On July 4th, we celebrate the independence of the United States of America and we’re going to go all out. After all, being independent is exciting. As a kid, you probably dreamed of the day you’d be independent and not have to rely on your parents for spending money, ask them for rides, or have them make all your decisions for you. As an adult, you may have a bigger dream: true financial independence. Financial independence goes beyond supporting yourself. It means being able to live only off of passive income and your own capital, without having to actually have a job or run a business day-to-day.
What is Financial Independence?
In practice, financial Independence is tough to achieve. But in theory, it’s a pretty straightforward concept. The idea is that you earn enough passive income to cover your expenses and maintain your lifestyle.
Here are a few examples. Can you identify who has reached financial independence?
Maggie has $10,000 in expenses per month. She has a full-time job and earns $9,000 a month. She also has invested in the stock market and earns dividends of $2,000 a month.
Tim and Jennifer have $8,000 in expenses per month. They are stay-at-home-parents and homeschool their two children. They have an extensive investment portfolio and own two properties that they rent out. Their total income from their investments and rentals amounts to $16,000 per month.
Elana has $3,000 in expenses per month. She has a part-time job and earns $3,000 monthly.
Dan spends $7,000 a month. He earns $10,000 from his job and another $2,000 from his investments.
Who has reached financial independence? The answer is Tim and Jennifer. Why? Financial independence is the stage in which you earn enough passive income to not have to work in order to generate the income you need to live. While Maggie is able to afford her lifestyle due to her job and stocks, she must continue working in order to pay her expenses. The same is true for Elana and Dan.
How Do I Achieve Financial Independence?
The first step to achieving financial independence is getting a grip on your own finances and understanding the financial opportunities around you. Financial independence doesn’t just occur overnight. Most likely, you’ll have to work and save money for a long time in order to build a portfolio that lets you sit back and enjoy your passive income. Passive income is money that you earn without having to actively work for it: through stocks, investments, royalties, dividends, and more.
What Are Some of the Best Ways to Bring in Passive Income?
If your goal is financial independence through passive income, you will have to invest your money wisely. This means researching the correct investments for yourself and your goals.
Here are some of the most popular ways to earn passive income:
Rental property - Buying a property as an investment and renting it out is a popular way to make passive income. This income requires little work and if you’ve invested wisely, the value of the property will probably go up over time. If you need to take a mortgage for the property, make sure to take this into consideration when calculating how much income will remain each month.
Dividends from stocks and other investments - Getting into the stock market is often a smart way to create passive income. Each year you’ll receive dividends from your stocks, bonds or other investments. If you’re a significant shareholder, this can amount to substantial income.
Business ownership - If you own a business but don’t actively work in it, you may still be receiving large portions of the profits each year.
Royalties from patents, music, books, etc.
These are just some of the ways that you can make your way towards financial independence. As you may have noticed, most of these suggestions require investing significant time or money up front. That’s why it’s so important to start learning and investing as early as possible (unless your grandparents left you a few million - lucky you). When you start investing early, you’ll benefit from compound interest over the years, meaning you’ll be able to reinvest the interest as you earn it.
Of course, achieving financial independence is a goal that most people never reach. It requires hard work, significant savings, and financial know-how. But if you do succeed, you’ll be able to relax and enjoy a July 4th BBQ any day of the year. Happy Independence Day!