Articles, FIRE, Retirement

How to Become Financially Independent

Written By: Rick Orford
Reviewed by: Mike Reyes
Last Updated October 5, 2023

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a couple who just became financially independent

Congratulations! You’ve made the most critical step in the process- finding how to become financially independent. In my book, I explain how I made several money mistakes over and over before finally deciding that enough is enough. To be sure, achieving financial independence has to be a priority if you want to be successful.

This article outlines a 3-step path towards achieving financial freedom, or independence. I use the terms interchangeably.

What Is Financial Independence?

Before getting into the “steps to become financially independent”, start by determining the why. So let’s break this down.

Ask yourself: Hey, it’s June 15, 2024, what do you want in life?

No, it’s not a million, or ten million dollars. The dollar amount is what you’ll need to get to have what you want and do what you want. And it will be different for everyone.

In my best-selling book, The Financially Independent Millennial, I define it as follows: Financial independence means having more PASSIVE INCOME than you have monthly expenses. 

It’s essential to know the distinction between passive income and active income. Active income is earned from the occupation in which you are “actively involved.”

For example, if you go to work every day, your income is considered “Active.” Unfortunately, you are limited with how much you can make with active income, as there are only “so many hours in the day.”

Passive income is the income you earn without being actively involved. It goes without saying, becoming financially independent requires that you have a passive income! 

Examples of passive income include:

  • Pension income, dividends
  • Bonds
  • Rental income
  • Royalties
  • Interest from CD’s/GIC’s, etc.

To become financially independent, you must have more passive income than expenses.

3 Steps To Financial Independence

One of the ideas I often had was, “if only I won the lottery.” Or, “if only I made more money” then I could someday free myself of a day-to-day job.

Unfortunately, the “if only” idea just doesn’t work without action. Surely, if there were a magic ball that would tell me the next week’s lotto numbers, it might make things easy.

The fact is, I’m here to tell you that it isn’t so. You see, you don’t need to win the lottery or get a raise to become financially independent.

Yes, it would certainly help, but unless you know how to build a monthly surplus, and maintain it, there’s no way you can ever achieve financial independence.

man writing on glass board

So if winning the lottery or getting a raise isn’t the key, then what is? Simple! Reduce your monthly expenses, and start building a monthly surplus.

Sound easy? It is! But, habit is hard to change. Luckily, money is its motivator. For example, when you have more money month after month frees your mind to think about more important things, rather than what needs to get paid.

Choosing to become financially independent and follow this course is the first step in achieving the life you always wanted to live.

Read on to discover the essential points to achieving financial freedom. Examples of topics will be cash flow management, debt reduction strategies, what to do with extra money, and knowing (roughly) how much you’ll need to become financially independent.

The very first step, however, has already been done. You got this far. Then, the next step is to introduce yourself in our private, members-only Facebook Group. In the group, you can discuss what you are learning, ask questions, and learn more from each other’s perspectives.

Step 1: Cut The Costs

Let me tell you a SECRET (but seriously, don’t tell anyone). There are a few ways to achieve financial independence. Becoming financially independent isn’t about earning more money. It’s about spending less. 

So how does one get on top of my financial house? Simple, it starts with simply knowing your monthly surplus.

But how? The easiest way to find out your monthly surplus is to have a look at your income and expenses for the last 2-3 months on paper. Or better yet, by putting it all on a spreadsheet. Categorize your expenses. Include any/all income.

Sounds like a lot of work? No, I did most of the word and a pre-filled spreadsheet for you. You can download my example budget spreadsheet here and follow along.

As you can see, I pre-filled two months of Income & Expenses.

Now it’s your turn to download your income + expenses from your online banking and put them all here in the spreadsheet.

Cost Cutting Tip

If you use a credit card, do not include the credit card debt, or the payments TO the credit card. Instead, set up categories for the credit cards as makes sense to you.

For instance, if you paid $480 in minimum payments from your checking account to your credit card, don’t count these $480 of minimum payments in your expenses. Instead, add up each category of costs (get these from online banking) on your credit card and insert them into the spreadsheet.

So if you spent $300 on clothes and $180 on restaurants – those are the figures you’ll use. Interest charges are also an expense.

