10 Smart Strategies to Achieve Financial Independence
The Financial Independence, Retire Early (FIRE) movement took a lot of criticism early on. However, more and more people are starting to recognize the need to gain financial independence. It’s not as crazy an idea as people used to say.
In the wake of the coronavirus, people now understand better the importance of financial security. It’s not easy, but it’s definitely possible. And, as Physician on FIRE argues, it’s definitely worth it!
What is financial independence?
Financial independence (FI) is when you are no longer dependent on the income from a main job to be able to meet your household expenses and reach your financial goals.
You can be financially independent if you have such low expenses that you just don’t need much money coming in. Another way to achieve FI is to have streams of passive income like real estate income, investment dividends/growth, or an online business.
Whether your goal is financial independence or early retirement, you absolutely have to have a plan! Where there is no vision, the people perish! So, let’s talk about some FIRE strategies, straight from the physician who achieved retirement at age 43.
10 Smart Strategies to Achieve Financial Independence
1. Calculate how much money you need to be financially independent
Under the 4% Rule, we calculate that you can safely withdraw up to 4% of your savings/investments every year and never run out of money. That only works if you have good investments that are generating at least a 6-8% rate of return year after year. For a more conservative estimate, you could use a 3% withdrawal rate for your calculation.
So, if you want to withdraw only 4% of your portfolio to pay for expenses each year, you need 25x your annual expenses in savings (25 x 4 = 100). Using the 3% rule, that would be 33x (33.33 x 3 = 100) your annual expenses. So, a reasonable range of 25-30x your annual household expenses in savings/investments would give you financial independence.
Obviously, the more you spend each year, the more you have to save to become financially independent. So, if your goal is early retirement or reaching financial independence at a young age, you need to spend less money or make more.
Most physicians fall into the trap of thinking they can just make more, but that simply doesn’t work most of the time. Our expenses tend to increase as our income increases. In order to achieve FIRE, you have to pay attention to “lifestyle creep”!
Have the financial discipline to spend less than you make. Keep your expenses in check and focus on the long-term goal of financial independence.
While budgeting isn’t the most fun subject to discuss, Physician on FIRE and I agree that it’s important for most people. If you look at studies of American millionaires, 97% of millionaires report that knowing where there money is going and what it’s doing was critical to their financial success.
So, you need a budget!!
You can download my free monthly budget template here if you want to get started on an easy budget that will actually work for you.
4. Have good family/spouse support
If you’re married, you will experience both relationship and financial stress if you don’t have unity around the subject of money. Financial difficulties and arguments are the number 1 cause of divorce in America.
If you and your spouse are able to agree on what you spend your money on, then you are also agreeing on your hopes, your dreams, your aspirations for your children, where you want to live, and how you want to live.
So, it’s important that you and your spouse work together, not only to create a budget, but to have the discipline and unity to work together on all of the little financial decisions that you’ll make on a day to day basis.
5. Seize buying opportunities
If you want to make major gains on investments, take advantage of opportunities to “buy low.” Times like the recession of 2008-2009 and the coronavirus insanity of 2020 offer opportunities to buy stocks and real estate “on sale.”
When others are panicking, they want to sell quickly and get out of investments they deem risky. You know what you call an asset that sells fast? CHEAP!!
You can take advantage of opportunities when other people are losing their mind. Be wise and do your due diligence in evaluating investments to be sure they’re sound. But, don’t be afraid to jump on a deal when it presents itself.
6. Don’t panic and sell
I like to think of the stock market as a roller coaster. There are ups and downs, highs and lows. If you stay on the roller coaster until the end of the ride, you’ll have a great time, even though there are some times that are scary.
The only people who get hurt on the roller coaster are people who jump off partway through the ride. When the stock market is going crazy, don’t panic and sell everything. Ride it out and keep investing while stocks are on sale.
Over the last 100 years, the stock market has generally gone up. While past performance doesn’t predict future performance, remember that the stock market is just an agglomeration of companies. When you invest in the stock market, you’re investing in companies and people. Unless the entire economy tanks all at once, you’re generally making a safe investment to put money in the stock market.
7. Avoid debt
Debt limits your choices. Debt equals risk. It inhibits your ability to reach financial independence. Like bestselling author Chris Hogan loves to say, “Interest you pay is a penalty. Interest you earn is a reward.”
If you want to get your money working for you, you’ve got to stop making it work for others. Get rid of debt! Knock out those car payments, crush those student loans, and tackle your mortgage with gusto!
You’ll love the feeling of debt freedom. The first time you look at your budget and there’s nothing going out the door in the form of payments, you’ll feel a deep sense of peace. You’ll never want to go back in debt after that.
8. Find balance between savings and spending
Misers are miserable. As you’re considering your FIRE plan, you should build in a plan for spending some money on things you enjoy. You could go crazy and live on $10,000 a year, and that’s definitely one way to get to financial independence quickly. If that’s your plan, go for it.
Most people find that unpalatable, which is fine too. If you never allocate money to some fun things, you’ll have a hard time maintaining the discipline to stick with your FIRE plan longterm. There’s a balance between savings and spending, and you can find it.
9. If you retire or partially retire, do it with a purpose!
Many people who retire early are back to work within a couple of years. Why? Because they have no purpose! Many people think retirement will be great. Fishing, golfing, hobbies, and relaxing are fine as far as they go. However, you can only do that for so long before you get bored.
People need a purpose! You need to have a plan for your retirement. What will you do? You could volunteer, start a business, go on medical missions, or have an encore career.
You could also consider partial retirement on your way to full retirement. Cut back your hours to half time for a while so that you can transition to full retirement gradually. While you’re working fewer hours, use the time to figure out what you plan to do with your retirement years.
10. Teach your kids how be financially independent
What kind of financial strategies are you modeling for your children? More is caught than taught. They will form their financial habits by watching what you do. If you want to have kids that grow up and leave your house instead of living in your basement forever, you’ve got to train them right!
That might mean that you don’t always buy the best and newest thing. It might mean forgoing a few luxuries so your kids start to understand what frugality looks like. It’ll be worth it in the long run.
Even if you think (like me) that you probably won’t want to retire early, you should think strongly about going for financial independence. The security that comes with financial independence will give you peace of mind and you’ll feel much more comfortable that your family’s future is safe.
These strategies aren’t super sophisticated, and that’s the secret of financial independence. It’s not about super-secret investing strategies that will help you get rich quick. It’s all about behavior. If you can take control of the person in your mirror, you’ll reach your goal of financial independence.
- Listen to the companion podcast episode with Physician on FIRE
- Five easy steps to make a budget that helps you win with your money
- What to do if you want to retire with enough money
- You can be a millionaire, and you should!
Leave a comment below and let me know what you think. Are you planning to FIRE? What’s your strategy? Any tips for folks who want to FIRE?
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Matt | thewahman
I think having a good family/spouse support isn’t just important in money issues, but also in perusing further business ideas. An example could be in taking a leap of faith in a new business adventure.
Another point that you mentioned in the introduction, but not in the points further down, is to constantly try and generate additional streams of passive income!
Thanks for the great post.
So true! Support in all aspects of our life and career is so important!