One goal of simple living should be to strive for more financial independence.
Havin’ money’s not everything, not havin’ it is
When you have money, you have options in life. When you don’t have money, you are limited. Because financial stress is a significant cause of anxiety for people, building up wealth to provide some basic levels of financial independence is a great way to improve your life.
As you become more financially independent, you are able to reduce your dependencies (or needs). Financial independence buys you the freedom to live the life you want, without the reliance on external means.
Total financial independence comes when your investments create enough wealth to pay for your living expenses. For most people, this takes a significant amount of invested wealth. However, there are smaller stages of financial independence along the way that continue to afford you more peace of mind and security.
Stages of Financial Independence
- Unstable – When you are unstable, you are unable to meet your basic needs. This means you are missing important payments and struggling to pay for basic necessities. You can’t remain in this stage long without external assistance.
- Paycheck to Paycheck – Many people across the globe are in the paycheck to paycheck stage, which is where your income and expenses are essentially even. You make how much you spend, and you can’t save much. This stage is one bad event away from failure.
- Security – You gain financial security when you can pay all your bills, have an emergency fund (3-6 months of expenses) saved, have little or no debt, and are actively investing extra income you have. At this stage, you can develop a strong sense of peace of mind.
- Independence – Reaching complete financial independence means that you make enough income from your investments that you don’t need to work anymore. It’s widely accepted that you can withdraw about 4% of your investments each year. This means you are financially independent when your total invested money is 25X your annual expenses. For many people, this is between $1-$1.5 million.
- Abundance – You are in a stage of abundance when you have more wealth then you’ll ever need. You’re able to donate generously and invest in passion projects without fear of financial implication.
How To Become More Financially Independent
As with anything in life, becoming more financially independent means acting intentionally to get there. Making a plan and sticking to it. You have to want financial security more than you want “stuff”.
The equation for becoming more financially secure is pretty simple: Reduce Expenses + Invest Money
Yes, income is a factor in financial independence, but as I’ve written before, it’s really not about how much money you make. Your financial life is more beholden to the expenses in your budget that it is your income.
A great blog to check out regarding financial independence is Mr. Money Mustache. He writes about ways to develop “financial freedom through badassidty”. Or put in other terms, he has articles on how to save and invest money while still enjoying life.
Also, check out some of these other posts on Simple Living Daily.