A Brief Guide to Financial Independence
My major financial goal is not to make more money just for the sake of making more money. My major financial goal is to achieve financial independence. The overall goal, on a lifetime scale, is to decide for myself how I use my time.
Money is not an end in itself. It is only a tool. But since money can meet most of our needs and wants, it is a more important tool than the others.
It is therefore essential to earn enough and to manage your money intelligently.
How do you earn your money today? And how would you earn more?
The traditional answer is “I work”. This is the method we have been taught since we were very young. It’s the one we most often come into contact with with our family and friends. It’s the one we see on TV.
It’s basically trading your time for money.
I say “crudely” because there are several elements that allow you to influence this transaction and to exchange little of your time for a lot of their money: the rarity of your offer, your expertise, …
But the principle is there: your time for money.
If you don’t give your time, if you are not physically present, you will not get any money back.
If you want to make more money, you can :
- Work longer: By working twice as long, you will earn twice as much;
- increase your hourly income: by being paid twice as much per hour, you will earn twice as much;
- do both: by cumulating the 2 previous scenarios, you will be paid 4 times more.
This is the usual scenario of what Anglo-Saxons call the “rat race”. To make a long story short, you have little or no control over the use of your time. And you remain trapped in this pattern to provide for yourself and your loved ones.
In itself, there is nothing wrong or bad. If you are happy like this and if it suits you, that’s fine.
However, you’ll agree that having more time for yourself, your loved ones and your favourite activities is still very pleasant.
If the “rat race” scenario suits you and gives you enough time to do what you want, that’s fine. But if you want to change that, you have 2 options.
The first option is to increase your hourly income. This way you can work less time to earn as much money. To keep the calculations simple, and using the previous examples, by being paid twice as much per hour, you can work half as long to get the same salary. Of course, you will progress step by step, increasing your hourly income by a few percentages.
This way, you have as much money as before, but also more time for your family, your hobbies and your passions.
Passive income and financial independence
The second option is to make your overall income independent of your time.
Even if you increase your hourly income, you are still operating on a time-share basis. What I am proposing here is to break this exchange, to no longer just exchange your time for money, and to have an income independent of your time.
This time-independent income is a passive income.
Passive income is income from an investment for which you do not need to be physically involved on a regular basis. It doesn’t matter whether or not you take care of that investment: it will still make money for you.
This is the opposite of traditional salaried work: you need to be physically present and give your time regularly. Otherwise, there is no salary and no income. Conversely, these investments no longer require your presence once they are in place: the rent for an apartment or a parking lot, stock dividends, royalties, company profits. These are good examples of passive income. Of course, you will have to spend some of your time maintaining them. But you’ll be a long way from 8 hours a day, 5 days a week, 46 weeks a year.
Increasing your passive income in this way allows you to be less dependent on your traditional salaried income and to eventually aim for financial independence.
Financial independence means having a set of passive income that is greater than your total expenses. Since the income from your various investments is greater than your living expenses, it leaves you with a surplus for your leisure activities, savings and future investments. Above all, it completely relieves you of the obligation to maintain an employed activity and a time-money exchange.
Becoming financially independent means being in control of the use of your time.
How to achieve financial independence
Putting it this way, it may sound ambitious. And it probably is a little ambitious. But it is by no means impossible. Others have done it without necessarily benefiting from extraordinary initial conditions. So there’s no reason why you shouldn’t do it. Or that I can’t do it myself 🙂
Moreover, you have to consider this as a long-term process and proceed step by step.
The whole process is relatively simple:
- to achieve a regular financial surplus (spending less than you earn);
- invest this financial surplus and build wealth.
The very first steps, those leading to a financial surplus, are easy. Might as well start quickly!
It’s not possible, with just one article, to detail how to achieve financial independence. That said, I can explain the overall process to you.
Drawing up a budget
The word “budget” is a rather unfriendly word. But without a budget, you will not be able to control your expenses or invest sustainably.
To achieve financial independence, you need to know your starting point:
- What are your sources of income?
- What are your expenses?
- What are your financial reserves?
The heart of the budget lies in the second question: your expenses. From there, you can :
- know whether you have a regular financial surplus;
- identify sources of decrease in your spending;
- draw up a budget and a plan to reduce your expenses.
