Financial Independence: How to Retire and Not Worry About Money

January 21, 2022
January 21, 2022 disrupt

Financial Independence: How to Retire and Not Worry About Money7 min read

Financial independence – this concept is one that so many people strive for throughout their work and investing careers. Everyone dreams of the day when they will be independent and no longer need to work to live. Some people, of course, may continue to work, but there is a significant psychological difference between working for food and working because you enjoy it! 

Sadly, even though many people would love to become independent financially, few achieve this noble goal. There are many reasons for this, but one of the most significant is that people do not know how much passive income they need to become financially independent (and investing to make that passive income happen!). 

If you want to be free from needing to work for a living, here’s what you need to know about financial independence, the number you’ll need to achieve it, and how you can get there!

What Is Financial Independence?

Many people talk about financial independence, financial freedom, financial security, and similar terms interchangeably. However, speaking precisely, these terms mean very different things. Indeed, they’re all metrics for how much passive income you are generating relative to your expenses.

Financial security happens when you have enough investments and income to cover your bare basics. In essence, financial security occurs when someone is no longer living paycheck-to-paycheck. If you’re not fearful of being unable to cover the bills if you lose your job (even if that means eating ramen every night), you qualify as financially secure. Being secure, in this sense, doesn’t mean you don’t have to work. It just means you can scale back and get by if you temporarily stop working!

Financial independence is the next metric, and it refers to having enough money and passive income to cover your current lifestyle. Put another way, you have enough of a passive income stream to pay for all the things you do now if you wind up losing your job. When that happens, you’re genuinely independent of work. You could quit any day and not miss out on any of the things you enjoy.

Lastly, financial freedom happens when you have enough to cover your ideal lifestyle. When you can cover all those Hawaii vacations you dream of or fund a life of leisure in Europe, that’s when you have authentic financial freedom. This metric represents the pinnacle of retirement and what most people aspire to have.

Why Is Financial Independence Important?

Why is this article focusing on financial independence instead of financial freedom? After all, doesn’t everyone dream of retiring in the sun living their best life and building generational wealth?

While this may be what everyone aspires to (and it most certainly is a worthy goal), the funds necessary to live that life are often exorbitantly high. Most people, absent a long, long life of sacrifices or some skill (like selling a business), will find it hard to be financially free in every sense of the word.

Financial independence, on the other hand, is much more doable. And it’s what everyone should strive to accomplish. Knowing that your lifestyle won’t take any hit if you stop working is remarkably calming. Instead of worrying about what performance review your boss will give you, you can focus on the work you enjoy. You can focus on building a business, philanthropy, or volunteering, knowing full well that your lifestyle (and that of your dependents) won’t take a hit.

It’s an achievable goal. The question, of course, is: how much do you need to become truly independent?

Calculating Your Independence Number

The first step toward becoming independent financially is knowing how much you’ll need to earn. That will give you a clear metric and goal.

To calculate this number:

  1. Figure out your average monthly expenses for everything you currently spend money on right now.
  2. Take into account all the necessities and consider all the fun purchases you make.
  3. For more significant purchases, amortize them over the year so that way you can break them down into a monthly number.

For example, if you know you buy a new cell phone every year, take that $1,000 and make it $100 a month.

At the end of it all, you might have an expense list that looks like this (note this is very simple for illustrative purposes):

  • Rent: $1,000
  • Miscellaneous: $200
  • Food: $300
  • Car/Gas: $300
  • Utilities: $200

Add those up, and they come out to $2,000 a month. Typically, though, it’s a good idea to add a buffer. Unexpected expenses can come up (and inflation will make those costs rise, too). So, in this case, let’s add 25% for good measure and say this person needs $2,500 a month to be financially independent.

Ways to Achieve Independence Through Real Estate Investing 

Continuing with the example above, now that this person has their target goal of $2,500 a month, the next step is to find ways to achieve this level of passive income.

There’s standard guidance you’ll find online about being able to withdraw 4% of your investments per year safely. $2,500 a month would be $30,000 a year. So, in theory, if you have $750,000 in stocks, bonds, and other investments, you should be able to withdraw $30,000 a year without depleting your balance too significantly over the long term.

For most people, $750,000 in post-tax funds is a lot of money to have up-front. Is there another way to achieve independence?

Remember that the metric doesn’t care about assets. Instead, financial independence happens when you have enough passive income, and one of the best ways to generate consistent passive income is through real estate.

While all investments risk loss, real estate is a quality investment for those seeking financial independence because it provides capital appreciation and passive income.

Consider renting out a single-family home. You could buy a home in parts of this country for $500,000 and rent it out for $2,500 a month.

That’s already less than the original $750,000 using the rule for other equities!

The problem is that buying property is still quite expensive. And, there’s always the risk that the property will have issues, require repairs, or that the tenants will move out, and you’ll have no income! 

Real Estate Syndications – The Vehicle To Reach Financial Independence

When it comes to investing in real estate to achieve financial freedom, real estate syndications can be one of the best methods for the average investor who has a full-time job, kids, a social life, with little to no time to manage tenants, toilets, or maintenance issues!

Real estate syndications solve many of the problems for investors looking to achieve financial independence. 

In summary, the idea of a real estate syndication is a syndicator/deal sponsor will pool together funds from many investors and purchase a real estate property. The sponsorship team will work to execute the business plan and ensure the property is a successful investment for investors! As a passive investor, you have zero involvement in the day-to-day operations handling contracts, tenants, paying bills, etc. 

Many syndications – have minimum investments in the $50,000 range, far below the purchase price of most properties. Additionally, the average cash-on-cash returns are about 10%, with most projects selling for a 30-50% profit on sale at the end of five years.

Therefore, let’s say you have $50,000 to invest. You could hypothetically receive $5,000 per year for five years, and then the property would sell for a profit (let’s say, $100,000). At the end of those five years, you could invest that $100,000 for $10,000 per year for five years, and so forth.

Is $5,000 a year or even $10,000 per year financial independence money? For most people, no. But, if you are earning about 10% per year and need $30,000 per year to be financially independent, you would only need $300,000 in assets.

 That amount is far below the $500,000 for a single-family home or $750,000 for equities.

Financial Independence Is a Worthy Goal

Financial independence is an investment in yourself that is worth making. The freedom and peace of mind that come from not having to work to live can be a freeing feeling. 

The key to financial independence is often a diversified portfolio with numerous income streams. Real estate, including syndications, should be part of that because of the opportunity to earn high cash flow and capital appreciation. Other investments those looking to achieve this independence might make include buying high-dividend stocks, REITs, bonds, and CDs.

No matter how you achieve it, calculate your financial independence number and make investing in your financial freedom a priority!

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