4 steps to achieve financial independence

4 steps to achieve financial independence

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Financial independence might seem like a distant prospect to many people, but it’s actually relatively achievable, if you have the right knowledge and goals, and a good plan. Seamus Wolf, co-founder of the retirement investment app Horizon65, explains how it’s done.

Financial independence may sound like a distant dream to you, but it doesn’t have to be that way. By taking your finances into your own hands, you are already taking the first step towards building your own future.

But what does the term “financial independence” truly mean?

Simply put, it means you are able to cover all of your costs and living expenses, without the need to work. It means that you are in a position to use your savings and assets to fully finance your life. How you use your fortune exactly is up to you. You may use your savings, sell your assets, or perhaps just be able to generate enough passive income to carry you through! 

How much money do I need for financial independence?

The amount of money you need to achieve financial independence depends on your own ideas, wishes, and lifestyle. As soon as you can finance your desired standard of living - whether frugal or luxurious - on your own, without needing to work, you have reached financial independence.

If you need only to cover your usual fixed expenses, it doesn’t take a lot of money to become financially independent. On the other hand, if you want to maintain a high standard of living with expensive real estate, additional purchases and travel, it will take a lot more saving. If you pursue your goals over the long term and keep increasing your income, you can adapt your way of life to the available capital.

How can you achieve financial independence?

In order to become financially independent and enjoy your freedom, you should proceed step by step: start with an inventory of your current financial situation, then start controlling your expenses and building additional sources of passive income. Here’s how it works. 

Step 1: What is your present financial situation?

First, it is important to accurately assess your starting position. You could start by making a financial plan. How much money do you currently have at your disposal? How much can you save every month? Do you already have reserves or investments? If yes, how are they performing? Do you still have outstanding loans that have to be paid off?

You should strive to balance your total income against your expenses, so that you can set aside a small sum each month for saving and investing. 

Step 2: Define your goals

In the second step, think carefully about what financial independence means to you, what you would like to achieve, and in how many years. Is your goal simply to take early retirement or to also discover the world, buy a large property and get your dream car?

Consider your current situation when setting these goals, because expectations that are too high can quickly become demotivating. Very few people become millionaires overnight. Set yourself various intermediate goals, to get closer to your dream, one step at a time.

Step 3: Build reserves

Before you think about investing your money, it is advisable to build up a reserve - because something unforeseen may happen, for which you will need money quickly. For instance, your car might break down and need extensive repairs or be replaced, or a sudden illness might leave you unable to work for a period of time.

The rule of thumb is to have about three months’ worth of income at your disposal. This amount is sufficient to take care of most problems, without being excessive. It will make it possible for you to take care of your living expenses, long enough to allow a readjustment of your balance.

Usually, the best place to store it is somewhere with high liquidity, for instance a checking or easy-access savings account. You might even choose to keep it in cash. The whole point of building reserves is security, not profit. That is part of the next step. 

Step 4: Make your money work for you

Every additional euro you are able to set aside should now be used to acquire new assets - to gain profit either through price appreciation or by generating passive income. There are a plethora of different possibilities and investments.

If you are unfazed about inflation, like predictability and want a reliable income, bonds would be a great investment for you. If you prefer tangible assets and want high returns, but can stomach fluctuating values, stocks are a better fit.

You can choose between lower-risk and higher-risk investments within these asset classes. For example, you can invest some of your money in safe blue-chip stocks from Europe or the US and some in growth stocks from developing nations. The same is true for state-backed securities on one side and junk bonds on the other. This makes it possible to further diversify your portfolio within an asset class.

However, there are other ways to generate passive income and thereby achieve financial independence. If you own rental units in real estate, you can continue to grow your wealth through rental income. Or maybe you can turn your hobby into a source of revenue - the sky’s the limit!

Investing for retirement can seem like a daunting prospect, as it’s not always easy to get all the information you need to make the right decision. That’s why the experts at Horizon65 are committed to helping you understand everything you need to know when deciding on a viable retirement investment strategy. Exclusively for IamExpat readers, they are offering a free consultation.

Seamus Wolf


Seamus Wolf

Seamus Wolf is a recognized expert in financial planning and pensions in Germany. He has specialized in retirement planning for close to a decade. As an independent expert in insurance...

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