Do this for the past two to three complete months—ideally 3. And, by the end, you will start to see a pattern.

At the bottom of the spreadsheet, you will find your surplus. As I said earlier, this is the most critical part of this lesson. Know your surplus.

Identify Areas to Cut Expenses For Achieving Financial Independence

The next step is to figure out how to increase your surplus. If you have a deficit, you’ll want to work to turn it into a surplus ASAP. While your instinct might be that you have to get a better job (i.e., a higher-paying one) or work more, the simple fact is:

“It doesn’t matter if you make $50,000 or $150,000 a year. You’ll never get ahead unless you spend less than you make.”

Rick Orford

It’s kind of like the old chicken and egg story. But how do you start? First, you need to be cutting the budget. Oh, yes, this is going to be fun. Keep telling yourself that, and it will!

You have to cut the budget. Cutting the budget is needed to generate extra money at the end of every month. For every dollar spent on a subscription, or something you don’t need, that’s a dollar that doesn’t used for something better.

A few ways budget cutbacks can get used:

  • Pay down debt 
  • Increase or create an emergency fund
  • Set aside for a large purchase, or 
  • Invest (with an investment professional).

Eventually, the last two will be your monthly goals. But how?

Where To Cut Costs

Now that you have a spreadsheet with at least two months’ expenses detailed, we need to look at where we can cut out some costs.

Society is generally quite knowledgeable about how much and when their income arrives, but rarely devotes more than a fraction of that time to focusing on their expenses!

Cash Flow Plan
INCOME (Monthly)    
Working Salary (Fixed)$5,618.09$5,618.09$5,618.09$5,618.09
Rentals Income (Duplex)$1,300.00$1,300.00$1,300.00$1,300.00
TOTAL INCOME$6,918.09$6,918.09$6,918.09$6,918.09
EXPENSES (Fixed Monthly)    
Rent / Insurance$1,750.00$1,750.00$1,750.00$1,750.00
Mortgage for Duplex, Taxes$604.82$604.82$604.82$604.82
Electricity – Primary Residence$105.00$104.51$104.51$104.51
Cell Phone$90.00$88.35$88.35$88.35
Cable TV & Internet$150.00$144.39$144.39$144.39
Credit Card A+B+C$220.00$220.00$220.00$220.00
Car Expenses$330.00$330.00$330.00$330.00
Student Loan$475.81$475.81$475.81$475.81
TOTAL EXPENSES$5,825.63$7,844.93$7,067.52$7,248.76
Surplus (Deficit)$ 1,092.46$ (926.84)$ (149.43)$ (330.67)

In this example, the first column is your TARGET (your goal). In addition, you’ll find the monthly columns that indicate what got spent. In this example, the goal is to achieve $1,092.46/mo ($12149.52/yr) in surplus income. 

Next, start filling in the past three months of income and expenses. 

As you can see, in December and January, there was no surplus. The example person spent $886.84 MORE in December than they earned. If this is like you, don’t worry, it’s not an uncommon issue and is generally easily fixed.

Determine your Needs and Wants

The first thing you need to think about when cutting expenses is to determine your needs and wants.

Needs are things like food, rent/mortgage, and utilities (like Electricity).

Wants are all the things that make us feel like we’re keeping up with the jones, for example, fancy restaurants, clothing, expensive holidays, etc. To be sure, wants are what I call financial independence killers!

Strategies For Cutting Expenses

My favorite way to start an expense-cutting campaign is to make it into a game. Patience is key – it’s something that will take time to get right. First, start slow and work out the easy categories first. 

Start with Shopping and Restaurants. 

Then, set a goal of cutting these categories’ worst month by 50%. For instance, in the above cash flow example, the person spent nearly $1,500 in December on restaurants. Consider setting a goal to cut that in half (I.e., $750/mo). And then, think about ways you might be successful in doing so. E.g., could you bring food to work (For lunch) or make your coffee at home, and bring it with you outside?

For the shopping category, ask yourself the next time you consider buying X or Y the following questions: “Do I REALLY need this” and “Can I live without it”? 

To Become Financially Independent, Do I Need To Pay All Debt?

