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How to become financially independent
Our opinions are our own. Retirement has a synonym: financial independence. You can work if you want to, sure.
Compound interest is a hell of a drug. Test it out: your financial independence calculator Eventually, numbers come into the money conversation. Put in your numbers as they are right now and calculate your age to retirement.
What is financial independence? The average retirement age is 61, according to the consulting firm Gallup.
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They may also be physically or mentally unable to work. Those who have a goal of financial independence tend to want to achieve it earlier — financial independence goes hand in hand with early retirementand makes up the first half of the increasingly famous FIRE acronym: financially independent, retire early. In most cases, those expenses are covered by investment income, frequently referred to as passive income.
Cut your spending way down Not everyone on the path to financial independence pinches every penny, but those who do tend to reach their destination faster. In general, the earlier you want to retire, the more frugal you need to be today.
Remember that the ultimate goal is to pay for your living costs without having to work; the higher those costs ways to gain financial independence, the bigger your pot of money needs to be.
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- The Bottom Line Achieving financial freedom is a goal for many people.
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- The financial independence, retire early FIRE movement has grown in popularity as more people seek a way to escape the rate race well before normal retirement age.
Every extra expense pushes your financial independence date further away. To put away that much of your income, you need to shave your expenses down to the bare minimum. Skipping the daily coffee is a drop in this bucket. Though your specific spending decisions will be based on your values, financial independence calls for drastic measures: Living well below your means when it comes to your home, your car, and your lifestyle and entertainment expenditures.
It goes without saying that debt is a dirty word.
Set yourself on the right financial path
If that sounds like too much of a squeeze, you can focus on the other half of the equation: earning more. Some people achieve the high savings rate needed for financial independence not by reducing their spending, but by increasing their income, often through side hustles. NerdWallet makes managing your finances easy. Keep track of your spending, credit score, and even find fresh ways to save. Sign up — binary options robot program free 2.
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There ways to gain financial independence a couple of rules of thumb early retirees and financial independencers turn to to figure out how much money they need to achieve those goals. This would, in effect, double as your financial independence number. To land on your planned annual spending, look at your current slimmed-down budget and see if you can project those numbers forward.
Many people seeking financial independence plan to cut that budget down even further in retirement, by paying off a mortgage or moving to a rental, for instance. But you should also be realistic about any expenses that might go up. The key here is twofold: factoring taxes into your planning, and using the most appropriate tax-advantaged accounts available to you.
In fact, Uncle Sam gets no cut when you pull your contributions back out, and you can do that at any time, at any age. Very important: Unlike your contributions, the investment earnings in your Roth IRA are subject to that hurdle.
You can read all the Roth IRA rules here. Those accounts often come with company matching dollars, which quickly add some extra heft to your balance.
What is financial independence?
You might also want to invest some money in a brokerage accountwhich offers no real tax perks but allows you to pull money out at any time, for any reason.
You still need income to fund your expenses, and that money is most likely going to come from the investments you choose inside the aforementioned accounts. Keep in mind that while you may be aiming to achieve financial independence at an age that is earlier than the typical retirement age, you still need to invest with a long time horizon in mind.