Financial independence is considered to be the availability of funds and the ability to dispose of them at any time at your own discretion. Many people are concerned about the question: how to become a financially independent person. Not everyone is a financial genius, but anyone can achieve success and become financially independent. Most people don't know how to achieve this accurately and quickly.
There are several universal and effective rules, following which you can become a successful and financially independent person.
Why is financial independence needed?
If you ask any person the question: “Do you need money?”, then all the answers can be reduced to two main options: “Yes, and the more the better” or “This is not the main thing in life.” The first answer is sincere, the second is philosophical, modestly keeping silent about the fact that you need to eat every day, and food in the store is not given for free.
After some reflection on the role of finance in an individual’s life, the banal truth inevitably arises that “Money makes a person free.” In the sense, free to make decisions. If someone has a lot of money, then he can look for a job until he finds a job he likes and that pays well, rather than having to run to where there are vacancies. He can do business or paint, travel or lie on the couch. He has a choice, and the more money, the wider the range.
But, if the above statement is correct, then the opposite should also be true - “Lack of money turns a person into a slave.” This does not mean slavery in its classical sense. There is simply no choice without money. You have to live as circumstances dictate. Get the first job you come across, often with unloved responsibilities, a bastard team, an idiot boss and a meager salary. So what to do? There is no time to look for something better; you need to buy bread today. This is how people live - they eat cheaper products, relax in the country with a hoe in their hands, travel on public transport - and every time there is an advertisement on TV, they suppress dull irritation in their souls.
How to determine in each specific case at what point on the scale a person is: closer to the extreme point “Free”, or near the opposite pole “Slave”? Very easy if you don't look at the amount of cash in your wallet. Who can be called free? i.e., financially independent? Only those who, having stopped going to work, are able to maintain their previous standard of living for some time.
So, for how long he can maintain this same level, having lost his usual income - that is how free he is, no more. For many people, it’s not bad at all if this period is three months or six months.
But, ideally, such a period should last until the end of life. This is absolute financial freedom, implying the widest possible decision-making opportunities. That is, for example, I am working now, but this is not because I need money for my daily bread, but because I want it so much. If I get tired of work, or if I don’t like my boss, I’ll quit. And the family will not suffer from this financially.
The above formula can be reversed. Let everyone look at themselves from the outside and think how free they are in making decisions? Can he leave a job he doesn’t like, buy a car he likes, take his family on vacation to a place he’s long wanted to go, etc.? Freedom of decision-making is directly proportional to financial independence. If there is no such freedom, then a person is a slave of circumstances.
Well, okay, in theory everything looks nice, but in practice? How can someone who doesn’t have rich parents become financially independent? And, in general, what can ensure this financial independence?
Let's start with the second question. Financial independence can be achieved by a source of money that does not require effort and resources (except for the initial organizational stage). This is called passive income. This option became possible after the collapse of the socialist system and the transition to a market system.
In some cases, the process of organizing passive income is simplified to the limit. For example, when inheriting a metropolitan apartment. I don’t want to sell it, but I also have a place to live. As a result, the decision is made to rent out the apartment. After its implementation (there are some subtleties, you need to consult and insure, but now we are not talking about that), the owner begins to receive a monthly income.
But what about the rest, not everyone gets an apartment as an inheritance? There is only one way out - to create a source of passive income yourself! To do this, you need to start investing. There are three main options:
— purchase of real estate for the purpose of its subsequent rental;
— acquisition of securities (bonds, shares, mutual funds (UIFs) or other forms of trust management with minimal initial contributions, etc.);
— investing in “someone else’s” business to make a profit, without direct participation in its activities.
Purchasing currency or bank deposits are not investments. These are means not of making money, but of saving it. A serious bank sets such interest rates on deposits as to compensate for losses from inflation, and no more. We won’t even talk about financial pyramids and other types of fraud.
At this point, the person reading the article would like to say: how many decades, given our earnings and prices, will it take to create passive income? And in general, if it’s so good, then why isn’t everyone doing it? So, the main (although not the only) reason why “not everyone is doing this” is the economic illiteracy of the population. It's not a fault, it's a problem. It will take significantly longer to change mentality than has already passed since 1985.
Then why in the West, where people are more economically advanced, are citizens not investing en masse? The answer is simple. First of all, who said they don’t do it? Secondly, it takes much longer to gain financial independence there than in the vastness of the former Union. Because the percentage of annual income on passive investments is much lower than ours. Here is an example of the main “Western” investment options, German and American:
The Germans are thorough people. They are never in a hurry. A person chooses investments that bring 6% of annual income (the emphasis is on stability, at the expense of profit), begins to invest 1/8 of his earnings in them, and after 27 years (taking into account compound interest) gains financial independence.
The American is not happy with this. His investment project will bring 12% of annual income, he will contribute a quarter of his earnings there and in 12 years he will become completely financially independent.
