PJS #005: 4 Steps to Financial Independence
Updated: Oct 24
In today’s issue of Profit & Joy Simplified, I'll share how I would set up a strategy to achieve financial independence ("FI") if I were just starting on that journey.
Creating financial independence is a key to unlocking more options for your life. And more options can mean more joy & space.
Money can't buy happiness, but it can buy financial independence.
Unfortunately, most people fail to achieve financial independence because they never even create a plan.
They simply go through life working hard every day without ever considering a long-term financial plan. And then retire.
You need a strategy to achieve financial independence.
If you create a FI strategy & follow through with it, there's no reason you can't achieve it.
Great news: A strategy to achieve financial independence is actually simpler than you’d think.
What is Financial Independence?
NerdWallet defines FI as “having enough passive income to pay all your living expenses. Most people who seek out this lifestyle don’t want to rely on being employed or dependent on others.”
Benefits of Financial Independence
Financial independence is about having options.
Yes, you can retire early, but you don’t have to.
When you've achieved FI, you can choose to continue to work because you want to, not because you have to. (That's where I am & it's fun to love your business so much that you choose to keep going!)
💡Once you adopt FI as a goal, start thinking about your future and what’s most important to you. Everything has a cost - now or later.
Rather than just working and spending money, plan for the lifestyle you’ll want and how much money you’ll need to support it.
The benefit of planning for your future coupled with intentional spending and saving is valuable whether you decide to retire early or not.
How to determine how much money you'll need for financial independence varies by person. I'll create a future newsletter issue to cover that.
4 Simple Steps to Becoming Financially Independent
While there are many methods to achieve financial independence, let’s keep it simple & follow the formula JL Collins gives in his famous “The Simple Path to Wealth” book:
Step 1: Spend less than you earn
The first key seems obvious, but the average American (55%) carries a credit card balance from month to month. Credit cards, car loans, student loans and mortgages are all relatively easy to come by…but can entice us to spend more than we earn.
So step 1 is to look at our spending habits and find areas to cut back. Some people cut way back and live very frugally to achieve financial independence while others just cut back some.
This is a choice about your present and future circumstances. For us, we had several years while raising kids that we couldn’t/didn’t save a lot extra, but we did spend less than we earned. Could we have reached FI earlier had we cut way back? Yes. But we still achieved FI in our early 50s.
You make the decision for yourself. Life is meant to be cherished now & later.
💡Review your credit card & bank statement to see where your money is going. Mint is a great free budget tracker (and there are several others) that can track your spending by category,
Once you see where you could cut back, do it now. Read back through those FI benefits & get motivated to make today changes to benefit your tomorrow.
💡Another option is to earn more. There is not a better time than now to pick up a side hustle. Could you create a course? Teach a skill? Even drive Uber?
The average millionaire has seven streams of income. How many do you have? My digital courses can make money for me over & over again.
Step 2: Invest the surplus
I am not a financial advisor so this is not investment advice. But my husband and I do read a lot about FI (and FI/RE) - especially my husband, Paul. We invested in some stocks in the past. But you know what we have discovered? We don’t have to do all that research and stress about which stocks to invest in.
Over time, the market goes up (check the history) so investing in mutual funds tied to the overall market is the way we have gone - and what JL Collins recommends.
It feels too simple, right? But statistically, it’s actually the smartest way to invest that surplus you now have because you implemented step 1.
JL Collins encourages a mix between:
Total stock market index fund
Total bond market index fund
Rather than stress about the ups and downs of the market, invest that surplus and leave it alone. It’s like a crockpot meal - invest the money & let it do its thing.
Your investment strategy needs to take into consideration what stage of investing you’re in (accumulation or preservation), your risk tolerance, and your investment timeframe. JL Collins's strategy might not be the right one for you.
What you don't need is to make this complicated. Analysis paralysis means you won't invest.
Step 3: Avoid debt
Debt sucks because it takes money away from what you can spend now to pay for something you got awhile ago.
So avoid adding debt.
If you have debt (and most of us do), here’s JL Collins’s advice on paying it off based on the interest rate you owe on it:
< 3%, pay it off slowly & invest the surplus
3%-5%, do whatever feels best to you
> 5%, use the surplus to pay off the debt first
Will doing this actually make me financially independent?
It depends…on how you define financial independence.
Let's just say you wondered if you could become a millionaire. Had you invested $18,000 in January 1982 in the S&P 500 index fund and done nothing else, it would be worth $1,392,307 in January 2022. Wowza.
What if you didn’t have that $18,000 to invest in one chunk but instead invested $150 per month over those same 40 years? It would be worth $973,979! If you really want that $1 million, make it $165 a month & you'd have $1,071,377.
How’s that for a simple investment strategy?!
I know you’re thinking about how up the market was in 2021. Me too. But you get similar returns on most 40-year periods. (Check it out using a free S&P 500 return calculator).
If your calculation of what it costs for you to be financially independent is a principal of $1 million, you basically got there with this simple investment.
Could you find $165 extra a month to begin investing? Or more?
Now think about what you could do to create the surplus to begin investing.
Step 4: Increase profit to increase investing surplus
What does all this financial independence talk have to do with my business?
Once you see the benefits of financial independence, it becomes motivating to create & execute a strategy to use your business as a tool to also create FI for yourself.
An increase in profit can be a surplus that you can invest.
What if your business could help you achieve FI?
Financial independence is possible and it is easier to achieve than you thought.
Spend less than you earn
Invest the surplus
Increase profit to increase surplus
Use your business as a tool to help you achieve your financial independence & vision of success.
And achieving your vision of success is what you really want, right?
What questions do you have? We've made mistakes and we still got there. You can too.
What excites you most about this? Reply & let me know. I read every one & reply. I love to hear from you.
See ya again next week!
P.S. Whenever you're ready, there are 3 ways I can help you
1. Get help building a cash flow forecast or understanding the levers affecting your profit here.
2. Want to chat about how I can help you achieve your vision of success? Schedule a call to see if we'd be a good fit to work together.
3. I post on LinkedIn every weekday at 7:15a CST. I'd love to connect. Find me here!