What is Financial Independence and What Does it Mean For You?

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There’s a growing movement taking the personal finance community by storm. Some quote the #financialindependence hashtag on social media, while others refer to something called FIRE. But what is financial independence, and does FIRE indicate some kind of monetary emergency? Read on to find out what financial independence means. Also, what does FIRE stand for, and discover what being financially independent might mean for you. 

What is Financial Independence?

Technically, being financially independent means that you own enough assets to be able to support yourself. You would have enough money to cover your living expenses, without having to work for, or be dependent on, someone else for your income. In an ideal world, you’d have no debt, a healthy portfolio of assets, and be able to live off the dividends and profit. 

For the majority, that seems like an impossible vision; completely unattainable. But that doesn’t mean to say that it is unattainable.  

How to Achieve Financial Independence

To start with, you need a really solid base. This means getting a really good handle on your money and probably, giving your personal finances a huge overhaul. 

The basic principles involve ensuring you have an emergency fund and getting rid of debt. It also means being careful with how you spend your money and putting plans in place for your future.

Emergency Fund

The first thing you need, before anything else, is an emergency fund. If you have debt, a good figure to aim for would be £500-£1,000. This is in place to cover you in case of emergency, such as a broken boiler, washing machine, or car engine. The reason for this is because if you’re already in debt, the chances are you don’t have any funds to pay for these situations. 

As Dave Ramsey, author of The Total Money Makeover* puts it, it’s a case of Murphy’s Law. If you don’t have the money to pay for it, you can pretty much guarantee that an unexpected bill will pop up.

And if you’ve got debt, the last thing you want is to be adding more to it. You’ll never get out of debt, and you’ll never be free. 

If you don’t have debt, you want to be saving up around 3–6 months worth of expenses, to cover you in a life emergency such as a pandemic (as we’ve all experienced), or losing your job. 

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Pay off Debt

It may be obvious, but if you want to be financially independent, you’re going to have to pay that debt off. Unfortunately, debt doesn’t go away. And when you’re deep in it, it has a nasty habit of sticking around. Not only that, but it can also be a downward spiral into more debt as you consolidate and spend, then consolidate and spend again. It’s a hard cycle to break, and you may need to review your beliefs around money in order to do so.

The other important thing to consider is that credit card debt which is accruing interest is basically taking more of your money than you originally borrowed. Speaking of borrowing, did you remember that you need to pay it back, or did you just use the card and then forget about it? The problem with using money that doesn’t belong to you is that it’s very difficult to keep tabs on how much you’re spending. Which leads us on to the next point. 

(Here’s a post on how to get out of debt). 

Create a Budget

It’s a boring word, and perhaps a nicer phrase for it would be Better Money Management. But it needs to be done. The thing with creating a budget is that it’s easy to forget about the things we don’t pay for on a regular basis. If you budget for your bills monthly, that’s a great starting point. But what about the things you pay for annually, like car MOT, breakdown membership, or Christmas and birthday celebrations? 

Food spends can vary every week, too, so you need to have an amount allocated to avoid overspending.

You’ll also need to review your bills and see if you can cut back from overspending

For more help in putting together a budget, check out this post.  

Once you’ve got a healthy budget in place, cut back unnecessary spending, and paid off any outstanding debt, the next step will be to build up your 3-6 months’ worth of expenses. 

Build 3-6 months’ worth of Emergency Fund Money

As mentioned above, this is to cover you for life emergencies such as losing your job, health problems or something else. It’s not there to pay for holidays, but is there as a kind of security/insurance for you in case you run into any problems. 

The money should be available to access ASAP, so you’ll want to go for a savings account with a good interest rate. Unfortunately, interest rates remain at an all-time low, but some interest is better than none, and your money’s value depleting faster than the rate of inflation. 

To make things nice and easy for you, you could use a money-management app like Plum*. Plum uses a clever algorithm to monitor your income and outgoings/spending, and then puts money aside for you based on what it thinks you can afford. 

I’ve written my own review of this app as it’s great at saving money without you noticing. There’s also the option to put your money into an easy-access interest account. You can read more about Plum here

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Start Building Your Investment Portfolio

There are several options available when it comes to investing. From stock and shares ISAs, to bonds, to property and investing in business. 

