Financial independence (FI) is one of the most important concepts of personal finance. It is considered an important goal for many people.
Financial independence means that you have sufficient wealth to cover the expenses of your desired lifestyle without being dependent on income from traditional work (i.e. a monthly salary from employment at a company).
People who are financially independent usually have assets (e.g. stocks, bonds, real estate, businesses) that can generate an income equal to or higher than their expenses.
This gives them the freedom to do whatever they want all the time without having to worry about money.
For me, financial independence does not mean that you will never work for money again. In some cases of financial independence that is the case – in other cases it isn’t. Financial independence means you are not dependent on receiving a paycheck from anyone doing work you don’t want to do.
So, being financiallly independent sounds like the dream, right? Being in full control of your own time sounds like something everybody should strive for. However, most people are not aware of the concept of FI and are stuck in the corporate rat race for most of their lives.
The good question is: how do you achieve financial independence?
There’s many ways to do it, but in my experience, these four overall strategies to achieve financial independence are the most normal ones.
Financial independence strategy #1: Extreme saving
Extreme saving is a common strategy used to achieve financial independence in the personal finance community. This is the strategy that I am using to achieve financial independence.
The concept of extreme saving is fairly simple to understand, but requires a lot of commitment to execute.
The basic premise is to adopt a frugal lifestyle. This means lowering your expenses as much as possible (move to a smaller house, cancel your subscriptions, don’t buy things etc.) and get a decently paid job that more than covers your expenses.
Ideally, extreme savers want to save 50-75% of their monthly income. The more you save, the faster you will become financially independent.
The savings are then invested in low-cost, long-term stocks, real estate or similar assets to yield a return that is reinvested to make compound interest do its magic over time.
Once you have saved roughly 25x your annual expenses, you can consider yourself financially independent.
This is typically the safest, but also slowest way to achieve financial independence.
Financial independence strategy #2: Lifestyle business
Many people, especially in the personal finance blogosphere, pursue financial independence by making a lifestyle business.
The purpose of building a lifestyle business is to just cover your monthly expenses while maximizing time spent outside of the business. Once your expenses are covered by your lifestyle business, you are financially independent.
People who start lifestyle businesses do not necessarily start them because they would like to spend all their time working with their business day in and day out, but they see it as a means to an end (and hopefully they have fun doing it too). They have no ambition of creating large businesses with many employees and a potential million-dollar exit plan.
Examples of lifestyle businesses are blogs (like this one), selling e-books online, real estate rental, a small shop on the beach etc. Some of the most popular lifestyle businesses provide passive income, although the income is perhaps not the most passive to begin with.
I know I said I followed the extreme savings strategy, but in fact I also follow this strategy. I am building my blog to generate some income over time while working in a normal corporate job and saving money there. This is also what people call a side hustle.
So, as you can see, the financial independence strategies are not mutually exclusive – you can easily pursue one or more of them at the same time.
Financial independence strategy #3: Growth business
Building a growth business (or startup) is another way to achieve financial independence.
People pursuing this strategy has an ambition of creating a company that can be sold for a large sum of money to secure them financially for the rest of their lives.
The goal of growth businesses is to maximize the value of the business to sell it compared to lifestyle business where it is to consistently withdraw value from the business.
A lifestyle business can easily develop into a growth business and vice versa.
The growth business strategy is typically a risky way of achieveing financial independence (because startups require initial investments and most of them fail), but it is relatively fast and also has the biggest potential upside of all the strategies.
Financial independence strategy #4: Un-jobbing
The final FI strategy is un-jobbing.
Un-jobbing means retiring from work today. It means only doing the things you love every day. You will not receive a consistent salary, but you will make some money doing things you find fulfilling.
People choosing to un-job usually live very frugally, and they work freelance or part-time with multiple income streams.
Good examples of un-jobbers are creative people (musicians, writers, etc.), who loves what they are doing and don’t want to spend time doing things they don’t find fulfilling.
Although I might not consider this financial independence, because you still have to work for money, I consider it independence because you are able to do exactly what you love all the time making just enough money to live a frugal life. However, since un-jobbing does not give you flexibility and security, it is not technically financial independence.
Un-jobbing is the fastest way to achieve a high degree of freedom and independence, but it also comes with a high risk of not being able to sustain the lifestyle forever.
Choosing your way to financial independence: Benefits and risks
Which strategy should you choose to achieve financial independence?
First of all, there’s not a single way to reach financial independence. You can combine the strategies, as I do, while trying to achieve FI, or make up your own strategy.
Choosing a strategy is highly dependent on your personality and preferences.
Below I have created a figure showing which strategy to choose depending on how your attitude is towards frugality, time, control and risk.
You should choose extreme saving if you want to live a frugal life, don’t mind waiting some time to achieve FI, are fine with having a normal job working for someone else, and don’t want to take risks on your journey towards financial independence.
You should choose a lifestyle business if you want to live a somewhat frugal life, speed up the process towards FI, would like to control things yourself rather than work for others and only want to take on some risk.
You should choose a growth business if you don’t want to live very frugally (although you still could), are fine with waiting for FI, would like to be your own boss and are fine with taking on high risk.
You should choose unjobbing if you want to live a frugal life, achieve freedom straight away, are fine with working for others and have a relatively high degree of risk concerning your income.
I have chosen a combination of extreme saving and a lifestyle business (this blog). In reality, I could potentially achieve financial independence faster by focusing exclusively on my lifestyle business, but I am too risk averse to just quit my job. Therefore, extreme saving remains my primary strategy until the blog becomes big enough.
A few good tips on your journey towards financial independence
Across all of these different strategies, there’s a few common sense tips you should always follow.
- Always save as much money as possible by keeping expenses low (don’t fall for the typical pattern of lifestyle inflation)
- Grow your salary (change jobs, negotiate salary, educate yourself)
- Invest your money for the long-term in low-cost assets (index funds, real estate etc.)
If you are interested in learning more about FI, I can highly recommend these financial independence books and podcasts.
Recommend books on the topic or podcasts (link)
Your turn: Which way of achieving financial independence do you prefer? Did I miss any?