The 6 Proven Steps to Financial Independence

6 proven steps to escape the rat race and be financially independent. The 6 steps you need to take to reach financial independence are spelled out and made easy. Follow these 6 steps to financial independence and you will be able to leave the rat race rich!

***This post may contain affiliate links. I do not recommend products that I have not personally vetted and love myself.***

Are you spinning your wheels in the rat race these days wondering if there is a better way to live?

There is! We all want to be free from the man; to free ourselves from the stranglehold that modern society places upon us. The ultimate goal that I think everybody wants is to be able to decide for themselves:

  • What they want to do
  • When they want to do it
  • Where they get to do whatever it is they want to do
  • With whom

I’m sure most of us don’t get up at the crack of dawn wanting to go to work, to work for money, just so we can get by another day to go back and work for money.

There is a better way, and I will lay out the foundations for the path in the following 6 simple steps.

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1. Recognition

Step one is to recognize that you are indeed in the rat race. The rat race, whether you enjoy it or not, is the same for everybody in it. You make money from your employer, you pay taxes, and then you spend what is left on living, fun, and everything else. In order to leave the rat race, you first have to realize that you are in it. Without this recognition, you will not be able to set yourself on the right path to freedom.

It is not hard to recognize that you are in the rat race. I too am a part of the rat race. When we work for others, they control us. It is not until we work for ourselves and mind our own business that we begin to separate ourselves from the rest of the rats and enter a world of freedom.

2. Learning

Step 2 on your way to financial independence is to learn more about what FIRE really is and how to achieve it. By simply reading this blog post and finding your way around the many fine examples of financial independence blogs you are beginning the process of learning. The learning process is never over, so don’t pause here on step 2 without continuing.

Financial independence has 2 definitions depending on the perspective, but they are complementary:

  1. the state of having sufficient personal wealth to not have to work to cover your basic necessities for the rest of your life.
  2. the point where your passive income each month is greater than your expenses.

The first definition is what most people think about for financial independence and what is usually espoused around the web. You work for money that you save and invest and then you are able to live off of your “nest egg” for the rest of your life. It doesn’t matter whether or not that nest egg becomes 0 at death or not.

The second definition is one I have come across several times in recent reading. If you can define the amount of money you need each month to live on and then figure out a way to generate that income with side hustles / passively then you become financially independent. Check out the below highly recommended books for much more information on definition 2.

3. Saving

I hope you are already working on saving money for retirement, but if not, it is time to start saving. The general goal to achieve financial independence is to save 25x your annual expenses minus taxes. This comes from the 4% rule that was popularized by the Trinity Study.

If you spend $40,000 per year that works out to be $1,000,000 needed to be saved to retire early on. $1,000,000 is less than you think if you save a significant portion of your income.

A “significant portion” is way above the average US savings rate of 4%. If you are spending 96% of your income every year, you will never reach financial independence. If you are willing to dedicate the effort to achieve freedom you will need to save on the order of 50%+ to reach freedom in a shortened time span. Check out the below plot to see the exponential relationship between working years until retirement and savings rate.

In order to monitor your savings, I recommend Personal Capital. With Personal Capital you can get a holistic view of your finances and really measure how much you are saving each month. It helps to find idle cash and get it invested so you can ready your target number sooner. Check Personal Capital out, it’s free!

The more you can save, the quicker you can exit the rat race and begin your life of freedom. Now you have to learn what to do with your savings.

4. Investing

Saving is not enough. You have to put your money to work. The goal is to have your money work for you and make more money. You do this by buying assets, the easiest of which to invest in is the stock market. The stock market does not need to be a confusing area, though so many believe it is. You just need to follow a few simple tips:

Follow these simple tips and you will be well on your way to investing for success. You don’t have to limit yourself to investing in the stock market though. You can also invest in real estate and then rent it out using standard contracts or services like AirBnB. Investing is all about risk management. You need to develop your tolerance for risk and then develop a plan to reach your goals.

5. Frugality

Frugality is the concept of living on less and always keeping an eye on the cost of your activities. Everything you do has a cost associated with it. Whether it is a direct cost of buying something or opportunity cost of not doing something, everything counts.

A frugal person recognizes this and minimizes their expenditures to allow a simpler and fuller life. There are many ways to be frugal and to save more money. You can:

Check out my budget hack posts, to learn more frugal ways to live. Just don’t lose perspective of the end goal. There is a point when you are being too frugal and it affects you and the people around you.

6. Financial Independence

Is financial independence the destination or the start of your journey?

It depends on your perspective. Either way, you need to be prepared for the day when you achieve financial independence. I recommend to sit down with your loved ones and discuss what you are going to do once you reach financial independence.

There are so many things that you can choose to do. If you truly love your job, then, by all means, continue to work, but you now have the power to demand better hours, remote working arrangements, fewer hours, etc. Since you no longer need the job for the money, you have escaped the rat race.

If you are like the rest of us, then you are ready to pull the plug on work. Take a well-deserved rest and then figure out how you are going to spend all of your free time. You should think about this before retiring to make sure you have at least a vague plan for filling your time. I heard it put best in this quote:

The opposite of happiness is boredom. ~Tim Ferris (author of the 4-hour work week)

Have a plan, but be ready to change as time progresses.

The final part of financial independence that you need to focus on after achieving FIRE is your plan for retirement withdrawal. You can take a look at my plan for retirement drawdown strategy along with many others at the bottom of that post.

TL;DR

Achieving financial independence is for the masses now. Just follow these simple steps and you too can achieve financial independence. Check out much more information in my free Financial Independence 101 email course.

Stay frugal, save more every day, invest everything that is saved, and track your progress, and you will be well on your way to financial independence.

What is your plan to achieve financial independence? Does it include other aspects? let me know in the comments.

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Comments

    1. That is so true. I talk about it with my coworkers and almost all of them say it’s not possible. It’s easier to talk about your retirement number and just leave out the part about retiring at 30…

  1. This is such a straight-forward list, and everything seems like common sense. To be fair, though, financial independence really isn’t a radical idea (yet it sounds so unnatural for everyone who hasn’t made it past step 1, haha).
    My plan for FI essentially follows the steps you’ve laid out since you’ve really drilled them down to their core. I made it past step one late 2016/early 2017, and have been figuring out how to save and invest enough to reach my “magic number”. Since I’m only a few years out of school, I need to work for quite a while longer to build up my wealth. On the side, I’m trying to figure out how to build passive (or semi-passive) income streams because I’m antsy to leave the corporate life (as much as I like the corporate paycheck).
    The “years until retirement” chart is a classic one and really hones in on how achievable FI is. I’ve averaged a 64% savings rate the past three months, but 10 more years of chugging along seems like such a long time!!

    1. 10 years does seem like a long time, but once you start rolling on the investments, it will compound faster and you may be under the 10 years of savings. Plus the passive/semi-passive income only helps to shave off more time from your “working” life. Best of luck on your journey.

      I think how simple it really is to achieve FIRE is the reason no one believes it is possible. When they see 60+% savings rates, they say it is no longer simple and no longer possible. It’s all just a matter of perspective.

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