Are you ready to win the big jackpot? Do you have rich relative leaving you a huge financial windfall? These are options that many people hope will come their way to secure their financial future. The reality is that most people will only gain financial independence through persistent hard work and planning.
How much is enough?
To know if you can have or do have enough money to achieve financial independence is a matter of doing the math. The idea is to find the magic number that will spell financial freedom for you.
Decide what financial independence means to you.
Not everyone thinks the same about financial independence. For some, this means never working again and having more money than you could ever spend. Others see it as earning a living from sources that do not require you to report for work everyday. Another group envisions financial independence as learning to manage accumulated wealth in a way that it will provide you a reasonable living for the rest of your life. Without understanding what you expect, you will not know whether you have achieved it.
Financial independence rarely means not having to think about money.
If you do not stay on top of your finances, you will soon lose whatever you have accumulated. Wise planning and managing of finances helps assure that the financial independence can be maintained once it is attained. You can even have financial independence on a smaller budget if your wants and needs are not excessive.
Many who appear financially independent actually work on their own schedule.
Writers, importers, bloggers, those who operate Internet businesses, franchise operators, and a host of others live a life of relative financial freedom. While these types of individuals may appear to not work, many of them work from a few hours to a few days per week at their personal discretion. The days and hours that they work are their choice. However, if they want to keep up their lifestyle, they have to continue to produce at least some profitable work every month.
You might have to make a few concessions for financial independence.
Because true financial independence requires a large income to be maintained, your lifestyle may need to be adjusted to step away from the daily grind. Plenty of people figure this out quickly at retirement. Their income drops and so does their lifestyle unless they choose to start spending down their financial assets. Even with millions in the bank, you may not be able to keep up unrestrained spending indefinitely. Set yourself a budget based on a maintainable income and learn to live within the boundaries of your income.
Working occasionally can buy your extras.
Many retirees and others look for income opportunities that are short-term or infrequent. They may use this bonus income to fund trips or gifts to charities or family members. These monies can also become a way to return the excess costs of medical care or other expenses to the next egg accounts.
Royalties and passive income may require attention to keep them up.
Sales of intellectual property, trademarks, and patents often come as a lump sum with ongoing royalties being paid to the creator or owner. Other types of passive income from investments or web businesses also may be part of your portfolio. While these often require very little maintenance, you usually have to give them some attention to keep everything on track. Some may even have requirements for your regular involvement to keep them active.
Save more money than you think you need
Almost everybody has some vision of the pile of cash needed for financial independence. The problem is that the world of money is not static. It changes almost daily. In order to guard against inflation, decreases in interest rates, rising investment fees, and unreliable dividend payments, you need to save more money than you believe is necessary. It is best to plan for enough investment money to pay your income needs and a surplus to keep you estate growing.
Work backwards to arrive at the amount of money you will need to have.
Do a little dreaming before you start planning your money. Write down everything you will want to have and do with your financial independence. Remember that most of what you own now will wear out. Allocate money each year for replacement. If you know that something lasts for a year, add its cost to your annual budget. If it lasts for 5 years, put one fifth of its cost into your budget.
Add in everything that you spend now that will still be around when you leave your gainful employment behind.
If you currently need $4,000 per month to live, start with this number. Add in the money needed to repair and replace the things you own. Toss in the cost of extra things like travel, hobbies, and increasing costs of health care. This may lift your number to $4,500 per month. To replace potential losses of assets or the value of assets, increase this number by about 20% to provide a cushion.
This brings you to $5,400 in monthly income.
Your annual income needs to be $64,800 to support this. To achieve this, your investments need to be large enough to generate this amount of income continually. If you can average 8% on your combined investments and savings, this would require $810,000 to make you financially independent. If you go conservatively, a 5% average return would increase this number to $1,296,000. If you were to reduce your annual need to $45,000, the total investment assets would reduce to $562,500 at 8%. At a 5% return, the nest egg would need to be $900,000.
Consult with a banker or financial advisor for investment options.
Investments mean risk. Unless you are a highly skilled investor, you need help to do this right. You need your investments spread out in such a way as to give you the needed income with a minimal amount of risk. For younger people, you can take more risk because you could always go back to work if needed.
For seniors, the risk needs to be decreased.
This means that a 45 year-old person might leave the workforce receiving a $64,800 annual income with $810,000 invested at 8%. However, he or she should plan for enough residual income to lift this amount gradually over the next two decades to the higher $1,296,000 at the safer interest rate of 5%.