Do you dream about financial freedom? Being able to live life on your terms? Not being told what to do and when to do it?
If you’re like most people, these thoughts have crossed your mind. You’ve dreamed of telling your boss “No,” walking out the door, and regaining control of your life.
But, most people can’t leave work. They’ve become handcuffed and need their job to pay bills and survive. These individuals won’t be able to live on their terms until they retire. And according to an article on US News, that won’t happen until most people are 66!
How many more years do you have to go until then?
It’s possible to quit working before traditional retirement age. You can start living out your dreams faster. It requires that you do things differently than most people, such as following a budget, living frugally, and saving. Three money skills that will help you reach financial freedom and retire early!
If you’re a student, you’re working towards it. Most employees are busy chasing it, too. Even though they may not realize it.
Financial freedom (also financial independence) is a way out of the rat race. You reach this point once you have enough money to pay for all of your future needs and wants. This gives you the ultimate luxury – being able to choose how you spend your time and who you spend it with!
When you become independently wealthy, you no longer have to work solely for money. Instead, you can work if you want to or you can choose to do something else altogether. Many early retirees end up pursuing passion projects, traveling, and spending time with loved ones.
The first steps towards financial freedom involve defining your ideal retirement lifestyle and how soon you plan to retire. With this information, you can estimate your yearly retirement expenses and reverse engineer the amount you’ll need and how quickly you’ll need to accumulate it. Then, you can use one of the 4 ways outlined below to save and invest until you have enough money to be free!
The most common way to reach financial freedom is by saving for it. Most people accumulate money by contributing to retirement accounts, like 401Ks and IRAs. Then, after decades of contributions, they’re finally able to live off of their nest egg.
Wall Street spends billions of marketing dollars each year reinforcing the traditional method. They promote the good returns you’ll make but fail to mention all the fees that you pay!
A recent article on NPR shows that some companies charge 2% of your portfolio’s balance in fees each year. These are expenses that you can’t escape because your employer chooses your 401K provider, not you. This means that of the estimated 8% annual stock market return, you’ll end up earning only 6%. A figure that doesn’t account for inflation, either! And don’t forget that if the market has a losing year, you’ll still get charged fees in addition to your losses!
People are living longer than ever before, too. Advancements in technology and medicine are prolonging life which is causing many retirees to worry about outliving their money. Their reliance on the traditional way may cut their happy retirement short.
This strategy for reaching financial freedom comes from The Trinity Study. Its authors wanted to find an amount that retirees could safely withdraw from their retirement accounts each year without running out of money. They reviewed different asset allocations, safe withdrawal rates, and how long the money would last based on historical stock market fluctuations.
The researchers found that withdrawing 4% of your portfolio each year gave a 95% probability that the money would last 30 years. Many times their analysis proved that millions of dollars would be leftover at the end of 30 years, too!
The 4% Rule is based on your yearly retirement spending. First, determine the amount your lifestyle will cost, then focus on accumulating 25 times the amount. Once you do, you’ll be able to live off 4% of your total portfolio each year for forever. Thus, making you financially independent!
For example, imagine you live like a tightwad and spend $40,000 per year. Then, focus on accumulating 25 times your yearly expenditures which in this case would be $1,000,000. Once you do, you’ll have reached financial freedom!
Most Four Percenters invest in low-cost index funds, like the ones offered through Fidelity and Vanguard. These securities have some of the lowest total expense ratios in the industry. They allow you to keep more of your money which helps you create wealth and live free faster which makes them Tightwad Todd approved!
Today, investors are more interested in passive income (aka mailbox money) than ever before. They realize that once their investment earnings are larger than their monthly expenses, they’re financially independent!
Passive income gets generated from the profits that an investment produces. Often, investors spend time acquiring and stabilizing an asset upfront. Then, once it’s performing, they can sit back, relax, and collect checks!
Most investors using the Passive Income Strategy have multiple streams of income. They invest in assets like dividend-paying stocks, businesses, and real estate. All of which provide them with cash flow to support their lifestyle.
Many new passive income investors start with dividend stocks. They buy stable securities with predictable cash flows which allows them to forecast their future retirement income. A great place to begin learning about dividends is NerdWallet’s list of 25 high dividend-paying stocks.
Investment real estate also provides passive income. You earn it from the cash flow a property produces and once you build a portfolio large enough, you’ll reach financial freedom and be able to live off its income!
Many passive income investments have tax benefits, too. Often, owners can write off the expenses associated with these assets. This reduces the owner’s taxable income, allowing them to save more and compound it to even greater amounts!
There are not many guarantees in the world of personal finance. But we know for certain that all investments get exposed to risk and will fluctuate in value.
Each of the strategies listed above have their strengths and weaknesses. And this is why you need to use a combination of them all when you’re planning for financial freedom!
Max out the employer match in your 401K. Contribute to tax-advantaged accounts, like IRAs and HSAs. Invest money in brokerage accounts and base your withdrawals on the 4% Rule. Buy assets that pay you passive income. And invest according to your financial order of operations.
By using parts from each strategy, you’ll reduce your overall risk. You won’t be completely reliant on one type of income during retirement. Instead, you’ll have multiple streams of income and will be able to weather all market conditions you face!
Don’t plan to reach financial freedom the same way as everyone else. If you do, you’ll get the same results, too. You’ll get told what to do until you’re in your 60s!
Instead, choose to do things differently. Use the strategies above so you can become financially independent faster and spend your time however you wish!
Everyone is working towards financial freedom, they’re just going about it in different ways. Choose the option that works best for you, then get to work creating wealth making your dreams come true!
Which option are you using to reach financial freedom? Comment below.
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