Many Canadians are rethinking their priorities and adopting a frugal lifestyle to retire quickly and achieve financial independence.
For many, financial independence isn’t about money. Having more wealth means having more time to do the things you love.
By earning your own money and not relying on employment, you can escape the 9-to-5 treadmill and live a more fulfilling life.
What is financial independence?
Financial independence (or findependence) means having enough passive income to cover your living expenses so you don’t have to work.
People who attain financial independence often continue to earn money but don’t have to work to support their lifestyle and pay their bills.
Many achieve financial stability through saving money and investing, while others generate sustainable income streams.
You can reach financial independence at any age. For some, this can happen in their 30s or 40s, while others might have to wait until retirement age.
Types of financial independence
Financial independence can mean different things to different people.
If you are in debt, you may feel uncertain about your financial future, and getting your finances in shape might take some time and effort. On the other hand, you may be close to reaching your financial goals if you’re near retirement.
Here are the different ways you can be financially independent.
Financial independence from parents
You are financially independent if you move out of the family home and no longer rely on financial support from your parents.
Adult children can retain this independence from their parents by learning how to budget, embracing a frugal lifestyle and growing their income over time.
Financial independence from work
Most people think of financial independence as supporting themselves without income from their full-time job.
To ensure that you don’t have to keep working, you need enough income to cover your living expenses for the remainder of your life.
There are many ways to do this; there is no magic formula. Remember that it’s not a race.
Financial Independence, Retire Early (FIRE)
Financial Independence, Retire Early (FIRE) is a lifestyle movement focused on achieving financial freedom through aggressively paying down debt, saving and investing. The goal is to quit your job and retire early, with enough income to cover all your expenses.
With FIRE, you live off your savings and investments. By multiplying your annual expenses by 25, you will get a rough idea of how much money you will need.
Once you know your target savings amount, you can work on increasing your income and reducing expenses to reach your goal faster.
The FIRE movement emerged from the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez, which argues that people should think about how many hours of work they need to put in to cover their expenses.
FIRE is not a get-rich-quick scheme and requires planning and discipline. It typically involves living frugally and saving up to 70% of your income to achieve a long-term financial goal.
After retirement, FIRE participants make small withdrawals from their savings, usually around 3% to 4% of the balance annually, to fund their living expenses.
In addition to the traditional concept, there have been several adaptations of FIRE:
- Lean FIRE: Living a minimalist life on an extremely tight budget.
- Fat FIRE: Saving more money so you can live a higher standard of living when you retire.
- Barista FIRE: Saving enough money to quit your full-time job and use part-time work to supplement your income.
- Coast FIRE: Similar to Barista FIRE, but involves investing early and letting compound interest boost your retirement fund. This method enables you to work less and coast to financial independence.
How to become financially independent
There are many ways to become financially independent. Here are some strategies that can help you generate wealth and achieve financial independence:
Set future goals
Discuss your goals with your partner, family, or friends. Consider what you need and want in life, and estimate the cost of achieving your goals. It’s essential to include future old age care in your plans.
Financial independence may seem out of reach if you constantly worry about your next paycheque. However, you can take control of your finances by devising a plan to pay off credit cards and other high-interest debts.
Whether that means seeking debt relief, earning extra income through a side hustle, or reducing expenses, paying off debt should be your top priority.
Increase your income
Consider ways to increase your monthly income. Are there adequate opportunities for advancement at work, or do you need to consider moving on? Would working part-time alongside your day job help you achieve your goals?
You may also want to create an additional income stream through a rental property or running a business on the side. Keep looking for ways to generate a passive income that will cover your monthly cost of living.
Reduce your expenses
To achieve financial independence, you must reduce your outgoings and maintain a strict monthly budget.
Use a personal finance app like Mint or YNAB to see where you spend your money. Look for ways to reduce your bills, avoid wasting food and spend as little as possible to achieve a high savings rate.
Many people striving for financial independence put away up to 70% of their income, which can involve a lot of sacrifice and struggle.
This can mean drastically reducing your spending and turning down nights out with friends, invitations to parties and other gatherings.
It’s a good idea to pay yourself first. This way, you allocate a proportion of your paycheque to your savings before paying your bills and force yourself to make savings elsewhere.
Invest in income-generating assets
Invest in assets that will increase in value or generate income over time. Learn how to invest in the stock market and use investment accounts.
You can reach financial independence faster when you use retirement accounts that offer tax breaks, such as an RRSP or TFSA.
By making deposits into an RRSP, you can lower your income tax bracket or even receive a tax credit. A TFSA doesn’t offer tax breaks on deposits, but withdrawals are not taxed, making it an attractive option for low-income Canadians.
Both accounts let you grow your money through qualified investments such as stocks, bonds, options, mutual funds, ETFs, savings deposits, and GICs.
Investing in real estate can be a wise decision, as the value of your property is likely to appreciate over time.
No matter where you start, the path to financial independence is attainable.
But don’t forget to enjoy today while you work towards financial independence. Find a balance between spending and saving so that you can achieve the freedom to choose your lifestyle.
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