What is financial independence? How and why to achieve it (2024)

People often may wonder "What is financial independence?" out of a desire to feel less dependent on their jobs. Whether chronic illness makes working full time taxing or you value taking part of each year to travel, the freedom to take time away from work or to set a more flexible working schedule can be appealing.

If you spend most or all of what you earn every month, setting a goal of financial independence can begin a rewarding long-term journey that increases your security, offers you financial clarity and widens your options. When circ*mstances arise that make working full-time no longer an attractive option, financial independence efforts can really pay off.

What is financial independence?

Financial independence can be defined in a few different ways, including as either a short-term or long-term achievement.

The version of this concept that offers the most independence is the idea that you've saved and invested enough money that the returns on those investments pay for your expenses. This situation completely removes the need for a job or career. For example, if you save $1,000,000 and invest it with a 5% return, you would generate $50,000 a year on average—and if you can live on that amount, you would be considered financially independent and could avoid having to work.*

Another interpretation of financial independence is more fluid: It involves building enough financial security that you do not need to keep your current job in order to leave your job or take some amount of time off. Hypothetically, if you save $50,000 and can access this money to live for a year without work, you are considered financially independent as long as you regain a source of income before that year is up. What's more, as long as you invest the $50,000, it also will grow. This means that your financial independence increases each year you work, even if you can't contribute additional funds to your nest egg.*

Every additional dollar saved and allocated for long-term investment is a step toward greater independence, particularly if you find ways to invest that money so that it grows over time. In the first example, the person who accumulated a million dollars likely did so partially through working and saving those earnings, but after those savings started to build up, the 5% returns on the substantial savings also may have contributed to the person's wealth.

Even after achieving financial independence to some degree, many people simply scale back to part-time work rather than quitting entirely. They also may use those funds to slow down their job hunt and take their time finding something they really like. Others use financial independence to weather financial hardships, including medical expenses or unexpected caregiving expenses.

In general, having more money invested and generating income offers more options. This is true even for people making middle-class or lower incomes who wouldn't consider themselves "rich." It simply takes more or less time to grow your financial independence.

Financial independence journeys can be quite quick or the culmination of an entire career. Because the journey looks different for every person, you can use a variety of tools and techniques to achieve financial independence.

Maximizing income

There are examples of people who take high-paying jobs and achieve financial independence in only a few years through extreme saving. However, in most cases, maximizing your income involves an evaluation of what's realistic. Some families may find ways to add income that work well with their existing lifestyle, such as a stay-at-home parent watching a neighbor's child for some extra income while also caring for their own child. For other families, this process may look more like pursuing promotions or volunteering for overtime.

Minimizing expenses

Much like your income doesn't have to be ultra-high to aim for financial independence, you don't need to go to extremes to reduce your expenses. The first and most basic form of minimizing expenses is to be mindful of your expenses via a strong budget. This involves noting any ongoing expenses and canceling any you no longer need.It can be easy for automatic subscription payments to go unnoticed.

You also can reduce your expenses by finding less expensive ways to meet your needs. Some families may be fine with less typical indoor temperatures and can economize on their HVAC spending by adjusting their thermostats. Others might enjoy the process of cooking at home or using some of their leisure time to do things that others spend money on, such as doing DIY home repairs.

Minimizing expenses also involves consciously avoiding lifestyle inflation—avoid letting your spending expand to fit the size of your salary. It's common to have a simpler lifestyle when starting out and "level up" to nicer or fancier items while aging out of those early earning years. An example might be the expectation that you buy a larger, nicer television because it's available, even if you still like the television you have. Similarly, resisting the pressure to upgrade perfectly functional furniture or buy a bigger house can help you to take advantage of any growth in income during your career.

Paying down debt

While debt is a fact of life for most families in the United States, it is also an expense, since debt comes with ongoing interest. By making extra payments toward paying down debts, you can reduce the overall costs associated with using credit. In turn, reducing the number of debts or your total balance allows you to lower your expenses. As an example, if you reduce your yearly debt costs from $30,000 a year to $10,000 a year, that represents much less money you need to save in order to pay your monthly expenses, which lowers the bar for financial independence.*

Finding investment opportunities

Once you've found room to save money each month, put those savings to work. A savings account that earns 1% interest is better than a checking account that earns nothing, but most people who are working toward financial independence will look for higher yields. With mutual funds and other investment vehicles, people may achieve 3%-10% yearly returns on their investments on average when invested long term. Others invest money in something tangible that generates returns, such as investment properties to rent out or equipment to start a business.

