The road to financial independence

I realized that I have written quite a few specific posts and tips for getting ahead but have yet to write about the big picture: Becoming financially independent. It is a long process that will not occur overnight. It takes discipline, determination, and focus to achieve.

Firstly, I want to define financial independence and what it means to me. I believe that financial independence is being able to live life doing what I want, when I want, and how I want without needing a full time job (salary). It is being able to live off of my savings (and earnings from those savings) to cover all of my expenses. This does not mean that I will not work it just means I don't have to work.

Secondly, everyone will define financial Independence differently. The basic idea is to be able to do what makes you happy without having to rely on another person or business for your livelihood. I personally want to travel the world and to do that I need passive income and cannot work full time (in one place). Becoming financially independent is the only way I can make that happen.

Their are many steps to becoming financially independent. I have summarized them here:

1. Pay off all debts and build emergency fund. I must attack each balance until they are all gone. I must also keep an emergency fund of at least 2 months living expenses so I don't fall back into the debt trap in the case of an unforeseen event.
2. Save, Save, Save! Once debts are gone I will channel the monthly income used to pay them into savings, investments, and business opportunities. In that order. I need to minimize tax liability and maximize returns on my savings and investments.
3. Re-balance and shift investments. Once I have saved a large portion of my goal I need to start moving out of growth and into income generating investments. At this point I will look at it as income replacement. I foresee this beginning around the $500,000 savings mark where I need to take less risk.
4. Achieving independence. I will be near my goal of $1,000,000 in net worth and begin the shift from saving to living off of the assets. I might work part time or run my own business to supplement income and unexpected expenses.

The above is very generalized and non-specific. This is the formula everyone should use to reach retirement (financial independence). There are lots of specifics that go along with each step which I will cover at some point on this blog. I have been focusing on step 1 thus far as I am in debt elimination mode and want to get to step 2 ASAP. Step 2 is the longest step in the process and the sooner you get there the longer your investments can grow. This also means you will need to save less in the long run as your savings will have more time to earn returns.

Everyone's road to financial independence is different. Life has a way of tripping up our financial well being but with good planning and an emergency fund we should be able to handle anything it throws at us. The top areas that must be focused on at all times are budgeting, saving, and self control. Without these we will be slaves to the paycheck for our entire lives. Do you still want to be working when you are 80?