Are you currently living paycheck to paycheck and just getting by?
If so, the idea of gaining control and freedom over money may seem a bit unrealistic.
However, it’s much more possible than you might think, but it will take some discipline and a smart approach.
In this article, we’ll take a look at the steps you can take to drastically improve your own financial situation and progress toward becoming independently wealthy.
What Does it Mean to Be Independently Wealthy?
First, we need to start by defining what it means to be independently wealthy.
While the term can mean different things to different people, in general, being independently wealthy means that your wealth or assets will be able to sustain you for your lifetime and that you:
- Don’t rely on financial support from others.
- Don’t rely on income from employment or work.
Financial Independence vs. Independently Wealthy
In the personal finance blogosphere, the term “financial independence” is much more commonly used than the term “independently wealthy.”
Although the two terms are similar, I believe there are also some key differences.
Financial independence can mean several different things, depending on who is using the term and also the context in which it’s being used.
You may read of a young adult being referred to as “financially independent” after moving out of their parents’ house and being able to completely support themselves.
In other cases, “financial independence” could be referring to the ability to live life on your own terms rather than needing to work a full-time job.
When you read about financial independence on personal finance blogs today, the most common meaning is someone who has assets or net worth that exceeds 25x their annual living expenses.
This definition is based on the Trinity Study, which found 4% to be a safe withdrawal rate for retirees (often referred to as the 4% rule).
While the definitions of both “financial independence” and “independently wealthy” are flexible and somewhat up to interpretation, there is a valid reason to believe that being independently wealthy is a step above reaching financial independence.
According to the 4% rule, if you live a very frugal lifestyle and your annual living expenses are $30,000, you would achieve the definition of financial independence with a portfolio of $750,000.
While you may be financially independent and you may be able to continue your current lifestyle without the need to produce income through a job, you’re still forced to maintain the same frugal lifestyle if you want to keep your financial independence.
Once your portfolio reaches $750,000, you can’t suddenly ditch the frugal lifestyle and expect that your assets will last as long as you need them to last.
Levels of Financial Independence
There are different levels of financial independence.
Those who live a very frugal lifestyle and are planning to maintain low living expenses in retirement will not need as large of a nest egg and this approach is often referred to as LeanFIRE.
Those who plan to spend more money in retirement will need to build up a bigger portfolio, and this approach is often referred to as FatFIRE.
Someone who is pursuing FatFIRE may plan on spending $100,000 per year or more in retirement.
In my opinion, the definition of being independently wealthy includes the ability to live a comfortable lifestyle without the need to pinch pennies.
In that sense, it falls more in line with the FatFIRE approach than it does with the LeanFIRE approach.
“Financial freedom” is another term that’s sometimes used. I would consider financial freedom to be similar to the definition of “independently wealthy.”
I believe that it’s easier to reach financial independence than it is to reach true financial freedom.
The LeanFIRE approach that involves keeping expenses to a bare minimum may allow you to be independent and not need the income from a job in order to live.
But it doesn’t give you true freedom over money if you need to constantly maintain that frugal lifestyle long term.
While there is no exact net worth or milestone that you need to reach in order to become independently wealthy or to achieve financial freedom, it seems reasonable to say that you need to be able to live a comfortable lifestyle with at least the occasional luxuries in order to qualify.
Another way to look at it could be to define someone who is independently wealthy or who has reached financial freedom as someone who is able to live off of dividends and cash flow from their investments rather than drawing down the balance of the portfolio.
How to Become Independently Wealthy
Now that we’ve attempted to define what it means to be independently wealthy, let’s take a look at the steps you can take to achieve it.
1. Spend Less Than You Make
The first priority is to spend less than you make.
This sounds very basic (and it is), but unfortunately, overspending prevents millions of people from reaching their financial goals.
The very first step in working towards a better financial situation is to get your spending under control. Here are a few specific things that will help.
Create a Budget
Many people don’t like the idea of a budget, but a budget is really nothing more than a plan that helps you to use your money in a way that you see fit.
You’re in control over the way that you allocate your money. So really, a budget helps to put you in control.
A budget is the best tool that will help you to ensure that you spend less than you make.
You can also include budget categories for saving, which will help you to reach your savings goals.
Track Your Expenses
While budgeting is important, tracking your expenses is equally important. How do you know that you’re actually sticking to the budget?
You won’t know how you’re truly spending your money without tracking expenses.
Again, free apps like Mint or Every Dollar can help, and Personal Capital also has some expense tracking features that make it a good free option.
After creating a budget and tracking expenses, hopefully you’re spending less than you make.
That’s a great first step, but you won’t become independently wealthy simply by spending less than you make.
Next, you’ll want to look for ways to cut costs and reduce expenses even further. Of course, there are countless ways to reduce your living expenses.
