Get financially independent

Published by Supertortuga on 2016-04-03
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Modern society is based on consumption which financed by paid work. In case the consumption can not be financed by saved money, the banks gladly provide credits, which must be returned with interests. Many people search for a way out of this hamster wheel to get financially independent.

But what does actually financially independent mean? Some might think that you are financially independent when you moved away from home and are free to spend your salary as you wish. Others say that you should be free from debt and even have some saved money. Or perhaps that you work for yourself without depending on an employer. All of these definitions refer to different grades of independence, but in this article I will define financial independence by being in a position where work (neither paid work nor other work) is not required for your living, but this is instead financed by passive income from capital (such as dividends or interest income) or properties (such as income from rent).

How you get financially independent

So how can you get financially independent? First of all you must understand, that this depends partly on how much you have saved but above all on how much you spend. If we suppose that the yield on invested capital (after taxes) is 4% in average over a longer period of time, the rule of thumb says that you will require an invested capital of 25 times your yearly expenses, in order to live off the yield without causing the invested capital to diminish. Let us say that your yearly expenses are 24.000 $ (2.000 $/month). You then will require some 600.00$ invested. This sounds like an insanely huge amount, and for most the first reaction will be that it is impossible to save such an amount of money even during a life time.

As we can see, this rule of thumb depends on:

  1. The amount of saved capital. How much you can save depends on one hand on how much you earn and how much of it you can save each month. Generally it is more difficult to influence how much you earn than how much you can save (which does not signify that it is easy).
  2. Your expenses. The less you spend, the less invested capital you need (and furthermore by a factor 25). And during the savings phase lower expenses mean that you can save more, which increases the amount of saved capital.

Practical tips

It is thus a high priority to decrease the expense to the strictly necessary, which goes against the common norms in todays consumtion based society (which it is however possible to break out from). Depending on the prerequisites it is more or less easy to reduce the expenses. The most important is though to change ones behaviour and start to question all expenses and evalute to which degree they are necessary. Below follow some guidelines, which should be general:

By having a lighter footprint you also contribute to a sustainable lifestyle that consumes less of the finite resources of Earth.

Tips about more in-depth sources

This article is in much a summary of what is described with much more details on these sites:

  • Early Retirement Extreme - blog that complements the book with the same name by Jacob Lund Fisker. Jacob present in an academic way his filosophy to reach financial independance in a period of time as short as 5 years. I recommend both reading the book and all the entries in the blog.
  • Mr Money Mustache - an Amercian blog about financial independence and how to reach it.
  • frivid42 - Swedish blog about a person with the objetctive to become financially independent by the age 0f 42, and that has reached his goal way ahead of schedule.

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