Financial independence: what is it and how to achieve it?

Have you ever thought about not having to work anymore? Living the lifestyle you want with more time for your family and peace of mind about the future? Find out what financial independence is and what you can do to achieve it.

There are many people who find it impossible not to depend on a boss or spend most of their lives dedicating around 10 hours of their day or more to going to a company. Or, working under a lot of pressure and arriving home exhausted at night.

This point of view, however, proves to be completely wrong once we understand what financial independence is and know an implementation plan.

In this reading, you will find out exactly everything about the much-dreamed-of financial independence, such as:

• What is a financial independence plan?
• Financial freedom;
• Stages of financial independence;
• How to achieve financial independence.

What is a financial independence plan?

When we manage to generate a fixed monthly passive income sufficient to pay our bills and live as we wish, we achieve financial independence.

Passive income is income that is not earned through your labor force, whether as an entrepreneur or an employee.

Therefore, this planning is the path that leads you to financial independence, which is, by the way, very particular.

For some, a monthly income of R$2,000.00 or an annual income of R$24,000.00 may be enough to maintain their standard of living. While others need an income of R$8,000.00, R$50,000.00 and so on.

Financial freedom

Contrary to what it may seem at first glance, financial independence and financial freedom are not the same thing.

Financial freedom refers to a accumulation of wealth, which can be exercised by those who have achieved independence and no longer have to deal with major concerns related to money.

In this case, short-term concerns are already reduced and the main objective now is to structure your financial life well, generating reserves and greater security.

Stages of financial independence

Now that we know the difference between financial independence and financial freedom, let's learn about the stages of the financial independence plan.

Financial dependence

Financial dependence is the starting point for all of us. After all, this is the moment when we depend on a third party to pay our bills.

In other words, it is the stage where personal expenses, such as housing, water, electricity, and clothing are paid for by those responsible for us. This is until we reach adulthood or when we get our first job.

Financial solvency

You are enjoying financial solvency when your financial income exceeds your expenses. This means that your personal cash flow is positive and you are able to meet your expenses.

Furthermore, if we are following a financial independence plan, the positive balance obtained refers to the financial reserve. When it is reinvested in profitable investments, it will make your assets grow even more.

If your expenses are maintained in the next period or month, your positive balance will be even greater, given the increase in your income through the reinvestment of resources.

Financial stability

Stability represents a balance between income and expenses which gives us peace of mind regarding money, as we can maintain our livelihood without having to go into debt.

The term stability conveys the feeling of “solid” or “safe haven”, that is, the absence of insecurities and worries. Reaching this stage requires the adoption of consumption, savings and reinvestment habits inherent to the financial independence plan.

Debt relief

Debts are like two sides of the same coin. While they allow us to complete projects and buy goods that we cannot afford to pay for outright at first, they are also a major obstacle to achieving financial independence. According to Serasa, currently around 40% of the population is in debt with overdue bills.

Financial security

Financial security consists of managing your money, allowing you to set aside an amount that guarantees between six and ten months of your current monthly income.

This will help you cover your expenses in an emergency situation such as losing your job or even changing your career. In the latter case, you won't have to abandon your medium and long-term plans and make a safe transition.

Financial abundance

We can say that we are experiencing financial abundance when we have resources that overflow to the point that we can help other people, because we know that we will have resources tomorrow.

Once you have achieved your dream of financial independence and invested in financial education, you will have the security that you will not lack the resources necessary to maintain your standard of living.

How to achieve financial independence?

Once we understand each of the stages of the financial independence plan, we will now discuss some aspects that should be particularly observed in this process.

Financial organization and planning

First of all, I will emphasize the importance of organizing your financial life. How is it today? Evaluate your income and expenses to better understand and control your finances.

Make a list of all your sources of income and your monthly and annual expenses, whichever you prefer. Set a limit for each type of expense and focus on increasing your income. With this, you will now have a personal cash flow in hand.

Now, all you need to do is create a financial plan based on the data you have gathered and make the most informed financial choices. Your plan doesn’t need to be rigid, but it should be flexible enough to keep up with changes in your financial life.

Budget targets are key to achieve financial independence

Only by monitoring and adjusting your budget can you take advantage of the opportunities that arise each day. In this analysis, you can determine whether you need to increase your income or save more money towards achieving financial independence.

You can start with small goals. Identify expenses that can be cut or eliminated and stay focused on building capital.

Observe your consumption patterns and look for less expensive ways to maintain your current or desired lifestyle. Reduce or eliminate only what is dispensable, but never what is essential, i.e. your favorite hobbies and tastes.

Pay off your debts, one of the fundamental pillars for achieving financial independence.

Debt is not only related to the debts you are unable to pay, but also to the habit of using credit cards, financing, etc.

As we buy, buy and postpone payments, generating debt, we compromise our budget proportionally.

If we add new installments to our bills every month, we can quickly end up with debts that exceed our monthly income.

To make matters worse, if we start to delay payments due to increasing solvency difficulties, we also have to bear the resulting interest and fines.

To achieve financial independence, it is essential constantly evaluate your cost priorities in order not to lose control between the income and expenses of your personal cash flow.

Get insurance

We are all subject to unexpected circumstances that even make it impossible for us to work. That is why insurance exists, and it is very important.

The purpose of insurance is ensure the protection of your assets without you having to get rid of them to pay emergency expenses.

To hire one, look for a solid brokerage firm in the market that offers plans with coverage that meets your needs. For example, an amount that covers your current level of expenses for a good period of time.

Learn how to invest, the big step towards achieving financial independence.

Knowing how to save is good, but the second step after that is knowing how to invest. And if you are not willing to do this, you will hardly achieve financial independence.

This is because investments are the quickest and easiest way to multiply your money.

By studying the financial market and the available options, we soon realize that investing is not a seven-headed beast, as some people tend to think.

After discovering your investor profile, through a test that can be done on a stockbroker's online platform, you can create an account and view several long-term alternatives.

Knowing your risk tolerance level is essential to knowing which investments are best suited to you.

It is recommended for those who are starting to invest to always invest in the emergency reserve, where fixed income securities such as Selic Treasury e CDB are highly recommended due to the stability they offer.

The financial market is not static. Monitor your portfolio and make adjustments.

Starting to invest is not the last step towards achieving financial independence. After that, you must continue making periodic contributions. Only then will you be able to grow your assets until you enjoy a passive income that supports your lifestyle.

The more you invest, the higher your profitability will be, which will grow at an exponential rate due to compound interest returns. Therefore, by maintaining the frequency of your investments, time and interest will work for you.

Don't hesitate to save every month to maintain your investments, increase your invested assets and maximize your long-term income.