Regardless of how you define financial independence or financial freedom, being able to live life and work on your own terms is something that appeals to all of us. If financial independence is your goal, of course, you’ll need to know how to make it happen.
While there are many different possibilities for building wealth, there are 4 proven ways to reach the point that you gain freedom over money.
1. Consistent Saving
The most common approach is also the most realistic for the average person. Anyone can reach financial independence by effectively managing their money for the long-term and consistently saving.
Spend less than you make and save as much as you can. It sounds obvious, but it’s not always easy. Living with consistently-strong financial discipline can have a huge long-term impact. You don’t need to be a high-income earner in order to grow your net worth to something substantial, but you do need time and consistent effort.
Of course, increasing your income and being able to save more will allow you to make progress faster, but even with an average income it’s possible to build a nice nest egg with the power of saving and compound interest.
2. Extreme Frugality
Although consistent saving and investing over a long period of time can allow you to reach your goals, some people turn to extreme frugality in pursuit of financial independence. Extreme frugality involves cutting every expense possible, often making significant sacrifices or inconveniences in order to minimize expenses.
Even with an average income, it’s possible to achieve a very high savings rate through extreme frugality. Another benefit of significantly reducing living expenses is the fact that it also reduces the amount of money that you’ll need to be able to support yourself in retirement, assuming you are able to maintain the same frugality. If you can live on just $ 25,000 per year, you would only need a portfolio of $ 625,000 in order to reach financial independence (according to the standard definition that financial independence is a portfolio equal to 25x your annual living expenses).
However, before you decide to take the extreme frugality path, you should consider the lifestyle that you want to have in retirement. Using extreme frugality to minimize expenses is considered LeanFIRE. Those who want to be able to live on more money in their retirement (like if you want to do a lot of travel) will pursue FatFIRE. The decision of LeanFIRE vs. FatFIRE is a personal decision that really comes down to your dreams and goals for retirement.
Business owners may be able to accumulate wealth faster thanks to a higher income, but that aspect of entrepreneurship that often leads to financial independence is being able to sell the business for a large sum of money.
A successful business may be worth a few million dollars, and an exit can make it possible to accumulate a significant net worth in a short period of time.
Of course, there is no guarantee of success with entrepreneurship, and in fact, most businesses fail. However, it only takes one success.
Many people who are pursuing financial independence are turning to online businesses because of the low barriers to entry and unlimited options. Also, many online business models offer enough flexibility that entrepreneurs can continue to run the business after retiring for traditional work, if they choose.
The last option that we’ll look at in this article is to move or relocate somewhere with a lower cost of living, which is sometimes referred to as geographic arbitrage. For example, if you live and work in New York City and you have a net worth of $ 1 million, that’s probably not enough to reach financial independence in a high-cost-of-living area. However, if you move to an area with a much lower cost of living (in the U.S. or internationally), you may be able to live very comfortably without the need to work.
Geographic arbitrage is not for everyone, but if you’re opening to relocating, moving to an area with a low cost of living can be a very powerful way to instantly improve your financial situation.