One of my probably not-so-secret goals has been financial independence. In a nutshell, that means the money that’s automatically coming in is enough to pay your living expenses without you needing to work. Typically, that money comes from things like stock dividends, income from annuities, royalty payments, interest on CDs or bonds, and other (less traditional) passive income sources.
Can you imagine being financially independent? Being able to just…do whatever you’d like with your time, secure in the knowledge that you’ve got enough coming in to pay your bills? That sounds pretty darn appealing to me. It sounds like freedom, in fact. (It also sounds a whole lot more exciting than “retirement”, even though that’s exactly what it would allow you to do. And it’s smart to prepare for retirement even if you’d like to work forever.)
The road to financial independence
So, how do you get there? It seems to me that you do so by following two basic principals:
Save and invest a portion of every dollar you make
Lower your expenses
The lower your expenses are, the less money you absolutely need to automatically generate to live on. That’s good, because it decreases the amount of money your nest egg will need to generate for you. And you build that nest egg by saving and investing a portion of every dollar you make.
In other words, you’ll be able to reach financial independence sooner if your expenses are lower. As a simplified example, if your expenses were $1K a month, and you were able to earn 3% after inflation on your income-generating assets, you’d need $400,000 worth of them. (Because 3% times $400,000 is $12,000. Divide that by 12 months and you get $1K.)
If it seems overwhelming…
If the idea of getting to $400,000 in income-generating assets (or more! if you want to live on more than $12,000 a year) seems overwhelming, remember the power of compounding and of starting early. The sooner you start setting aside money and making good investments, the faster you will get there. (Dinkytown.net has a ton of savings calculators you can use to figure stuff like this out.)
In part, it’s a matter of how much you want it and how much you pay attention to your money. Don’t let it fly out the door without a plan. Decide what you want your money to do, and then make it behave. When you follow good financial principles (such as having an emergency fund, health and car insurance, a budget, saving & investing, etc) you’ll get there.Posted in Retirement on 08.29.12 with 6 comments.