financial situation is (ie, the longer your distance from financial independence). People can also find out from the financial planner who is to be insured, for what amounts, for how long and for what risks.
Choose insurance without savings, where you know exactly how much you pay for. Focus on the most important risks (death, disability, permanent consequences of the accident).
Get rid of “bad” debts
These are the debts whose interest rate is higher than the rate of return at which you can invest your money. If equity funds (one of the most profitable forms of investment) earn, on average, about 6 – 10% per year in the long run, then a loan with interest above this limit is bad debt. If you already have such debts, repay them in the order of their interest rate.
Invest and do not speculate
According to the financial plan, set aside a specified amount (at least 10%) of your income for long-term investments. Do not speculate; regularly invest regardless of market developments. On the other hand, in the event of large declines, if possible, you can increase the amount invested, as it is likely that you will never buy at a lower price.
Diversify your investment portfolio
A good financial plan will tell you what products to use to invest. The portfolio should have a spread of risk and invest your money in different types of assets, in different regions and currencies, and products managed by different managers. It will make the portfolio more resilient to fluctuations in various markets. The reserve will be used to cover short-term shortfalls of income and one-off expenses. Diversify reserves according to liquidity.
Don’t be seduced by advertising
Don’t succumb to offers that are just popular, and everyone is talking about them, or they are new, untried, but they are just “in.” Rather, rely on products that have a history and are tried and tested. Once you have enough assets, you can set aside a maximum of 10% of assets for the “popular” products, and you can try to play with them.
The Bottom Line
Each person must determine for himself the Vector of development and the desired degree of financial independence. Subject to several factors and the correct distribution of assets, each citizen can get a lot of advantages in the future and significantly improve their standard of living.