If you want to get started in investing, I’d recommend doing some research, starting with reading some books on the process. I’ve added some recommended reading below. While these books cover the entire money concept, they can help to give you an overview beyond merely managing your money correctly and saving for a rainy day.

For actual investment advice, I strongly recommend speaking to a financial advisor and doing in-depth research. It’s important to remember that investments can go up and down, so it’s best to be prepared.

Alternatively, Plum also offers an option to get started in investing from as little as £1 (capital at risk), which you can find out more about from the app. 

There are other investment routes that you might want to pursue also. For instance, cryptocurrencies like Bitcoin can be profitable for aspiring traders. Again though it is vital that you do your research before making any financial decisions. For instance, you might want to consider using trading platforms like Plus500 at first. You can learn more about Plus500 including how to set up a plus500 bitcoin wallet by taking a look at some of the resources on the Kryptoszene website.

Create Your Own Passive Income

Passive income is one of those things that’s been around for a while but is growing in popularity and curiosity. It’s basically a form of income where you do the work upfront, and then continue to receive payment. It doesn’t mean there’s no work required and will mean a LOT of work in the beginning. It will also mean ongoing marketing to keep things progressing, but the point is, the bulk of the work is done and continues to provide an income. 

Examples include books (printed and digital – publishing is accessible to all now thanks to Amazon), music, courses, blogging through affiliate marketing and ads, and many more. The internet provides so many ways to monetise things nowadays that with a plan, some hard work, and determination, anyone can create their own little empire of wealth.  

More traditional ways of creating your own passive income include the aforementioned investments. Certain investments will allow you to generate a nice trickle of money every single month. Primarily, property investments are good at doing this because you can invest in houses and rent them out for people to live in. As rent gets paid into your account, you sit back and don’t really have to do much else!

Passive income can be an excellent way to grow your wealth alongside a more active income source. Less pressure is put on your actual job too because you have this new revenue stream (or two) backing you up with more money. 

What is FIRE?

Okay, so we’ve covered the basic principles of financial independence and how you might achieve it. (Again, I strongly recommend further reading on this subject as I’m not a financial advisor, but I have read a LOT. I’ve seen evidence of achievement and I’m on the journey myself so believe it’s entirely possible). 

But, what’s FIRE? While the acronym sounds urgent, it’s not actually a financial emergency as I touched on above. The urgency comes from saving hard and fast for the future.

F.I.R.E. stands for Financial Independence Retire Early, and it’s what a lot of people within the personal finance community are aiming for. It means achieving that kind of financial independence so that they can live off their income and, well — retire early. 

It’s a wonderful idea in theory, but I personally believe that retirement is doing what you want and not being a slave to the workplace. It’s living your life exactly how you want. If that means doing something you love and earning money from it, why retire? Personally, I think I’d be bored. I’d still need a purpose. 

Why ‘Financially Independent Me’? 

When I first started this website, it began life as an avatar called Miss Penny Money. It was a blog to document my own personal journey out of debt, and improve our financial situation to one where we were living comfortably and no longer scrimping and saving to make ends meet. It was a side effect of living on a single income and paying “affordable monthly payments”. I didn’t want that anymore. 

But, since paying off over £10,000 of debt in just two years, I want to move towards a more positive point of view. I think financial independence sounds better than debt-freedom. And I think it’s about so much more.

It’s about self-worth, too. After years of being a stay-at-home mum, sacrificing salary for parenthood, and trying to find ways to earn extra income, I finally had enough of not earning my own money. I had enough of being overlooked after being out of the workplace for 8 years (despite evidence to the contrary of my own skills and abilities). I’d had enough of losing all faith in my own abilities and believing I just wasn’t good enough.

Financially Independent Me is about confidence, empowerment, and self-worth. It’s for women like you and me, to change the world and create our own version of financial independence. To be able to earn our own money, and create our own wealth.

It’s living the life we want to, on our terms. Building our own empire, and being truly independent. 

It’s about being unconventional, and changing the world for women. And it starts here. 

Tell me, what does financial independence mean to you? Let me know in the comments below!

Recommended reading:

The Total Money Makeover* by Dave Ramsey

Rich Dad, Poor Dad* by Robert Kiwosaki

*Affiliate links