The term “financial independence” has gained a lot of popularity lately. It’s been the focus of popular podcasts, blogs and now there’s even a new documentary about this life-altering movement.
In short, financial independence is the point at which someone has developed enough income from their assets that they don’t need to work in traditional employment anymore. With pensions and the promise of social security slowly fading away, people are deciding to take their future into their own hands and create the life they want to live today.
Investing for traditional retirement through an employer sponsored 401k or an IRA is an excellent way to secure your financial future in your 60’s and beyond. For those who are interested in creating more control and freedom in their younger years, here are some popular ways that have been adopted in the financial independence movement.
Real Estate Investing
Owning real estate as an investment has many advantages including tax benefits, appreciation and much more. This is a popular vehicle for individuals pursuing financial independence because investors are able to own a tangible asset that can provide a consistent income.
Investing in real estate can come in many forms including:
Buy-and-Hold Rental Properties
Purchasing a rental property, fixing it up and renting it to qualified tenants is an excellent way to set yourself up to receive monthly income that covers part or all of your annual expenses.
For example, let’s say Alexi’s annual expenses are $40,000. If Alexi wants to achieve financial independence, she’s going to need to generate enough after-tax income to cover what she spends each year. If she decides rental properties are the way to go and each rental provides her with $5,000 of after-tax profit, then she’ll need to own eight properties to become financially independent.
Real Estate Investment Trusts (REITs)
Perhaps Alexi doesn’t like the idea of physically owning and managing homes, but still wants to take advantage of the benefits of real estate. Real Estate Investment Trusts (REITs) can be another route for her to consider.
REITs are similar to mutual funds where a group of people can own small portions of an asset. In this case, the asset is in the form of real estate instead of stock or bonds. Like stocks, bonds and mutual funds, REITs can be purchased through an online broker or custodian.
Depending on market conditions, this option can provide a healthy return for Alexi’s financial independence plans.
Taxable Brokerage Account
Investing in the stock market has been a reliable way to build wealth for generations. Many people may already be used to this method if they’ve been investing in their 401k or IRA. When thinking about your financial independence plans, investing in a taxable brokerage account makes sense because you can access your funds earlier than the traditional retirement age.
Inside your taxable brokerage account, some investment options include:
An index fund is a mutual fund that allows you to buy into an entire market index like the S&P 500 or the Russell 2000. As these indices are updated based on the performance of the companies in the index, your investments are updated as well. This way, only the top performing companies are included in your index fund investment.
Another major benefit of index fund investing is that the fees (in the form of expense ratios) are extremely low in comparison to actively managed funds. Over time, high expense ratios can really eat away at your overall returns so keeping them low is a smart move.
Let’s say our friend Alexi likes the idea of individual stock investing as a part of her financial independence strategy. She wants to own a piece of her favorite company, Apple. Becoming a shareholder can also be done through a taxable brokerage account.
By owning shares of a well-established company like Apple, Alexi can grow her income outside of her day job through dividends. This periodic payment is truly passive as well. There’s little that Alexi has to do to earn this money besides being a shareholder.
Small Business Ownership
There’s no quicker way to gain your financial independence than by starting your own business. You immediately become in control of your time, the work that you do and how you design your day.
On the flip side, you’re also in charge of your business expenses, your benefits (including healthcare) and making sure you get paid. When you’re not an employee anymore, there’s no guaranteed paycheck
If you’re pursuing financial independence, it’s important to not “jump ship” from your employer until your business is proven and has a steady income stream. Alternatively, if your investments from real estate and/or stock market investing are supporting you enough to cover your annual expenses, then starting and growing the business you’ve always wanted will be a lot easier.
Here are a few popular small business routes when it comes to planning your financial independence:
Starting a business online can be a great way to dip your toes in the water of entrepreneurship. Depending on the route you choose, the startup costs can be quite low and the opportunity for growth can be very favorable
If you have extra hours during the week or weekends, you can take on contract work through companies and industries you like. Popular freelancing gigs include writing, graphic design, illustrating, social media coordinating and web development. Opportunities like these can offer the freedom of working remotely as well as a great income source to fund your financial independence plans.
Monetizing Your Passion
If you have a hobby that you love, your financial independence plans can get a boost if you figure out a way to get paid for it. You’re probably going to be doing that hobby anyway so you might as well make money too!
For example, our friend Alexi loves weddings. She enjoys helping her newly engaged friends pick venues, floral arrangements and even the food selections. Using her passion for weddings, Alexi can turn her hobby into a wedding planner side hustle. This entrepreneurial switch can help her to do work that she loves while earning more for her financial independence.
The extra money she earns can be invested in real estate, the stock market or simply into her small business. This steady growth and focus on paying herself first will help Alexi create the life she’s always wanted.
Every financial situation is different. It’s important to talk to a licensed financial advisor to help you find the best plan of action for your personal financial situation.
What do you think about financial independence? Please let us know in the comments below.
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