As inflation sets in and the cost of living continues to increase, supporting oneself is becoming more and more difficult. Many Americans look at financial independence as nothing more than a dream, believing they’ll never be able to attain it. While financial freedom is often associated with the upper class, with enough time and dedication, anyone can achieve their financial goals.
What Does it Mean to be Financially Independent?
If you look up the definition of “Financial Independence” you are not likely to find a solid textbook definition. Financial independence can mean different things to different people. The most common interpretation of the term is someone who is able to financially support the lifestyle of their choosing without ever having to work.
This definition, however, is confusing. What does ‘work’ mean? What is financial ‘support’? This is how we best interpret financial independence: The ability of one’s assets to cover the expenses of a lifestyle of their choosing. Here are three requirements one must satisfy to be declared financially independent:
- You do not have to actively work to support your lifestyle. Therefore, you passively earn the income that covers your living expenses.
- Your assets are planned to cover your living expenses indefinitely. Therefore, you are not expecting to look for new sources of income in the foreseeable future.
- You do not have to be ‘wealthy’ to declare financial independence. As long as you are able to support the expenses of your lifestyle, you are independent.
How can We Earn Money Passively?
Now that we understand what financial independence looks like, we need to understand how we can go about earning passive income. While there is an endless amount of ways one can earn passive income, achieving success is not a walk in the park. That is, acquiring an efficient and steady source of passive income will require taking risks and investing strategically. You will need to educate yourself thoroughly on the subject to understand how your money could be efficiently invested.
Investing does not necessarily refer to the stock market, either. Your investments can earn money through hundreds of different sources: rental income from real estate, income from business operations, royalties from a product you sell or license, dividends from investments or partnerships and interest earned from loans given to companies or individuals.
However, possessing only one stream of income may not grant you enough money to declare financial independence. In fact, most millionaires or successful investors have at least seven streams of income. Reaching financial independence may lead to a lifetime commitment of continuous investment. Before taking any risks, ask yourself what you want from financial freedom, why you want it and how you’re going to go about getting it.
Habits that will Minimize Monthly Expenses
You don’t have to rake in large amounts of money to declare financial independence. As long as you are generating income that is greater than your expenses, you are financially independent. Therefore, financial independence can be more easily achieved with efficient money spending habits.
- Spend your money in cash. Not only do you avoid debt on your credit card, but cash spending also allows you to be conscious of how much you are spending.
- Manage your budget so that you spend less than you earn. Unfortunately, 78% of Americans live paycheck to paycheck. Create a budget that guarantees you spend less than you make. You can then use the surplus to invest or deposit into an emergency or retirement fund.
- Spend what you need. Achieving financial freedom is easier to obtain when you are frugal with money and investing it in the right places.
- Reward yourself. While budgeting is a contributing factor to the success of your financial independence, you should still reward yourself when deserved. You’ve worked hard for your independence, so celebrate your freedom!
Achieving financial independence is not as simple as wishing for it and waiting for success. You need to take action. Use the tips above to take the first steps toward financial freedom. While financial independence is not an easy feat, with persistence and hard work, it is possible to obtain financial freedom.