What is Financial Independence?June 4, 2018
By Billy & Akaisha Kaderli
Financial independence is when you have enough invested assets to live the lifestyle you want for the rest of your life. You may choose to continue working, but you are no longer dependent on a paycheck to live your lifestyle or cover expenses.
Financial independence is freedom.
You are not chained to a job you dislike, a city or commute with too much traffic, or the sort of weather that doesn’t suit you.
When you are financially independent you can pursue your passions. This may include traveling, learning a musical instrument, inventing a product, volunteering, hiking, biking, writing that book, mentoring, pursuing a spiritual quest or doing a myriad of other things.
Once you are making enough money from your investments to cover your expenses, you can relocate yourself in any number of paradises around the world. You can RV across the continent, house sit around the globe, grow the perfect garden, or learn a new language.
How to Get There
We like to call it “Creating a Money Machine” where your invested money continues to grow ahead of inflation, even though you are drawing from it to cover your expenses.
The best way to understand how much you will need to create this scenario is to figure out how much you are spending today. Not how much you make by working, but how much cash you are putting out to live your lifestyle. Multiply that spending figure by 25. That is your target investment amount.
Assets vs Income
Long before your retirement date, it is important to structure your portfolio towards growth as compared to income.
That’s not to say you cannot own income-producing investments such as bonds or REITs to balance your portfolio. But ideally, those should be held in tax-advantaged accounts such as IRA’s so that the income is not currently taxed.
The rest of your portfolio, depending on your age, should be in low-cost growth ETFs or mutual funds such as VTI, Vanguard Total Market. This way your investments are structured in a more tax efficient manner.
I hear many stories of people well into retirement with annual incomes of 100K or more who have to give a portion of that back to Uncle Sam for income taxes each year. Then they fear inflation eating away at their spending power.
Equity assets will grow to outpace inflation thus keeping your purchasing power intact. Plus, then you are in control of taking capital gains if and when necessary.
This is important, especially if you are planning on decades of retirement like we did.
The idea is that assets outperform inflation. Income does not.
It was our experience that our expenses dropped significantly once we left the workforce.
Mind you, we sold our home, invested the proceeds for growth, and decided to travel. Doing this afforded us the opportunity of not maintaining a residence while it sat empty for months or years. This freed us from property taxes, insurance, and home repairs.
We eventually became car-free as well. This meant we no longer had car insurance, repairs, or fuel costs, which also left more money invested in equities.
Financial independence eventually taught us that we needed little to be happy. We basically became minimalists before it was fashionable!
This style of living may or may not appeal to you. But the point is when you are financially independent, you can create whatever lifestyle best suits you. You are the one in charge of your life and that is very freeing.
Ask yourself: Would you like to be financially independent?
About the Authors
Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism, and world travel. With the wealth of information they share on their award-winning website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstore or on Amazon.com.