Financial Independence is defined as having enough income to pay your expenses for the rest of your life without needing to work. It doesn’t mean you won’t be making any money, it just means that the income you are generating is passive. Financial independence is the final stage and end goal for most people. Unfortunately, you can’t just skip to the end, you need to pay attention as to which financial stage you are currently in and how you can keep moving towards your goal.
“Money can’t buy happiness” I am sure you have heard this saying before. The funny thing is the only people who tend to spout it, are rich people. I am yet to hear a poor person make this statement and truly believe it. I do think money can buy happiness and I think people are lying if they tell you otherwise. The object of money itself is not the point, the point is having enough money so that you first reach the stage of financial security followed by financial independence. There are a few stages you need to go through in order to end up at the end goal of financial independence, but anyone can do it.
Stage 1: Financially dependant aka you broke girl.
You might not have any income at this point in your life or you could be a broke university student living week to week with minimal income. This stage is also relevant to people who do work full time but do not have any form of an emergency fund. They might also have bad debt like a credit card, a personal loan, or a car loan. Basically in this stage, you are one unexpected expense away from disaster. Money is very tight and you find yourself often worrying about how you will afford everything. If you are in this stage and you are reading this then that is great news. You are ready to start making a financial plan to escape these shackles and sort your finances out. You need to start by tracking your expense and budgeting. Go through the past three months of expenses and find out where every dollar is going. The hard part is not doing the tracking as pretty much everything will be in your internet banking app, it is thinking about what you can sacrifice in order to get yourself into stage 2. Stage 1 also means looking at ways to increase your income as it will be one of your most valuable tools in getting ahead financially.
Stage 2:
Learning to save & live below your means. Unfortunately, most of the time you can look rich or you can be rich. Just because someone is earning 100K per year and is wearing designer clothes does not necessarily mean that they are a financially secure person. In this stage, you should now be more aware of your spending and have a weekly amount of automated savings. In this stage, you should have no consumer debt or be prioritising paying this off as quickly as you can. It is fine to still have debt such as Hecs debt at this stage or even a mortgage. Now that you are more aware of your spending habits you will probably start finding that you are buying a lot less materialistic items than you did in stage 1.
Stage 3:
Financial Stability. In this stage, your savings account is looking quite healthy and you have a nice emergency fund. You may have even have some other financial responsibilities like a mortgage if homeownership is a part of your overall strategy for financial independence. You may also have started investing in the share market and are building up a small investment portfolio alongside paying off your property. Here is where you are really starting to see the benefits of investing and understanding the power of compound interest over a longer period of time. You feel comfortable with your income and do not worry too much about being able to pay your bills each month.
Stage 4:
Financial security. In this stage, you are feeling pretty content. You have a decent income, no consumer debt & are generating some passive income from your investments. You will have some decent cash savings & your mortgage is in its end stages. The feeling of knowing that you are not going to have to worry about a mortgage payment for much longer is a great feeling. There is no better security than a home you own outright. You might be in a position here to cut back to working 3 days per week and enjoy life a bit more.
Stage 5:
Financial Independence. The end goal for most people in life. In this stage, you are able to maintain a good quality of life without needing to work. You will be receiving passive income from your investments (whether that is a share portfolio, your superannuation or investment property. Your passive income covers all your expenses and you still have some leftover. Life is good! There is no time frame for getting to this stage. For some people, it will take only a relatively short window of time and for others, it might take 30 years. There are many different variables such as income levels, kids, mortgage size, age, divorce & lifestyle. If you can live a happy life spending 20K dollars per year then you can reach financial independence a lot sooner than someone who needs 60K per year.
The thought that you could maintain the lifestyle you currently live without needing to work might seem like a pipe dream, but it’s not. You may never be in a position where you are earning enough to have a lavish luxurious lifestyle filled with designer bags and first-class flights. If you want those things, that’s okay, you just might have to keep working for quite a while. If you are happy living a more frugal life with less focus on materialistic items then financial independence is actually more achievable than you might think. Part of the lifestyle for people in the financial independence community is all about having minimal expenses in order to leave the rate race early.
So after all this, can money can buy happiness? Does having enough money to buy material objects make you happy? Yes, it probably does…at least for a while until it gets old and you want the newer version. That 60 thousand dollar car also probably doesn’t give you much of a smile when you are forced to work overtime to make this month’s repayment. What might make you happy is being in a financial position to cut back to 3 days per week because your expenses are low and you have built up a small but steady passive income stream. Would a four-day weekend bring you happiness? I know it certainly would for me.
As your goals shift and change throughout these financial stages it is good to decide on what the end game means for you. Is it a complete early retirement from traditional 9-5 work or would you be happy with part-time? Do you want to live on acreage in a nice house where you can grow your own veggie patch or are you happy living in a unit in the city?
If you have a plan, even a very loose long-term plan, it can make financial independence seem more achievable- especially in the early stages of the journey.
