What financial independence means and how to get there

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We’ve all dreamed of quitting our day jobs and doing whatever we want, or even doing nothing at all. Alas, there’s always one thing in the way—financial independence.

It may sound crazy, but it’s achievable, especially when armed with the right financial know-how and a solid, goal-based plan in place. We’re not suggesting that this is something you can accomplish right off the bat, as it often takes careful planning, patience, and a long term view of your financial future. But, here’s how to get started with carving your path to financial independence.

What is financial independence?

In a nutshell, financial independence means having enough money coming in to cover your expenses without having to work or depend on others. Success in this department is generally a combination of how much money you’ve made and whether you’ve managed it wisely.

It’s how a celebrity living a fast life full of luxury can burn up millions, but a thrifty construction worker can retire with millions. Keep in mind that you don’t need a treasure chest of wealth to begin with, as smart, incremental choices can go a long way towards building a nest egg.

It’s within reach for many people long term, but most of us need a little extra guidance on how to get there.

Figure out how much you’ll need

It’s up to you to figure out how much you need to live the life you want. Tally up your must-have lifestyle expenses and determine the yearly cost, factoring in any upcoming adjustments or big life changes you foresee.

Next, calculate your net worth. Net worth is how much you own in assets (including savings, stocks, investments, equity in properties, etc.) minus how much debt you have. There are a number of net worth calculators available online that can make this easy.

Then, divide your net worth by your yearly cost of living. This is by no means an impenetrable formula, but it can give you a better idea of how long you can sustain your current lifestyle with your current net worth. For most of us, reaching financial independence will be about building wealth over the course of a lifetime while living frugally, then living off of what we’ve saved for the remainder of it.

4 approaches to financial independence

There are many ways to become financially independent, and each approach comes with different risks, costs, and lifestyles they can buy. Here are some of  the most common.

1. Budget and save your money wisely

Biggest risk: You’ll have to make sacrifices that those in your sphere perhaps will not be making. This can mean saving instead of vacationing, cooking at home instead of dining out, driving an old yet reliable car for as long as you can, or settling for a smaller abode than your ultimate dream home. 

Starting resources: Use budgeting software or apps to organize your finances, stick to a budget, and track your savings. Need some help reaching your savings goals faster? A high yield Varo Savings Account offers no fees and easy auto-saving tools to help grow your money.

Lifestyle this approach can afford: Budget or moderate lifestyle.

2. Get a side hustle

Biggest risk: Starting a side hustle doesn’t have to require a lot of money, but it can take up a significant portion of your time. Given the name “side hustle”, it’s probably likely that you’re working another, perhaps more time-consuming job while you get this project up and running. The biggest risk here is that the side hustle you’ve invested much of your time in doesn’t make much money (or at least as much money as you need) after you develop it.

Starting resources: The main resources needed here are time, energy and creative thinking. But, you may need some money up front to start a craft or website, as well as invest in training if you’re not already an expert.

Lifestyle this approach can afford: Budget, moderate, or extravagant lifestyle, depending on the level of success you have with turning the side hustle into a thriving business. 

3. Add passive sources of income

Biggest risk: Your additional passive income streams don’t pan out or make money. Because your initial investment can be higher for a passive income stream (such as buying a rental property), it’s a bigger risk than some of the other options.

Starting resources: You’ll need money or loans to invest in things like rental property or a new business. Remember, no investment is 100% safe, and you can always stand to lose some, if not all of the money you’ve invested, often due to factors beyond your control.

Lifestyle this approach can afford: Moderate or extravagant lifestyle.

4. Invest your money

Biggest risk: Investing might be the riskiest of the bunch, but it also offers the greatest opportunity to increase your earnings—by a lot. As we said before, you can always stand to lose some, if not all of the money you’ve invested. Even well-researched investments can lose value quickly due to factors beyond your control like shifts in the market or economic downturns.

Starting resources: To begin with, money you’re comfortable investing. You’ll also need an investment account of some sort, as well as the time available to properly research and monitor how and what you put your money into. A financial advisor or broker can be a big help here, but that will incur some extra cost. 

Lifestyle this approach can afford: Moderate or extravagant lifestyle.

You can make financial independence happen

Heard the saying “don’t put all your eggs in one basket”? It may be a bit of a cliché, but it rings true when it comes to charting a course towards financial independence. A healthy budget and savings plan can work well alongside an investment portfolio. If you add a passive income stream and a side gig to the mix, you may find yourself in even better financial shape.

If you’re serious about becoming financially independent, mix and match these methods to find the approach that works best for you. There’s no one-size-fits-all model, nor is there one path to guaranteed success. As with most things in life, you’ll most likely have to adjust your plan along the way due to unforeseen circumstances, different milestones you achieve, and even shifts in your mindset and goals for the future. The trick here is to start laying the groundwork for financial independence sooner rather than later so that you’re better equipped to tackle whatever comes your way as you plan for the future.

Unless otherwise noted above, opinions, advice, services, or other information or content expressed or contributed by customers or non-Varo contributors do not necessarily state or reflect those of Varo Bank, N.A. Member FDIC (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s) other than Varo.