by Stacy Francis, CFP®, CDFA
My brother and I had a long talk about financial independence last night, over the most delicious Crème Brûlée. I realized how much the two have in common! Both the dessert and the concept are things everybody craves – yet very few have a clue of how to make them happen. Still, the theory behind financial independence couldn’t be easier to grasp. Put simply, you are financially independent when your investment income meets or exceeds your expenses, so that you do not have to work for a living. For example, if your annual expenses add up to $25,000, and the average yield from your portfolio is 10% per year, then you need at least $250,000 worth of securities in order to be financially independent.
Sounds fab, but how do I make it happen? Well, starting off, it’s all about the difference between what you make and what you spend. This difference you can invest, and each dollar set aside takes you one step closer to the life you want.
If you find that the gap between your income and your spending is too small, there are two ways to mend it. The first one is to make more money. Can you ask your boss for more responsibilities? Switch to a different company — one that pays more? Expand your business or take on a few additional clients?
The second way is to spend less money. Keep a spending journal until you feel you know where your money goes. Then sit down and cut all the things you don’t truly need, and that are keeping you away from that independence you desire. Be ruthless – and you will be thankful later.
Another important thing to keep in mind is that the cheaper you can live, the less capital you need in order to be financially independent. A $300 monthly car payment translates to $3,600 per year, or $36,000 extra that you need to save up before you can quit your job. When you become clear over what matters the most to you, you can line up your life and your finances accordingly.