Debt reduction is the natural next step to achieving financial independence. Certainly, generating a healthy surplus is essential to eliminating monthly debt payments. Also, the surplus will be the key if you need help getting out of a debt spiral. Plus, the first step in debt reduction is to identify what is good debt vs. bad debt.

Good debt

Good debt is anything that has an asset attached and, ideally, has equity and can get sold. For example, good debt is a secured loan with a reasonable (non-predatory) interest rate. Loans that often match these criteria are mortgages and, to some degree, car loans. 

Many who are financially independent continue to use leverage and maintain good debt. For example, a smart investor might have a mortgage on a rental property and pay 4% interest to the bank. All while earning 10% from the rental income.

Speaking of mortgages – it’s always best to have it with an equal housing lender. An equal housing lender is regulated and it ensures that you aren’t subject to predatory terms.

Bad debt

Bad debt is a loan account that carries high-interest rates (i.e., over 15%) and is never good for one’s financial future. Indeed, bad debt is unsecured as it does not have any assets attached that you can sell. Credit cards, and student loans (due to their high, unsecured balances) often come to mind. They can seem like endless obstacles that can’t get overcome. Further, bad debt will undoubtedly play a role in preventing someone from becoming financially independent.

Having said that, there’s an exception to using unsecured debt. If you are buying an asset that holds value and can be sold, then, using a credit card or line of credit may be okay. In this case, you’ll need to pay attention to the interest rate.

For example, your situation might look a little like this:

 Total OwingMonthly PaymentMonths Remaining
Car Loan$17,000.00$472.0040
Credit Card A$4,000.00$40.00240
Credit Card B$5,000.00$50.00240
Credit Card C$6,000.00$60.00240
Student Debt$22,000.00$275.00120

When it comes to which debt to pay off first, experts have two schools of thought. Some believe it’s best to start with the loan/debt that has the highest interest rate. 

I believe starting by paying off the account with the lowest balance. Why? It becomes a quick win. And motivates you to pay off the next highest debt. Not only that, it builds confidence, and I think you’ll more than likely stick with the program. Why not give yourself a quick win? 

Don’t Forget The Surplus

Also, consider your monthly surplus target. The target surplus that you should have at the end of the month. The higher the number, the better. And, if you exceed the goal, consider that a win! If your monthly surplus target is $1,000 and you have $1,200 leftover, that’s fantastic! Over a year, consider setting a surplus target of 75% of your income. And by the end of the 2nd year, try for 50%. For instance, if your monthly household income is $7,000 – set a monthly surplus target of $3,500. It won’t be easy, so take it slow.

Improve Your Credit Score

house poor infographic about credit scores

By now, you’ll have reduced expenses, created a surplus, and started paying down debt. One thing you may be surprised to know is that your credit score will have likely improved, perhaps a little. It’s true! As long as you’re not late making your payments, and lowering your debt load, your score would have likely improved!

Why might this be important? Lenders look at your credit score as a risk factor when determining whether or not to grant you the loan in addition to setting your interest rate! In other words, a higher credit score will generally mean you pay less interest! Paying less interest means a higher monthly surplus!

Step 2: Increase Your Income

As you reduce debt payments, the next step is to increase income to generate a monthly surplus. At this stage, your surplus can continue to get used to pay down your high-interest/consumer debt. 

Get A New Job

Career prospects today are better than they (almost) ever have. Anyone who wants a job can get one. A nice benefit of this is that after a few years in your current position, you can likely move into a new / better / higher-paying role at either your current employer or elsewhere. 

Considering that unemployment is at a near all-time low, don’t hesitate to ask for a raise, or look for a better-paying job. 

Get A Side Hustle or Start A Small Business

Whether you make $50,000 or $150,000 a year doesn’t matter. You’ll never get ahead unless you’re spending less than you earn

Rick Orford

The above quote is one of my favorites, and I feel like I say it daily. After cutting expenses, there is no quicker and easier way to improve your monthly surplus than getting a side hustle

Starting a side hustle or small business is one of my all-time favorites to increase my monthly income. Also, it can make you the most money. 

For example, consider ridesharing, food delivery, teaching English online, becoming a local tour guide, or even just a simple part-time job! Getting a side hustle will help you increase your monthly income.

And, I believe just about anyone can do it. 