That’s beyond the scope of this article, but you can find plenty of money-saving tips here.
2. Eliminate Debt
If you have consumer debt like credit card debt, car loans, student loans, or other personal loans, paying down that debt should be a priority (especially the high-interest accounts).
Once you have that debt paid off, you’ll have more money each month for saving and investing and you’ll be able to accumulate wealth much faster.
3. Invest with a Plan
After reducing expenses and eliminating debt, you’ll have a higher savings rate (the percentage of your income that you’re saving) and more options for investing.
In order to become independently wealthy, you’ll need to invest wisely and with a purpose.
You don’t need to be a financial expert, but you should make an effort to educate yourself on basic investing concepts and increase your financial literacy, if needed.
This article on investing for beginners is a great starting point.
While investing can be an overwhelming topic if you’re brand new, you need to get started. The basics aren’t very complicated once you gain just a little bit of familiarity with the concepts.
If you’re not comfortable investing on your own, you could hire a professional or use a robo advisor that will manage your finances based on your own situation.
M1 Finance is an excellent option for beginners because it offers free automated investing. You can follow one of many “pies” (a pie is simply an allocation or your portfolio by percentages with different investments) that have been created by professionals for different purposes.
All you’ll need to do is select a pie, contribute money whenever you can, and M1 Finance will automatically invest it according to the pie.
Another way to get started is to get free stock from different finance and investing apps and continue growing your investing experience and portfolio from there.
Index fund investing is an excellent option for new investors (and seasoned investors as well).
Investing in index funds doesn’t require a lot of knowledge because you’re simply investing in an index, like the S&P 500, and you also won’t need to make decisions about buying or selling. Index funds are typically a long-term buy-and-hold investment.
When it comes to investing and building wealth, the metric that gets most of the attention is net worth. While you’re net worth is very important, you should also consider your liquid net worth.
This is a measure of your net worth, but it only counts assets that can be quickly converted to cash (or it significantly reduces the value of non-liquid assets).
Your liquid net worth is important because it will impact your ability to weather unexpected emergencies that may come up.
4. Stay the Course
If your goal is to become independently wealthy, this is a long-term goal that’s very unlikely to be achieved quickly. You’ll need discipline to stay the course.
This is especially true when financial and economic conditions get rough, like they are right now. A big drop in value may cause you to rethink your strategy or doubt that you’re on the right course.
But if you’re in it for the long haul, you need to keep the big picture in mind and remember that short-term gains and losses are not that significant over a long period of time.
Inevitably, there will be some times where your investments drop in value, but if you’re taking an approach to investing that has proven to work in the long term, stay the course.
5. Increase Your Income
Earlier we looked at reducing your living expenses as a way to increase the amount of money that you’re saving and investing. The other way to increase your savings rate is to make more money.
Ideally, you’ll be working to reduce expenses while also working to increase your income, which will give you the best chance of maximizing your savings rate and speeding up your progress.
There are a lot of different ways that you can go about increasing your income, but the best place to start is to look at your options to get paid more for the work that you’re already doing (or for working the same number of hours that you’re currently working).
That could mean asking for a raise, getting a promotion, or looking for a higher-paying job.
These options will not always be available to you, or maybe you’re happy in your current job and don’t want to change. Obviously, there are other factors that need to be considered aside from simply how much money you can make.
For those who can’t get paid more for the work that they’re already doing or don’t want to change jobs, starting a side hustle is another great option.
There are all kinds of different side hustles that allow you to make money outside of a job. You can find something that interests you and fits with your schedule.
6. Minimize Lifestyle Creep
Lifestyle creep is when your living expenses increase along with your income.
The goal of increasing your income (if you want to be independently wealthy) is to allow you to save more money and grow your net worth faster.
If you spend that extra money that you make, it won’t have any positive impact on your long-term financial goals.
A small amount of lifestyle creep is normal and could be expected. For example, most first-time homebuyers purchase a condo or townhouse because they tend to be the most affordable options.
Later on, you may be able to upgrade to a single-family house that costs more money to purchase and maintain.
Likewise, as your income increases, you may spend more money in other areas, like vacations.
You don’t need to completely avoid lifestyle creep and live on the same budget forever, but you want to be sure that your expenses are rising much slower than your income is rising.
Limiting lifestyle creep will give you the best chance of reaching your long-term goals.
Final Thoughts On Independent Wealth
By following these steps for the long term, it’s possible to become independently wealthy and gain significant freedom over money.
It’s not easy and it will take some sacrifices, but it is achievable.
If this is something that you want to accomplish, commit to it and put the plan in motion as soon as possible. The earlier you start, the better your chances will be for reaching your goals.