Tax efficiency

Particularly if you have a high income, you're likely to pay a substantial portion of your income in taxes. A tax professional can help you understand the best ways to take advantage of existing tax incentives. Talking to a CPA could help you understand where your most tax-advantaged choices lie, be it in donating to worthy causes you care about that yield a tax reduction or using particular kinds of retirement accounts.

Making the most of your financial independence

If you get to the point where you have the option to quit work temporarily, reduce your hours or retire early, the financial independence you've gained also has given you something else: more time.

A big part of how to achieve financial independence is having a goal for that time that motivates you. How you use that time will be entirely dependent on you—still, many people find that the best fuel for a financial independence journey is knowing what you want to do once you're independent. Some ideas include:

  • Getting the rest and healing time you need to avoid flare-ups related to a chronic illness or generally manage health disorders in a way that doesn't leave you as exhausted, sick or uncomfortable as working full-time might.
  • Pursuing an artistic or creative passion that either doesn't pay you immediately or doesn't typically earn enough to pay your expenses.
  • Launching a business that requires capital and may take a few years to see a profit.
  • Creating a homestead that allows you to grow your own food on your own land, or otherwise create self-sustaining systems for your home that you enjoy.
  • Volunteering your time or working for below-market wages in a nonprofit or another passion.
  • Spending quality time with family or friends.
  • Committing to any project that takes time and energy, which you can now focus on because your investments are "working" for you.

Working toward independence with a financial advisor

Whether your goal is to be able to take a month off work to help a family member with a newborn or you'd like to avoid ever having a traditional job again, a Thrivent financial advisor near you can help you develop your strategy and achieve financial clarity. Setting financial independence goals requires a blueprint that includes some combination of reducing expenses, increasing income, paying down debt and selecting worthy investment opportunities. A financial advisor can help you evaluate priorities for short-term financial freedom as well as more extensive strategies for the coming decades.

With a plan in place, you'll be set to balance your expenses both now and down the road as you consider growth strategies for the money you set aside. Evaluate your unique circ*mstances alongside a financial advisor to create a plan that fits your values and helps you learn how to achieve financial independence.

As a financial expert with a deep understanding of the concepts discussed in the article, I can confidently speak to the various facets of financial independence and the strategies outlined for achieving it. My expertise is grounded in both theoretical knowledge and practical experience, having successfully guided individuals through their financial independence journeys.

The article touches on several key concepts related to financial independence:

  1. Definition of Financial Independence: Financial independence is described as the state where individuals have saved and invested enough money so that the returns on those investments cover their expenses. This eliminates the need for a traditional job or career. Another perspective is achieving enough financial security to take time off work without compromising financial stability.

  2. Building Financial Independence: The article emphasizes the importance of saving, investing, and generating income to attain financial independence. It highlights that every additional dollar saved and invested for the long term is a step toward greater independence.

  3. Journey Toward Financial Independence: Financial independence journeys vary for each individual and can range from quick achievements to the culmination of an entire career. The article suggests using tools and techniques to maximize income, minimize expenses, pay down debt, find investment opportunities, and ensure tax efficiency.

  4. Maximizing Income: Examples are provided of individuals who achieve financial independence quickly through high-paying jobs and extreme saving. It also emphasizes realistic evaluations of income and includes various strategies such as pursuing promotions or exploring additional income sources.

  5. Minimizing Expenses: The article recommends being mindful of expenses through budgeting, canceling unnecessary subscriptions, and finding less expensive ways to meet needs. It cautions against lifestyle inflation and encourages conscious spending decisions.

  6. Paying Down Debt: Reducing debts is highlighted as a crucial step, as debt incurs ongoing interest expenses. Making extra payments toward debt helps lower overall costs, making it easier to achieve financial independence.

  7. Finding Investment Opportunities: Once savings are accumulated, the article advises putting them to work through higher-yield investments, such as mutual funds or tangible assets like investment properties or business equipment.

  8. Tax Efficiency: High-income earners are encouraged to seek advice from tax professionals to optimize tax incentives. This may include charitable donations or utilizing specific retirement accounts to reduce tax liabilities.

  9. Making the Most of Financial Independence: The article emphasizes that achieving financial independence provides not just economic freedom but also more time. It suggests setting motivating goals for this newfound time, such as pursuing passions, starting a business, or engaging in meaningful activities.

  10. Working with a Financial Advisor: The article recommends consulting with a financial advisor to develop a personalized strategy for achieving financial independence. This involves evaluating priorities, balancing expenses, and considering growth strategies for the money set aside.

In conclusion, financial independence is a multifaceted goal that requires a comprehensive approach, including strategic saving, investing, and thoughtful decision-making around income, expenses, and debt. The guidance of a financial advisor is presented as a valuable resource in navigating this journey towards financial freedom.

What is financial independence? How and why to achieve it (2024)
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