If you want to start something a little more serious, find a product or service that you can sell to others (People or businesses) on a consistent monthly basis. Make it subscription-based. For example, customers pay you a set amount every month (Automatic payments, i.e., via Paypal Subscriptions, are a favorite of mine). Then, in your business plan, make sure to consider how it might be scalable (I.e., what happens if you suddenly got 10x the customers, or 100x). 

Perhaps the product is a newsletter that gives the reader value on a particular topic. Or, maybe it’s a service like bookkeeping. Bookkeeping is hot in 2024! Whatever it is, keep your expenses low, watch your dollars, and make a goal of eventually making it a hands-free business, or do like I did and sell it for seven or even eight figures!

Create an Emergency Fund

The reason to have an emergency fund is to save money you can use if “worst came to worst.” For example, you might have lost your job or incurred significant and unexpected expenses. The emergency fund should take care of these unexpected expenses! The cash can be in a bank account, i.e. a savings account. But you can’t touch it unless there’s an emergency! 

Experts agree an emergency fund (sitting in a savings account) should contain six months of your needs expenses. Indeed, that means rent/loan payments/insurance, etc. It does not include discretionary categories such as eating out or “new jeans” because these would be cut regardless in an emergency. However, unexpected expenses can get paid from this fund.

Step 3: Invest Your Monthly Surplus

As you’ve already done a ton of work, this step will seem like a breeze. Once you’ve paid off your consumer debt, high-interest debt, and student loans, and created an emergency fund, now it’s time to put your money to work. You can start retirement planning!

Make it a habit to invest your monthly surplus money regardless of the current market conditions. Buy stocks, or save the down payment on a rental property, etc. 

Consider passive income opportunities, for example, dividends or rental income, and keep reinvesting that income + your monthly surplus. Through the power of compounding, your money will start to grow faster than a speeding bullet. Whatever you do, always invest with a licensed investment professional, and ideally from a wealth management firm.

Financial Independence Number

Your financial independence number is essential to retirement planning as you’ll need to know how much you’ll need to be “Financially Independent.” To be sure, your financial independence number equals your annual expenses (needs and wants) times 25. 

So if you say your monthly expenses are $4,500/mo, then the amount you need to be FI is $1,350,000. This money will need to get invested in a conservative portfolio of dividend-paying stocks, and a combination of short & long-term bonds. Then, the dividends become the passive income that you’ll live on, thus achieving financial freedom.

The 4% Rule

Need to know: The 4% Rule is the conservative withdrawal rate experts agree can be withdrawn from your investments in “retirement” without touching the principal.

How do you calculate it? To get your financial independence number, multiply your annual expenses (needs and wants) by 25.

For example, your minimum expenses look like this:

  • Mortgage/Rent/Insurance/Maintenance: $2000/mo 
  • Food/Restaurants/Shopping $1000/mo 
  • Car/Gas/Insurance: $600/mo 
  • Misc/Travel/Discretionary $400/mo

In this (albeit minimal) budget, you would add up the monthly expenses ($4000), and multiply by 12 to get the annual figure, and then 25.  Also, in this example, you can achieve financial independence with $1,200,000 invested.

This amount of money invested should generate enough income to sustain a 4% withdrawal rate.

Financial Independence FAQ

How Much Do I Need To Save To Become Financially Independent

If you want to retire at 65 or 67, and are in your 30’s – you can likely get away with saving & investing 10-15% of your income, and you’ll probably be ok. To reach financial independence and retire early, one needs about 15-20 years and save and invest up to 50% – 60% of your income. The range is vast as market conditions, age, salary, etc., all are different equation variables.

How much do you have to make a year to be financially independent?

You could become financially independent with a salary of $50,000 a year, or $150,000 a year. The key to becoming FI is to have a monthly surplus.

How can I be financially independent at 22?

To become financially independent at any age, you’ll need more passive income than expenses.

At what age should you be independent?

For most, you could achieve financial independence in 15-20 years. So, if you start at age 20, you could reach FIRE by 35.

Final Thoughts On Becoming Financially Independent

The path to financial independence is usually a slow and boring process. Getting rich quickly is not the norm. And I might even say, unless one learns the money skills needed to maintain a healthy retirement, getting rich quickly could lead to burning through the money just as fast.

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