Financial independece! Sounds great, doesn’t it?
So how does one become financially independent? There are a number of ways, but the easiest onces a unfortunatly not awailable to all. These are some examples.
- Born rich, inherit money/assets, trust funds
- Win in the lottery
- Saving up
- Build passive income
So if you are not in the first or second category, you will need to work to obtain financial independence. The most common method is to save agressively – more than 50% of your income – and invest the money. You must continue to do this until you earn enough to live from the profits you make on the investments.
Financial independence is the status of having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent.
Wikipedia
Saving up – how much do you need to be financially independent?
Well – as always – that depends. First of all it depends on how much you need and that depends on cost of living where you live. Are you willing to move to a cheaper location? What level of living do you aim for? Many people in the FIRE movement choose to live minimally in a Tiny House to keep living costs at a minimum.
The savings necessary also depends on the profits you are able to gain form your investsments. If you calculate that you can get a 9% yearly return from you investments, then you should probably see if you can live from only 6-7%. If not, then you need to reduce your living costs or do some more saving up.
What is passive income?, why do you want it and how to generate it.
Passive income is any income that are not directly tied to your own labour hour by hour. While receiving money from parents/state/trust fonds etc. are also passive income, it does not make you financially independent.
So generating passive income will require some initial or periodic work, but you will also earn money while not working.
Passive income has been a relatively loosely used term in recent years. Colloquially, it’s been used to define money being earned regularly with little or no effort on the part of the person receiving it. Popular types of passive income include real estate, peer-to-peer (P2P) lending and dividend stocks.
Investopedia
Why you want passive income
Passive income is what you need to live from if you do not have a salary and the goal is that the foundation of the passive income is big enough to generate what you need for the rest of you life.
Financial independence is not very interesting in itself. It is more the options it gives you that are alluring. With financial freedom you can choose to do almost what you want with your time as long as you dont spend more money than you have planned. Some will continue to work, but always with the option to leave at any time. Others work parttime or freelance and others chose to work only with volunteer work (community, charity etc). But basically – financial independence gives you freedom.
Some people aim to have sufficient to live only on the profits, which mean that they ultimately will leave their savings to their inheritors (requires larger savings). Other people try to time things, so the will have used the majority of their savings when they die (require less savings).
Some sources of passive income
- Profits from investments
- Royalties from music, photos etc.
- Owning a company
- Owning a popular page/channel on the web
(income from ads, sponsors) - Rent from owning real estate
As you can see, most of these sources does not come free. You will need to work substancially to generate the intial wealth and not spending it but saving it for investments.