The Four Stages of Financial Independence
If you ask the average person if they want to be financially independent, they would say “Yes”. Unfortunately, few people understand what true financial independence is.
It is more than just moving out of your parent’s place, being able to pay your own bills or not being worried if you will be able to pay your own bills. This is what most people think of. This is actually financial stability.
Financial stability is being in a career or position that allows you to make a stable income that allows you to pay your own bills and take a vacation when you finally get time off from work.
True financial independence is when your income is not tied to your ability to work. This means, you can make money while you are sleeping, cooking dinner, traveling the world or whatever you decide to pursue in your free time. You are also freed from the fear of losing your job or your ability to work.
One of the best ways to achieve true financial independence is with income producing investments such as multifamily real estate. If you want to go beyond financial stability and achieve financial independence here are the four stages you must pass through to get there.
Financial independence does not happen by accident. It has to be an intentional goal that you set out to achieve. Once you decide you want to be financial independent you have to decide how to achieve this goal.
The path to financial independence makes you more aware of your personal financial health. Because the income that makes you financially independent will be from investments you have to invest. In order to invest you have to have a surplus of income to do so.
In this stage you create a budget. How much money are you making each month? How much are your monthly expenses? Determine how much money you absolutely need to spend each month and how much money you can save to put towards investing. Remember this as it will be important later.
This will get easier over time, because your income will grow with your investments, making your expenses a smaller percentage of your total income and leaving you with more money to save and reinvest.
Basic income is the first reward you will receive when you start on the path to financial independence. This will either be your first rent payment from a property you own or a distribution from a multifamily apartment syndication.
The income you initially receive may be small, not life changing but it is a start. However, the joy you feel in that moment will be fulfilling and validating as you have had to sacrifice a lot to save up enough money to make your first investment and get to this stage. Now you are finally seeing it payoff. This will also motivate you to double down and work harder.
With this basic income you are receiving your overall income has increased. This will allow you to save more and save faster, to make additional investments and continue to grow your income.
Income meets Needs
Remember the budget you made when you were in the decision/ commitment stage? This next stage of financial independence is when your income from your investments covers all of those fixed expenses. Congratulations! In this stage your income meets your needs and you are technically financially independent.
If you were to become injured and are unable to work for whatever reason, all of your living expenses would be covered by your investment’s income. Just because you are financially independent does not mean you have to stop working but there is a level of comfort that is afforded knowing you can work solely because you want to, not because you have to.
Imagine what this would mean for your lifestyle. You can either save even faster to invest even more or use this financial independence to explore a new career or venture. Because all of your expenses are already covered you have less to fear if your new aspirations are less than successful.
You can also continue working in your current career, use your increased income to live a fuller life whether that involves traveling, support charitable causes, sending your kids to a better school or whatever helps you reach your initial goal.
“Financial independence affords a level of comfort knowing you can work solely because you want to
Income Exceeds Needs
When your income from your investments exceeds you monthly expenses and the amount by which it exceeds your monthly expenses you have reached the fourth and final stage of financial independence.
If you have not achieved your initial goals yet you have gained the skills and knowledge needed to get there. You may ultimately reach a point where your income from your investments exceeds your income from your job.
Depending on how you reached this stage, passively or actively, you may retire all together. Ultimately you would want your investment income to be as passive as possible so that you can maximize freedom of your time as well as your financial independence.
Passive Income Vs. Active Income
Passive income is like an elevator. The elevator would be the investment vehicle your money is invested in. The floor you select would be the goal you are trying to achieve. The speed at which the elevator moves would be the effectiveness of the investment and the quality of returns it produces.
Passive income is great because there is not much work that is needed once you invest. Most of the work is done upfront, you have to make sure you are in the right elevator in the right building to make sure you get to your destination. Once that is taken care of you just sit back and enjoy the ride and maybe a little elevator music too.
Active income is like a ladder. You still have to do all the work upfront of making sure you have the appropriate ladder and you placed it in the right location. You must then physically climb this ladder, rung over rung until you reach your destination. How fast you get to your destination all depends on your ability to climb the ladder.
Investing takes work if you want to reach your goals, whether you are doing it passively elevator-style or actively rung over rung on a ladder. The big difference is the amount of ongoing work that you will have to do.
One is not better than the other. But one may be better for you depending on your lifestyle.
Whichever way you choose the most important advice is to get started. The earlier you get started the more time you have to get to your destination and the earlier you get there the more time you will have to enjoy your stay.
Our favorite vehicle for achieving financial independence is multifamily real estate. It provides multiple income producing benefits that helps you to reach your destination sooner.