Financial independence is achieved when your income from personally established sources, such as investments exceeds the amount needed to sustain your lifestyle. Once your investment income pays for your living expenses, you can theoretically live off of your investment income forever. The lower your expenditures, the smaller your investment portfolio needs to be. For example, if your yearly expenditures total $60,000, then a financial investment portfolio earning 7% yearly needs to be around $857,000 to cover your lifestyle costs ($60,000/0.07 = $857,000). Now, this quick calculation does not consider the taxes you may be liable to pay on the investment income or fluctuations in investment returns, but it gives you a general idea of how much you need to have invested to achieve financial independence. Some other complications to this could be lifestyle creep, inflation, or changes in circumstances. For example, if you pay off your mortgage, your lifestyle costs will decrease, but if you purchase a new vehicle, your lifestyle costs might increase.

Financial independence, at least to me, is not the desire not to work or be productive. It’s the desire to have the option and flexibility to live and work how I want. I enjoy work, and I don’t see myself ever ‘retiring’. I plan to continue working in one form or another until I am physically unable to. Financial independence gives me the option to take more risks, including changing jobs and trying new things. In my twenties, I was so broke that I would have never taken the risk of leaving my job, because if it didn’t work out, it would potentially be financially devastating, or set me back years on my financial goals. The added flexibility and reduced financial stress allow financially independent people to be ‘free’ of the financial burden we have all felt. Financial independence is achievable for everyone; the following are key concepts that should live in the back of your mind as you work your way toward financial independence:

Key Concepts

Delayed Gratification: You don’t need to buy everything right now – by delaying purchases, you will push the expenses until later in your life when you can better afford them. Example: you may reconsider the need to travel to Hawaii at 28 years old, realize that you can travel there in 15 years, and enjoy the trip even more now that you don’t have the financial stresses.

Work Hours vs. Purchase: When purchasing something, consider how many hours you need to work to earn the net income necessary to purchase the item. Example: If you work 40 hours/week and have a take-home pay of $800/week, then the new set of $300 sneakers will take a full 15 hours worth of work to afford, essentially two full days – is it still worth it?

Make Net-Worth Conscious Purchases: When considering a purchase, always consider how it will impact your net worth. Example: a $10,000 vacation to Disneyland will reduce your net worth by $10,000 but investing $10,000 into a good quality mutual fund will increase your net worth.

Understand Depreciation: Most items we purchase depreciate. A new car will be worth 50% less within just a few years. The clothing and home furnishings (couches, appliances, etc.) you purchase is worth a fraction of what you paid for it after a single use. Plan your purchases around minimizing depreciation and be conscious about what the item you are purchasing will be worth within 1 week, 1 year, or 5 years. Example: A new car will lose $20,000 of its value within 3 years, so purchase a 3-year-old car at the $20,000 discount.

Know your Automotive Costs: Cars are one of the most expensive purchases we make and one of the highest contributors to monthly expenses. Track and understand your automotive costs, including fuel, insurance, depreciation, and maintenance, so that you can estimate your cost per mile/kilometre. Once you know how much every mile/kilometer costs you, you will be more selective about the trips you take. Example: you may find the sandals you want are $15 cheaper at a mall that’s 20 miles away. When you consider your car costs $0.50/mile to operate, you realize that the round-trip to the mall will be 40 miles, costing you $20 to save $15 – you will then decide to simply pay the extra $15 on the sandals and not drive to the mall.

Prevent Lifestyle Creep: As you become wealthier, it is natural for your living expenses to increase as you begin to live a more costly lifestyle. You may decide to upgrade your home, buy a nicer car, start eating out more frequently, and travel more. The problem with lifestyle creep is that it can be a never-ending cycle, where you can never increase your savings because every time your income increases, you upgrade your lifestyle. Be aware of lifestyle creep and don’t fall into the trap!

Influence of Status: Be conscious of the influence that the desire for status has on our expenditures. Don’t be the broke person driving an expensive car and wearing designer clothing. Don’t be drowning in student debt but brag about the prestigious university you attended. Purchase things that make sense to you and you only. Don’t care what others think.

Spend Less Than You Earn: It seems simple enough, yet millions of us are in debt. There are two sides to personal finances: income and expenses. If you are having difficulty keeping up, you can either reduce your expenses or increase your income – or both.

Know Where Your Money Goes: Track all of the money you earn and document where it all goes. To be financially successful, you need to be conscious of how much everything costs. It’s easy to be ignorant, but it takes work to be diligent.

Question Things, Make Your Own Decisions: We are consistently exposed to societal pressures and steered by advertising to live and spend the way others intend. Retail spending occasions are nearly monthly occasions that retailers use to convince society to spend – it’s a never-ending cycle of spending. Societal norms and traditions influence what type of home we buy, how much we spend on engagement rings, and when to buy gifts for people. Although it can be difficult to counter societal norms and traditions, try to make decisions for yourself and because of what you feel you need to do. Instead of buying your partner a gift on Valentine’s Day because advertisements are telling you to, consider surprising them with a meaningful gift or gesture when it feels right for you.