What Does Financially Independent Mean?
(This page may contain affiliate links and we may earn fees from qualifying purchases at no additional cost to you. See our Disclosure for more info.)
When you're financially savvy, and on your way to a secure retirement, you may believe you already know the steps to achieve financial independence.
But when you're climbing out of debt and just taking control of your money, financial security might seem entirely out of reach.
If you have kids, focusing on solving your own money problems may be complicated by your concern about their financial future too.
Financial independence means two different things at two different points in life. And both are significant milestones in life and personal finance.
You and your adult children may even be working toward the two stages of financial independence simultaneously!
While they're starting careers and striving to stand on their own two feet financially, you might be trying to figure out how you can work less and enjoy life more.
Here are explanations of both kinds of financial independence and actions to consider to make the path to “FI” attainable. No matter where you're starting from.
What is Financial Independence?
When many hear of someone being financially independent (FI), they may think the person inherited money, won the lottery, or received some other form of cash windfall. But that's often not the case.
In general, reaching financial independence means you have enough income to pay for your living expenses for the rest of your life without having to work.
This stage of FI is sometimes debated. But there's little argument it should be a future goal for everyone.
For some, financial independence or FI may come as early as their late 20s or 30s. While others may never reach financial independence before retirement age or before they're forced to retire for other reasons.
Many people who attain FI continue to work to earn some money. But the idea is they don't ever have to work again to pay their bills and afford the lifestyle they desire.
Finding Your Way to FI
There are many ways to achieve financial independence status, and each has its benefits and drawbacks.
Some people opt to work a career job for years and save and invest a high percentage of their salary. Others combine a career with real estate investing.
Still, others might take an entrepreneurial route and build multiple income streams.
The strategies you choose to use and the timeline you decide to follow make the path to financial independence personal.
Just don't forget it isn't a race!
Always think about what will make you happy along the way to reaching your financial goals.
Becoming Financially Independent from Work
Here are thirteen steps to help you build your financial house. They'll lead you down the path to financial freedom, so you'll have a secure future with more control of your time.
1. Envision What You Want
Think about your future with and without work and discuss it with your partner, family, or friends.
- What do you want in life?
- What are your hopes and dreams?
- How would working less or not at all help you achieve the life you want?
- Do you know what your necessary expenses in the future will be?
- What current income streams will help you pay for these future costs?
- How will you fill the gap between future income and expenses?
- Once you have some concrete ideas, set your goals.
- Make a conservative estimate of how much the future you desire will cost each year.
- Remember to include the expense of health care and a few years of long-term care or some plan for assistance as you age. You definitely want a financial plan to support a very long life!
2. Design for Work Being Optional
You can't assume you'll be able to work until the traditional retirement age or longer.
Even if you love your job or think that you'll always work at least part-time, you may not have that option.
Consider starting a hobby or side hustle while you're working that you can turn into a side business in retirement.
It can help fill a void when you're no longer employed and can add to your income from retirement accounts, Social Security benefits, and other income sources.
Bonus when it allows for more passive income.
3. Eliminate Debt
Determine how much debt you have and develop a plan to pay it off.
Debt, especially credit card debt, can be a significant source of economic difficulties if it's allowed to grow.
It doesn't all have to be paid off at once, but paying off consumer debt and other high-interest debt should be a priority.
Also, pay attention to your credit history and track your credit score.
4. Increase Household Income
Understand what your take-home pay is each month and brainstorm ways you can increase your monthly income.
- Ask for a raise?
- Learn new skills for a promotion?
- Change jobs?
- Take on a part-time job (even a temporary one) in addition to your “day job” to help you meet money goals?
- Work a side gig such as lifeguarding, tutoring, house or pet sitting, dog walking, driving for Uber, delivering meals, etc.
- Start a freelancing business
Consider implementing some passive or nearly passive income sources to boost your incoming cash flow as well, such as:
- Renting out a room in your home
- Selling items you no longer use
- Investing in dividend stocks, REITs, crowdfunded cropland, or other real estate ventures
- Writing a book or blog
5. Know Where Your Money Goes
Use a tool like Empower or Tiller Money to track your expenses and see if there's anything you can do to reduce them.
If you've never tracked your spending before, you might be surprised to know where you can save money each month.
Always spend less than you earn and strive to grow the gap between your income and your expenses.
6. Create Your Money Management System
Set up a monthly spending plan and understand this will be a work in progress – especially early on.
Then stick to your budget as tightly as you can, making sure to pay yourself first by sending money to your savings and investing accounts.
You can use a simple spreadsheet or invest in a great service like Tiller or YNAB. Both provide a great community to learn and interact with on top of offering a great tool.
It may take some time to find the budgeting system that works best for you, so don't give up if the first one you try doesn't fit your personality or lifestyle.
7. Grow Your Savings
Put money into an emergency fund (ideally 3 to 6 months of living expenses) and create sinking funds to avoid going into debt for unexpected problems such as a job loss or severe illness and routine bills.
Consider keeping sinking funds in a high-interest savings account and your emergency fund in a money market bank account to benefit from a higher return and compound interest.