Putting your personal finances in order
Even if you already have a regular financial surplus, you can do much better. And if you haven’t already, this is the step to do so.
Since the previous step, you’ve identified:
- the expenses you can cut;
- the expenses you can cut.
Do what you need to do. This may also allow you to free up a reasonable budget for truly rewarding “leisure and fun” expenses. Not like cigarettes, for example …
Creating a precautionary fund
This step does not allow for real progress towards financial independence. But it does allow, on the way, to be less dependent on the hazards and problems that may arise.
Moreover, it also allows you to get into the habit of saving regularly:
- first, you save to create and feed your precautionary fund;
- secondly, you can save to prepare your investments.
Invest, create and capitalize
Here we are! Once your expenses are under control, your budget is in place and your precautionary fund has been created, you can invest, create your assets and move towards financial independence.
This is really the heart of the process. But the previous steps are no less important to do this in a healthy and sustainable way.
There’s no shortage of investment methods, so I won’t say any more. The most classic methods are real estate, the stock market and setting up a business. I will say more in other articles.
Measuring your progress
Moving towards a goal is also about following your progress. To track your progress towards financial independence, you can track your financial independence ratio.
The financial independence ratio is very simple to calculate: it is a simple division!
Ratio = Monthly Passive Income / Monthly Expenses
Since you have set up your budget, you know your monthly expenses. To find out your passive income, simply add up all the income that takes you very little time per month. It’s up to you to see the maximum threshold. Personally, I find that less than one day per month, or 8 hours, is fine. Afterwards, of course, even less is better!
If your ratio is 0, you are obliged to work and stay in the time-to-money exchange. The goal is to reach a ratio of 100%. Your salaried work will then no longer be necessary: you will use your time as you wish 🙂
Start today: 2 simple steps
These 2 steps will allow you to :
- begin the creation of a precautionary fund;
- automate the monthly payment to this fund;
- get into the habit of saving.
Step 1: Open a Livret A
Booklet A does not offer a huge return. But its interest lies elsewhere:
- simple operation;
- guaranteed return without any taxation;
- money available at all times.
This is the easiest way to start putting money aside.
The Livret A has a little brother: the Sustainable Development Savings Account. The only difference between the two is the ceiling. And you can only have one of each.
Step 2: Schedule an automatic deposit
That’s the heart of the plan.
Set up an automatic deposit to your newly created Livret A account. Immediately after you create it.
It doesn’t matter how much: start with £100 or £50, or even £20 or even £10. The important thing is not the amount but the automation.
You will try to increase this amount a little later. But right away, the most important thing is to automate and therefore to pay yourself first. And that, even if it seems very (too) simple, is really the first step towards your financial independence.
Of course, if you can transfer £200 or £500, go ahead!
Step 0: Choose a better bank
Step 0 is optional. But if you want to take things in hand and start off on the right foot, you might as well do it in a good bank.
Actually, there is no such thing as a good bank. There will only be one bank that suits you and with which you have a good relationship. Or rather good relations with your account manager :-).
That being said, you can think about this: choose a better bank than the one you have today.
Indeed, if the only relations you have with your bank are the annual meetings to take stock or to refuse the latest banking product, you can seriously consider moving. You are not married to your banker, and you will save on the packages that you will surely pay for nothing… for nothing.
So I advise you to go to the bank where I have been for 1 year, after 15 years in traditional banks. It is Boursorama Bank.
I’m very happy with it:
- £1.5 monthly fee;
- an adviser easily reachable by phone;
- quick answer by e-mail;
- all operations accessible online;
- secure (unique and personal code card, validation by SMS, …)
- all the services of a traditional bank.
Opening an account with a credit card is quick and easy. The requirement is to have a salary of £1350 (£2700 for 2 holders) or to leave a balance of £5000 (£10000 for 2 holders) on your accounts.
If you would like to switch to Boursorama Banque, I can sponsor you: leave me a short message via the contact page. That will give us a few dozen GBP more each!
The very first task
Now that you have an overview of the operations, all you have to do is define the first task: call your banker to make an appointment.
Drop this blog and go do something really useful 🙂
With this article, I wanted to:
- to make you aware of the basic exchange you make: Your time for money;
- to explain to you the basics of passive income and financial independence;
- make you want to become financially independent.
The goal is to use your time as you see fit. Personally, this is where I really put my real wealth. And what about you?