Congratulations!

You’ve reached the beginning of what is arguably the most interesting and rewarding tier of financial maturity: Independence. In this tier, you are now firmly focused on reaching some version of “Financial Independence.” You have the expertise to manage your day to day finances, you have the security of a solid emergency fund, you have wiped out your high and medium-interest debt, and you have taken solid steps to save for your long-term future.

However, you are not financially independent yet. Specifically, you do not have the passive income and savings available to support yourself for the rest of your life. You still need to trade your time in order to earn income. Additionally, you still need to invest a portion of your income in a way that will allow you to earn future passive income (e.g. by owning a rental property, selling an online course etc.), or, investing some of your income so you can eventually draw down those savings directly (e.g. by selling stocks you purchased, taking cash out of accounts etc.).

Finding Your ‘Whys’ and Your ‘Whats’

Before you dive into trying to reach “Financial Independence,” take a moment to reflect. For example:

Why are you pursuing financial independence?

• Do you want to have the time to travel, learn a new skill, or spend time on a hobby or other passion?
  

  Research has shown that visualizing your goals can actually help you to achieve them.

• Do you want to leave your existing job and pursue something that may be less lucrative but more in line with your interests?
• Do you want to continue in your existing job but use your secondary passive income to support a family member or close friend?
• If you’re looking to retire early is it so you can pursue interests that may be harder to do when you’ve reached typical retirement age (e.g. adventure travel etc.)?

What will you do when you reach financial independence?

• What will a typical day look like when you have reached financial independence?
• Will you do more of things you already love doing or will you completely reinvent yourself and your lifestyle?
• Will your lifestyle cost a similar, greater, or lesser amount compared to your existing lifestyle?
• Do you define financial independence as never having to work at all or does it just mean being able to drastically reduce your work or change the type of work you do?

How will you manage common situations in financial independence?

• Do you want to be completely debt free or will you be comfortable with low-interest debt so long as you have reliable income to pay it?
• Will you need to acquire health insurance on your own and will it meet your needs at a reasonable cost?
• Will you need or be able to get loans for large purchases based on the type of income you have?

Finding Your Balance

Once you have a clear idea of why financial independence is important to you and have a good idea of what your life will be like when you reach that stage, you can begin to think about what sacrifices you are willing to make now, so you can achieve your financial independence dreams later. For example:

• Expenses: How much would you be willing/able to reduce your expenses now in order to invest in your future? What types of expenses might be possible to reduce? Consider the flexibility you have or don’t have with categories like dining out, entertainment, travel, transportation, home mortgage or rental costs. And don’t forget about one time expenses like home remodels and upgrades. Obviously there is going to be a floor on the amount you can reduce your expenses so you need to be realistic about what works for you.
• Income: What can you do to earn more income and will it involve substantial sacrifice or will it be in something you already love doing? Will you try to get promoted or change jobs primarily so you can earn more money (whether or not you’re excited about the new role) and invest it in your future? Will you be willing to work nights and weekends or have additional irregular “gig” work?

Crunching Your Numbers

Finding your ‘Whys’, ‘Whats’, and ‘Balance’ are great mental exercises. But if you want to go beyond dreaming, you have to develop a willingness to crunch your numbers to truly understand what it will take to get where you want to go.

This isn’t a once and done exercise. If we assume it’s going to take you more than a year or two to reach financial independence, it’s likely that your goals may shift or you may discover new and interesting ways of reaching these goals. The possibilities are endless and they will be specific to you. But it may be helpful to crunch some numbers by creating different scenarios with alterations to these categories:

• Timing: When do you want to reach financial independence?
• Income: What are your different possible sources of income and will it all be passive income or a mix of passive and actively earned?
• Expenses: Where are the greatest areas of flexibility within your expenses?
• Investment Growth: How has your investment performance (in stocks or index funds, real estate, a side business you’ve started), changed your outlook for any of the other three categories mentioned above?

Significant changes to any one of these categories can have major implications for the others. And this is why cultivating a willingness to play around with the numbers based on different scenarios can be so helpful. When you’re ready, review the content in the “Long-term Savings” category (logged in users only) of this tier to see some precise methods for crunching your numbers.

Summary

Reaching financial independence is the overarching goal of this tier of financial maturity. Additionally you’ll also get the chance to consider your emergency fund one last time, what makes sense for you when it comes to paying off low-interest debt, additional insurance you may need, and protecting your assets through vehicles like wills and trusts.