Also, think about establishing special savings accounts for:
The higher your savings rate, the quicker you'll hit financial milestones.
Using your budget, determine how much money you can put into investments:
- Retirement accounts – 401(k)s, IRAs, etc.
- Brokerage accounts
- Rental properties or other real estate investments
- Or other investment strategies meeting your needs
Consider your risk tolerance levels, and look for the best rate of return for the risk you're willing to bear.
Pay attention to investing fees too.
Managed Mutual funds are often more costly (which doesn't necessarily make them better) than Index funds or ETFs (exchange-traded funds) through Vanguard, Fidelity, or other brokerages.
- Check out our Worthy Bonds Review, a product providing a fixed 5% interest rate to investors while helping small businesses.
- Beginning stock market investors start here
9. Improve Net Worth
Monitor the growth of your investment portfolio and overall net worth.
Continue building streams of income, mainly passive income that'll help you generate enough personal income to pay for your living expenses for the rest of your life without having to work.
10. Use Tax-Advantaged Accounts
Be mindful of your income and tax brackets. Utilize pre-tax and/or after-tax accounts to save money on taxable income.
Both types of tax-advantaged accounts have different retirement savings options, like employer-sponsored defined contribution plans or individual retirement arrangements IRA's.
As your income grows or slows, you may desire to utilize different accounts to keep your tax rate in check.
11. Protect Yourself, Loved Ones, and Your Assets
Create an estate plan if you don't already have one, and make sure you keep it updated as you move through various life stages.
You need to have proper documents in place to ensure you're protected, your family will be cared for, and your assets will be there when you need them or passed on to your heirs.
Part of estate planning also involves insurance planning. Health, life, disability, homeowners, auto insurance, etc., help you manage the risk of a significant financial loss.
Grab a copy of our book Estate Planning 101 to help you build and protect your estate.
12. Guard Against Inflation
You don't want to forget about inflation rates when calculating your future financial needs.
Regular savings accounts won't outpace inflation, so investing your money is essential.
Inflation can eat up a lot of your nest egg and total returns through the years. So be sure to diversify your investments to help protect your retirement in inflationary periods.
13. Downsize / Reduce Cost of Living
Your home is often your most considerable expense, and one trap many of us fall into is keeping up with the Joneses.
To help speed up your journey to FI, consider staying in your starter home, downsizing if you've already upgraded your home, or moving to a lower cost of living area.
You'll also want to get and maintain a handle on spending or so-called retail therapy.
Many in the financial independence community have done so successfully, without compromising significantly on their standard of living.
Financial Independence from Parents
This stage of FI is the first we all hope to achieve.
Adult children who no longer require any monetary support from their parents are at the first financially independent stage.
This doesn't mean a parent can't provide some financial assistance if they choose. It merely means a child can meet their financial obligations without parental help.
With money concerns, including five-figure student loans, rising rents, and considerable consumer debt – many young adults face an uphill battle when trying to leave their parents' financial' nest.
And parents may also be “sandwiched in” – helping their kids and providing support for aging parents while saving for their future retirement plans.
For the benefit of everyone involved, parents and adult children have a responsibility to each other to focus on changes. And to develop a financial plan to make this step of financial self-sufficiency a priority.
How Young Adults Can Become FI
These options can help 20-somethings tackle student loans or credit card debt and avoid taking on more.
- Learn how to track expenses and make (and stick to) a budget
- Make choices like sharing housing with friends
- Buy used cars or take public transportation
- Gamify their money management to make it more enjoyable
- Build a solid credit score
- Start a side hustle or obtain an additional part-time job
- Balance the need and cost for continued higher education against the potential for higher income and employee benefits.
- An advanced college degree – or even an undergraduate degree may or may not make good financial sense.
Over time, multiple sources of income paired with making frugal choices like cooking at home can provide the money adult children need to minimize and eventually eliminate the need for parents' financial support.
Related: Setting Up Your Financial Life After College
What Parents Can Do to Encourage Financial Independence
Parents can start setting limits on the assistance they provide their children. And work closely with them to create a financial plan to end all financial support over a set period.
Parents need to realize they may actually be harming children by enabling them to make decisions not focused on becoming financially secure.
When a parent always steps in with a solution, their kids may not learn the importance of meeting their needs while putting off wants for the future.
This will only lengthen the time needed to reach FI.
Providing advice, emotional support, and helping adult children learn to problem solve money issues shifts the financial relationship to adult conversations, rather than a parent instructing their child on what to do.
Obtain Financial Independence
No matter which stage of financial independence you're seeking, you'll be less dependent on someone else in the long run!
Adult children will be “on their own” when they no longer need money from their parents.
And when you have sufficient income to meet all of your needs and the lifestyle you want without ever having to work again, you're no longer dependent on your employer.
Your financial house will be built, and your future will be financially secure.
Both are great economic independence points where you can take more control of your money, time, and life!
- Can I Save For Retirement While Helping My Kids & Parents?
- Flipping a Switch: A Guide for Life and Financial Transitions [Book Review]
Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.
Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.