ok, here’s how it works:
Financial Independence is defined as when your income from passive investments exceeds you cost of living. Simply put, if you sit on your ass and have money rolling in, enough cash to cover all your expenses (and perhaps a little left over), then you’re financially independent.
Most people think about financial independence in terms of being filthy cash rich, and that ain’t true. Financial independence comes when you work simply because you’re interested in what you do, or because the job brings you pleasure, NOT because your it’s necessary to your survival. The paycheques sorta pile up because your investments pay all your bills. I think that anyone can become financially independent; all it takes is the desire to be free, and the discipline to follow a system.
I’ve got a Masters in Finance, teach part time at a University in London and really enjoy helping people achieve their financial goals; that being said, I work in banking and detest how the Financial Services industry has created this mystique around the art of investment such that the greater majority of people believe they can’t achieve financial independence without professional help. That’s wrong.
I’m a dumb country boy and regard debt as slavery so here’s my simple approach to achieving financial independence.
- Know preciselyhow much money you bring home. PRECISELY
- Make a budget – and stick to it. I keep an Excel spreadsheet, and know exactly what it costs me to live in London by the day /week/month/year.
- Live well below your means – I do, I have always done so, and it’s paid off
- Trim expenses until your outgoings – as measured in your budget equal your income
- Trim expenses until your outgoings are less than your income – this allows you to save money each and every day/week/month/year
- Never stop paying attention to your expenses; they WILL creep up on you otherwise. Set aside time each week / month to review and question EVERYTHING
- Never stop looking for better deals on all your expenses
- Make sure you’ve got enough liquid savings to cover six months living expenses
- Invest any excess cash you save (above the six months expenses noted above) in cash flow generating assets – a savings account is the best place until you
- Become educated in investing; sites like TheMotleyFool and others are great, but it’s your responsibility to take care of your money – EDUCATE YOURSELF!!
- And SAVE SAVE SAVE – any money you come across must be saved
- QUESTION – before I purchase anything I know the price from at least three sources
- Your entire goal during this stage of the plan should be the acquisition of capital ; without your own money you will NEVER be financially independent
Up to this point these steps are followed by anyone who achieved financial independence. Unless you live below your means, know precisely what it costs you to live, how much you make and acquire capital, you can never, short of winning the lottery, become financially independent. And all this was the hard part.
After this it’s easy but there are many different ways.
What worked for me was investing in bonds, which provide monthly cash flow. Initially the monthly income was low, but I constantly reinvested each and every penny. And every spare money I came across was invested as well.
Now my biggest problem is what to do with several thousand dollars free cash flow at the end of every month; after all, concentration risk (too much of a good thing) is just as bad as not investing at all.