Our situation is completely different. In the former republics of the USSR you can find investment options with returns from 20 to 50% per annum! Therefore, an ordinary young family can become financially independent in just 5 years. If you don't believe me, pick up a calculator. Below is the specific calculation, you can check each step.
It doesn't matter what country our hypothetical newlyweds live in. The main thing is what the source data looks like in absolute numbers. We will count money in dollars, the values of income and wages will be as close as possible to real ones. Those who wish can then recalculate at the current exchange rate for the currency of their state.
Types of economic status
- Money pit. In this option, income does not cover expenses at all, so you have to constantly borrow money to pay off the previous ones. Accordingly, there can be no talk of savings. This condition is very difficult, but it is quite possible to get out of it.
- Instability . The income-expense ratio is approximately equal. If debts occur, they are for a short period of time. Due to the fact that there are no savings, any unforeseen situation (job loss, illness...) can drag you into a money pit.
- Stability . In this case, you manage to receive more than you spend. And even if a crisis situation occurs, a person in this state may well survive for several months.
- Economic freedom. In addition to the fact that income significantly exceeds expenses, existing liabilities do not require inclusion. There are also significant savings that can easily last you for a very long period of time.
So, a husband and wife receive $1,000 monthly between them.
From the day they decide to achieve financial independence, they begin to save a quarter of their salary in order to invest it with a yield of 30% per year. According to young people, the remaining $750 is enough for them to live a normal (in their understanding) life.
$250 will be saved per month, per year – 12 x $250 = $3000. Now we need to take into account compound interest. Each amount begins to work for a young family from the moment it is invested. That is, the first payment gives a profit of 12 months, the second – 11, the third – 10, etc. If you do the math, you get the same figure as if you put the entire amount at half interest: $3,000 x 15% = $450. In total, by the end of the first year, the family will have the amount (contributions + compound interest): $3000 + $450 = $3450.
Recommendations
Explore
Study the stories of successful people, look up to them, explore the history of their promotion, perhaps their ideas or situations are similar to yours, and then this similarity will be support and inspiration for you. Consult with friends who successfully run a business, be more in their environment, make useful contacts. Soak up this “money aroma” that hovers around people who know how to attract and preserve it.
I advise you to read the article on the blog: “Real stories of people who achieved success through their work and perseverance.”
Share
Share your talents with the masses, even if it’s just the ability to bake delicious pies. Many great people offered their services in the markets, there is nothing terrible about that. Promote yourself, and over time, when you get the hang of it, you can move into the passive income phase, when these skills will already work for you. Step by step, you will gradually get your bearings and be able to achieve financial freedom.
Explore
Research the market to find a niche that is not yet fiercely competitive. Or, if you already have ideas, create a high-quality business plan that you can present to investors. And it rarely happens that there is a potential investor right away, so don’t lose hope and don’t stop, even if you hear “no” 15 times in a row. Knock on other doors and they will definitely open for you. There is a famous author under the pseudonym Dr. Suess. His first book was rejected by 27 publishing houses. Now his literature leads the market among popular children's authors.
Learn
Learn not to make hasty decisions. Yes, you have to think quickly, but when it comes to finances, you have to consider all the pros and cons, risks and benefits. Panic and fuss may not work in your favor; money doesn’t like that.
Invest
In addition to investing in stocks and so on, invest in your education if, with the help of advanced training, you can move on to a higher-paying job or gain knowledge to run your own business.
Save
You can also reduce costs by giving up bad habits, by purchasing only the necessary things according to a pre-compiled list, during seasonal sales or in wholesale stores. Close loans and pay off debts.
Work
But you can also increase your profit level by working part-time on the weekends or in the evenings on the Internet. Think about how a hobby can bring you money.
Total: $21345.15 + $6403.55 + $3450 = $31198.7.
So, the investment period is over! Now let's see what happened in the end. As we remember, five years ago our newlyweds decided that $750 a month would be enough for them to “live.”
The return on invested capital is:
- for the year: $31198.7 x 30% = $9359.61;
- per month: $9359.61: 12 = $779.97.
Young people have achieved their goal! Moreover, they achieved this in just 5 years. (But many of us work for 30–40 years and have nothing like this). Now they have a choice. You can continue to work, receiving a total income of $1,750 for your family. Or you don’t have to work at all; the problem of “a piece of bread” will never loom before your eyes again. There is also the option to work and continue investing, increasing your passive income in order to stop at a higher level.
But if people have a choice, it means they have become free! Moreover, until the end of his life.
By the way, in the above example, only the share of the salary that is invested and the percentage of profit matter. It doesn’t matter at all from what total amount this part is taken. If, as in the above example, it is from $1000, then it is $250. And if from $5000, then it will be $1250. In any case, with a share of ¼ and a 30% return, it will take no more than 5 years to achieve real financial independence.
