How You Can Achieve Financial Independence

While it might be feasible for high-income earners to sock away enough money to become financially independent, is it really a plausible dream for regular folks like you and me? Those who earn under $100,000 per year?

Financial Independence for Average Income Earners

Achieving financial independence (FI) when you’re not making six figures (or more) will definitely be a challenge. It will involve taking a few important steps that people making big bucks might not have to take.

But I do believe you’ve got a good shot at achieving FI if you’re willing to take the steps I’m going to tell you about. However, reaching FI starts with knowing what you need to live on and how you’ll save enough to get to the point where you feel financially independent.

Set Your Target FI Dollar Amount and Be Realistic About It

How much money do you actually need to consider yourself financially independent? In other words, what is FI to you? By definition, being financially independent can mean a number of things:

You are the only one who can decide the target number that marks financial independence for you.

For instance, I read about one guy who doesn’t have an astronomical amount of money in savings but still considers himself financially independent.

Why? Because the net income from his rental properties covers his monthly living expenses.

He does work, but he doesn’t have to — thanks to his rental income. If a monthly income from rentals or side hustles is enough for you to consider yourself financially independent, great.

However, if you’d rather have enough in savings and investments that you can live off the interest income indefinitely, then make that your goal.

Being Realistic Is Key

Just because you think something is true doesn’t mean that it is. You need to be realistic.

Think back to my example of the guy who thinks he’s achieved FI because he makes enough in net rental income each month to cover his expenses.

What happens if one, or two, or four of his tenants leave? Does he still have enough rental income to cover his expenses? Or does his financial independence fluctuate based on his rental occupancy rate?

I’m not saying his type of system isn’t a great route to FI. I’m simply pointing out that you’ve got to be realistic about what FI really means to you and how secure in your definition of FI you really are.

Now after you decide what route to FI you want to go with, you can go about achieving it. For the purpose of this article, we’re going to talk about how to get to the point where FI means you’ve got enough money saved and/or invested that your return on investment (ROI) each year covers your annual expenses.

How Much Do You Need in Annual Income?

So the question becomes: How much do you need in annual income to cover your expenses? This is where being realistic is important, and it’s going to take some personal analysis.

Let’s say you’ve got all your debt paid off, and you decide you can live off of $50,000 pre-tax dollars per year. At the very minimum, you’re going to need $1 million in investments, and that $1 million is going to need to provide an average rate of return of 5% per year.

Do some figuring and decide on the numbers that mean FI for you.

Once you’ve figured out how much money you need to be financially independent, you can go about amassing it. Here are some steps you can take to get there.

5 Steps to Achieve Financial Independence

The steps that help regular folks get to FI are going to be different from the ones high-income earners take to get there. Are you up to the challenge?

By following the steps below you can have more money in your budget each month. That means more money to save and invest, and that extra money is what is going to help you achieve your goal of FI.

Let’s say that by following the steps below you find an extra $1,000 in your budget each month that you can save and invest. If you earn an average market return of 9% and invest that money for 25 years, you’ll end up with more than $1,000,000.

And if you continue to earn 5% on that money going forward, you can take out $50,000 each year to live on.

Here are some steps you can take to find that extra $1,000 (or more) per month to reach your personal FI goals.

1. Create a Solid and Strict Budget and Stick to It

If you’re a low or medium-income earner there’s no doubt that you’re going to have to live on a stricter budget than your high-income earning friends if you want to achieve financial independence.

You'll need to be strict about minimizing expenses so that you have more money to save and invest each month. Some expenses that might need to go include:

In other words, you'll probably need to change things up where your lifestyle is concerned. Trade in those salon highlights for a box hair color. Eat at home and cook from scratch. Use every tip you can find for saving money on groceries.

Drive less expensive, paid-for cars instead of newer cars with car payments. Shop around for car insurance. Analyze every line item on your budget and get rid of unnecessary expenses.

Do you have to live this way forever? Probably not. Assess your saving and investment balances each year and decide if you can loosen up the purse strings a bit or if you’d rather live like a pauper for a couple more years until those balances are a bit closer to your goal.

Budgeting wisely can mean the difference between being an average saver or a super saver. And super savers have a much better chance of achieving financial independence.

2. Invest Your “Found” Money

“Found” money is money you never expected to have. It’s money that comes to you outside of your regular earned income. “Found” money can add up to thousands of dollars per year if you include money sources such as:

Make a commitment to put all “found” money toward your goal of reaching FI and watch your savings balances skyrocket.

3. Pay Off and Stay Out of Debt

Debt payments really weigh you down in terms of reaching financial independence.

Take that $1,000 per month that you need for reaching your $1 million dollar goal. If you’re paying that out in the form of a car payment or other debts each month, you’ve just lowered your chances of reaching FI tremendously. Is it worth it?

It might take some time to get used to driving older, paid-for cars. But as someone who decided a decade ago to dump car payments and newer cars for older paid-for cars, I can tell you it’s worth it.

I love driving my 2005 car. It’s in great shape for its age. But mostly, I love it because it’s paid for. No banks or loan companies knock on my door each month asking for their $400.

It’s mine. All mine. And keeping that car gives me the ability to do other things that I deem more important with my money. Like saving and investing. It’s a good feeling, and I have no plans to trade that car for a newer one that comes with payments.

If you’re currently saddled with car loans, consumer debt, or a hefty mortgage payment, do what you can to pay the debt off.

Put a chunk of your disposable income each month toward paying off debt. Sell your newer cars, pay off the loans and use some cash to buy older, reliable used cars. Get your credit cards paid off.

You might even choose to trade in more expensive housing for cheaper housing. Rent a place that’s not quite as big. Or sell your larger home for a home with a cheaper mortgage payment.

The sooner you pay off your debt, the more money you'll have to invest to reach financial independence.

4. Pick Up Some Side Hustles

Another way regular folks reach financial independence is to find ways to increase their income. For you, that could mean going for a promotion or raise at work. Or delivering pizzas at night and on the weekends.

If you take advantage of your skills and work some online side hustles, it's possible to bring in an extra $500 or more each month if you work them right.

As an example, my writing career started as a side hustle in 2013. It’s now a bona fide income source that helps me support four kids on my own. Last year alone, I earned $27,000 via freelance writing.

If you use your skills wisely and choose the right side hustles for you, you may be able to fast-track your path to FI in a big way.

5. Invest Wisely

Another key to reaching financial independence if you're an average income earner is to invest wisely. Find an investment advisor you trust who charges low fees. (Money expert Clark Howard says the amount you pay in investment fees can make or break your ability to retire when you want to.

If there's one available, you should definitely take advantage of the 401(k) at your job. If you aren't already, make sure to invest at least as much as you need to get the match from your employer.

Be sure you’re making contributions to retirement investments as well as non-retirement investments so that you’re increasing your wealth in both arenas.

Follow the investment advice of well-known experts and use a buy-and-hold method. Invest in blue chip stocks of companies with long histories of steady success. Avoid day trading and other riskier forms of investing.

This is especially important when you’re investing as a lower income earner. You’ve worked extra hard to get where you are; don’t throw away those efforts by investing in a lot of high-risk ventures.

Final Thought

Yes, it is possible for you to get to the point where you’re financially independent — even if you don’t earn big bucks. The key is to use wisdom in earning and investing and discipline in spending and saving.

It might take you longer to reach financial independence than it will your six-figure-plus income-earning friends, but you can still get there.

More Money and Investment Tips From Clark.com:

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