FINANCIAL
INDEPENDENCE

Financial independence and financial freedom mean different things to different people. It can mean the ability to deal with short-term emergencies, or it can mean early retirement with no need to work ever again. This guide helps you answer the question: how do you achieve financial independence?

---

Developing a plan to achieve greater financial security involves addressing some relatively straightforward questions about your overall investing aims, while being realistic about your current financial situation and risk tolerance. Once a plan has been developed, many of the following steps should naturally fall into place.

Setting Financial Goals

Everyone will have different opinions about what financial independence looks like to them as an individual, but establishing personal aims is the best place to start planning for financial freedom.

It’s important to also build in some tolerance regarding your targets, but without clear goals, it’s difficult to measure progress and adjust your strategy along the way.

Early retirement is a common investment goal that many new and experienced investors share. Others have shorter term aims, including the ability to alleviate pressure from their current financial situation. Some investors are looking to engage in personal development, perhaps through a career break or retraining facilitated by increased financial independence.

Review Your Financial Health

It’s important to consider your starting position and ensure that you build your investment plan on a solid foundation. Minimising debt should be a priority before investing.

There is limited benefit to earning an 8% annual return on your investments if an outstanding loan charges 10% per annum.

Maintaining an emergency fund is also important. Holding back some cash reserves can protect returns on longer-term investments, as it lowers the risk of becoming a forced seller at a time when market prices are low.

Start Investing

Once you’re ready to start investing for financial freedom, the date by which you want to achieve your target will determine what kind of assets you want to invest in.

For example, high volatility assets, which are known for extreme short-term price moves, are widely considered a better fit for those with longer investment time horizons, as these investors are more likely able to ride out short-term price volatility.

If you’re still deciding exactly what financial independence looks like to you, it’s perhaps also worth considering the other reasons for investing, such as the potential for lessening the impact of inflation or creating a passive income.

Growing your wealth and potentially achieving financial freedom requires discipline and patience, but investing doesn’t have to be complicated. Learning the key investing terms is a great place to start, if you want to best position yourself for success.

Setting Investment Budgets

Investing requires discipline, because putting money aside in the hope of growing your wealth in the future involves an element of sacrifice. There are tried-and-tested techniques that can help you to embrace that aspect of the investment process.

For example, the 70/30 method is a technique that involves spending 70% of earnings and investing the remaining 30%. 

Alternatively, the 50/30/20 plan splits net income three ways: 50% goes on essential spending, 30% on luxuries — or “wants” — and 20% is saved and invested.

Investing in lower risk assets that are less likely to fall in value or make significant returns could be a good option for investors reluctant to forego spending today.

Investing for Early Retirement

Investment aims are unique to each individual, but once you’ve come up with a roadmap to financial independence, you’ll likely find that others are in a similar situation.

It is, therefore, possible to benefit from the experience of others, perhaps through copy trading, which involves following the ideas and decisions of another trader.

Alternatively, for those interested in saving heavily with the intention of retiring early, studying the Financial Independence Retire Early (FIRE) program will grant you access to the ideas of like-minded people.

Final Thoughts

Achieving financial independence and securing a comfortable lifestyle requires more than just a steady income. After giving some thought to the planning stage of your investment program, your assets then need time to grow.

This is why new investors are commonly advised to start investing as early as they can.

Visit the eToro Academy to learn about ways to achieve financial freedom.

Quiz

FAQs

What types of assets can I invest in?

There are a range of assets available to invest in, including stocks, bonds, ETFs, commodities and cryptoassets. The convenience, variety, liquidity and cost-effective nature of the financial markets make them an obvious choice for investors. Alternatively, you could consider investing in different markets, such as property assets.

What is asset allocation?

Asset allocation is the process of deciding how much capital is to be invested in different financial instruments. You can adjust your asset allocation, rebalancing your portfolio, in response to changes in market conditions or your investment aims. 

How can investing accelerate financial independence?

Investing can help you develop a valuable capital resource which you can draw on to fund your lifestyle aims – it might be that you want to retire early, or are planning to take a career break. Remember there is benefit in developing an investment plan which includes a degree of flexibility, so that it can be adapted to suit unexpected changes to your personal circumstances.

How do I balance spending and saving when aiming for financial independence?

Carry out an appraisal of your income and expenditure and establish what is a realistic amount you could afford to allocate to investing. Consider how your situation might change in the medium and long-term, and maintain a cash emergency fund you can draw on if needed rather than being forced to liquidate investments at a time when they may be undervalued.

How long does it take to be financially independent?

The term “financial independence” means different things to different people so the time it takes to achieve will depend on personal circumstances. Achieving your goal can be aided by setting out interim targets which can be treated as “milestones”. As you reach them along the way they will offer guidance on how your investment program is working out.