Financial independence means that we we can live without having to actively work for money. It’s as simple as having enough income to cover your way of living, while spending time doing what you actually want to do. It could be something that some people classify as a job, but regardless, being financially independent means you have the freedom to choose how you spend your days. To achieve financial independence you need to have:
- Predictable monthly expenses, and
- Passive income, or accumulated funds, to cover those monthly expenses.
Having a solid household economy and living below your means is the foundation to be able to put away funds for other purposes. But that doesn’t mean living a cheap life – only making sure to buy the right things and spend money where it counts. Once that foundation is in place it’s possible to start looking at financial independence and how to afford to buying a Ferrari, a painting by Dalí or your own island, if that’s what you want.
Through compounding returns the passive income stream will generate an exponentially growing income that allows just that – given enough time and making sure the plan is followed.
Get predictable expenses by creating a household budget
As is obvious, the lower expenses we have the faster we can become financially independent. But, also having predictable expenses is a critical success factor. Creating a household budget for your current and desired life as financially independent is crucial for this, but it’s really not any more difficult than that.
This is how to get predictable monthly expenses designed to support your lifestyle:
- Define how you want to live your life, now and in the future. Break down your defined lifestyle into budget posts and gather information on the actual costs, creating budget posts.
- Piece together different complete budget alternatives based on your budget posts, seeing how the overall picture changes with different priorities.
- Implement the budget in your personal economy, automating as much as possible to stick to it.
- Regularly review and revise your budget to make sure it fulfills your current and future priorities.
Sounds easy enough, doesn’t it? Having your spending under control and also making sure that it’s aligned with how you really want to live is the most basic premise of financial independence. Without being aligned you’ll overspend, and by overspending you break the fine balance that’s needed to stay independent.
Create a passive income stream by investing in dividend growth stocks
Why is this so important? Because we’re only financially independent as long as the source of income is passive. If we have to work for it we might be our own boss or can work from anywhere in the world, but we still have to put our time and energy into providing for us.
The most common source of income for retirement or financial independence is to save up a big pile of money (or various types of investments) which are then liquidated and used to cover the expenses. This works for a set time span but has some limitations, for example that we run out of funds if we live longer than anticipated or that we can’t increase the income once we start living as financially independent.
So, a better way is to create a passive income machine which grows faster than the inflation rate. One way to do it is by investing in dividend growth stocks. If you save and invest money in in this type of stocks every month, the passive income generated from the dividends will eventually cover your expenses, ie. you’re financially independent.
After you’ve started investing you should establish a monthly routine to ensure you continuously invest in the stocks that will provide the most passive income over time. The monthly routine should include the following steps:
- Review your current portfolio, making any necessary changes such as selling companies which are in the danger zone for freezing or cutting their dividends and identifying which sectors are over- or underrepresented.
- Screen for dividend growth stocks in financially sound companies that are priced fairly and provide a solid and increasing dividend.
- Evaluate and rank stocks, investing this month’s savings as well as dividend returns into the stock(s) that gives you and your portfolio the most value.
Following this blueprint will give you a stock portfolio with an exponentially growing passive income stream from dividends. Together with sticking to a budget you’ll not only be financially independent, but can continuously increase your standards of living even after becoming financially independent without ever touching your main capital. Sounds quite good, doesn’t it?