Well, okay, we sorted it out. But you still need to know where to invest your money in order to get just such a return, from 20 to 50% per year. The decision depends on the amount that can be allocated for investment:
- from one hundred thousand dollars - the best option seems to be the purchase of commercial real estate and its subsequent rental (premises for shops or offices);
- from ten to one hundred thousand dollars - purchasing an apartment for renting it out or purchasing securities through trust management companies;
- from one hundred to several thousand dollars - you can choose mutual funds, PAMM accounts or something similar, their profitability is just within the above-mentioned values.
In conclusion, what exactly needs to be done?
Any long road begins with the first step. We must decide that the old way of life is a dead end. Fundamental changes are needed regarding generating passive income. This is the most important thing; without such a decision, everything else makes no sense.
1. Understand your financing options.
2. Depending on the possibilities, choose a method of investing money.
3. When determining a specific area for investing funds (premises for purchase, mutual fund, PAMM account, etc.), use the recommendations of those who have studied the issue in practice and have serious experience (one of the lists of “proven” managers with a profitability of 3 – 4% per month or 36 - 42% per annum can be found on my blog, see PAMM reports).
After developing a strategic plan (points 1 – 3), start taking action!
I have prepared an Excel template for you where you can enter your initial data and get a plan for calculating your financial independence.
Strategy 3. Cash flow control
After drawing up a plan, it is necessary to take into account all existing income and expenses. Katerina Zhizhina also thinks so, saying that it is boring and boring, but without this there cannot be a significant increase in well-being. Any earnings can be spent quickly and ineptly: 15 thousand rubles, and 15 million rubles. It's not about the amount of income as such, but about the attitude towards money. Rockefeller always scrupulously and carefully analyzed all expenses, even when he became a multimillionaire.
Be sure to count your money and budget carefully. Only by knowing the current state of affairs and planning your expenses ahead can you move towards financial independence. Moreover, managing a budget has now become much easier, according to Leysan Khalikova, an expert at VIGTrans, reporting that many applications have appeared on the phone that help keep track of expenses and income, as well as set aside a certain amount for your goals. This is a very convenient tool that really works and helps develop self-discipline.
Natalia Pritchina, LIME: “Developing a budget is a necessary element in order to stick to your main goals. Try it yourself: a well-drafted financial plan will become your main assistant in setting priorities. Thanks to it, you can avoid unnecessary impulsive spending. Don’t forget the most important thing: when money is spent haphazardly, there is always a chance that you will be left broke a few days before payday.”
Creation of reserve capital
Reserve capital is a mandatory reserve that will come in handy in case of unforeseen circumstances (loss of a job, business, solving major household issues, treatment, etc.) that require large financial expenses.
Experts advise doing it in the amount of 3-6 monthly amounts of your expenses.
Let's look at some rules for creating reserve capital:
- Regularity of investments. Set aside a percentage of your salary or other income each month. It is better to do this right away, without waiting until the end of the month. Otherwise, the money you earn may be wasted.
- Inviolability of capital until unforeseen circumstances occur. This may seem the most difficult. Learn to restrain yourself from momentary spending for the sake of larger benefits in the long term.
- Quick access to money. The money in your emergency fund should be available to you at any time in case you need it to invest in your passive income. To store money in a bank, it is best to open a replenishable deposit with the possibility of early withdrawal of the deposit without loss of interest.
- Fund replenishment. If force majeure did occur and you had to take part of the money or the entire amount from the reserve fund, try to return to replenishing it as soon as the situation stabilizes.
Once your emergency fund is created, you can move on to the next step in your financial journey.
Reduce your expenses
The less money you spend, the easier it is for you to increase your own savings rate and get to that very 40-50% of your income.
You can cut costs:
- for housing (by searching for cheaper rent, refinancing a mortgage, receiving tax deductions);
- for things you don’t use (subscriptions to TV channel packages, home phone and expensive mobile tariff, gym where you don’t go);
- for insurance (there are companies where you can buy a policy cheaper than from well-known brands);
- for a car (do not buy too expensive models, choose brands that save fuel).
Use cards with maximum cashback for purchases, and when ordering online, also use cashback services. This will allow you to return a few percent from each spend.
It is important not to get into debt on credit cards - always stay within the grace period, during which the bank does not charge interest.
Read on topic: 10 cashback services that will help you save
Invest strategically
Financial independence in 5 years is not possible unless you invest strategically. Focus on finding the best investments to generate passive income streams in the long term. Chances are you'll decide to max out a few investment accounts each year.
Real estate investing and index funds are the best ways to create wealth. Do your research and develop a strategy that suits your time. If you need help, consult a financial advisor.
Stocks, real estate, collectibles, or cash investments all tend to rise and fall in value. Focus on investments purchased at attractive prices that are likely to appreciate in value over time.
