Will financial independence translate into financial success? If you can achieve the former, will you automatically be the latter? That depends on your perception of what it really means to be successful financially.
We all want to be a financial success. Regardless where you came from or how much you are earning every month, we all strive to measure high in the wealth meter. That is how the consumerist society defines success. We need to have a high amount in our bank account. That is what we try to achieve as we go to work day in and day out.
While there is nothing wrong with the pursuit of wealth, you have to make sure that you know its role in your life. Having a big amount in your bank account is not the answer because you have to match it with a couple of habits to. This is why instead of focusing on building up your wealth, you need to concentrate on achieving independence.
But before you take the first step towards financial independence, you need to ensure that you understand what it is all about first.
What does it take to be financially independent?
You need to understand the real meaning of being free from financial dependence before you can hope to have it. An article published on Forbes.com discussed the results of a Capital One survey that revealed what consumers think about being financially independent.
According to the article, 44% of Americans believe that it is when you do not have any debt. 26% said that it is when you have enough money in your emergency fund. 10% said that it is when you are financially able to pursue an early retirement.
Of all these definitions, only the early retirement got it right. You can be debt free and yet still be financially dependent. You can also have an emergency fund and still, you are not financially independent.
When you want to financial freedom, that simply means you do not have to work to support daily needs. It implies that your money is already sufficient for your lifestyle and that eliminates the need to work just like everyone else does. In case you are working, it is simply to occupy time and not out of real necessity.
We all love that definition but you have to be careful that it does not indicate that you have amassed huge amounts of wealth. According to Wikipedia, there is more to being independent financially than just the amount of money that you have amassed.
Your assets should be generating income.
This financial status involves having your assets generate enough income that is beyond your expenses. It does not necessarily mean that you have millions in your account. The key to this is you make your money work. You do not just put it aside and save it. You have to make sure that it is placed in a basket where it will make you more money – even if you do not lift a finger.
Your assets are not weighed down by liabilities.
You can say that you have a house, two cars, and even a yacht. You think that makes you financially independent? It makes you flashy, but it does not make you independent. If all of these assets are bought through credit and they are not yet paid, you cannot fully consider them as a part of your wealth. And unless your home is being used for rental or your cars are used to generate income, you are a bit far behind when it comes to financial independence.
How does frugality and investing help with being independent financially
Trying to free yourself from your dependence on money is only as complicated as your willingness to change your habits. There are two important financial concepts that you need to learn to help you achieve this financial situation: frugality and investing. We will discuss below why we think this is true.
Frugality is when you make smart choices about your money so you will not spend beyond your means while keeping yourself happy.
As the key towards financial independence, frugality encourages you to:
- Maintain a standard of living that makes you happy. A popular misconception about being frugal is you will feel restricted. This is not about deprivation. In fact, if you do this correctly, you can find abundance despite your frugal lifestyle. Remove the notion that being frugal will make you miserable because that is really what you will get. But if you think that it will free you from the unnecessary expenses, then that is the lifestyle that you will have.
- Pursue a higher level of satisfaction without breaking the bank. Since you are free from the unnecessary expenses, you get to enjoy what you love to do without breaking the bank. This is the most important part about being frugal. You have to live below your means. Not doing so will defeat the purpose of frugality and will keep you from financial independence.
- Seek out alternatives. To maintain your fun activities while sticking to your budget, you will learn how to look for alternatives that will allow you to enjoy the usual activities without spending as much as you used to. With a frugal lifestyle, you will become more creative a resourceful.
- Spend according to your needs and not affordability. It is very important that you learn how you can spend only based on what you need and not how much you are earning. That is how we lose out regardless of our income. When you are quick to upgrade your lifestyle with your income, that is how you will end up earning a 6 figure income and still lack financial independence. According to an article published on MrMoneyMustache.com, the only way that you can get rich is to spend much less than what you earn.
If you do not know who Mr. Money Mustache is, he and his wife were able to retire at the age of 30 even with a kid at home. They did that by being financially independent. And if you look ever their blog, you will see two important things that they preach to their readers. Frugality and investing is the key to achieving financial independence.
Now that we have discussed frugality, let us learn how investing can help you be more independent of the need to work for money.
As a key to financial freedom, investing helps you:
- Put your money to work. In the Wikipedia definition, it is mentioned that your assets should be generating income for you. It can be in the form of a rental place that will give you a monthly income through the lease. Or it can be through stocks, bond and other forms of investments.
- Grow your wealth exponentially. Investing is the best way to grow your personal wealth. The great thing about it is you get to earn even while you sleep. By having your basic necessities taken cared of without the need for you to work, you are free to pursue other activities. It can be to pursue a hobby that you can also capitalize on. That will help you grow your actual wealth. Or can be to enrich your life and relationships – which is far more valuable than what money can buy.
- Gain freedom from having your schedule dictated for you. When you work in a corporation, your life is dictated by your work schedule. When you have financial independence, you do not have to be bound by that. Since your assets are working for you, it eliminates the need to go to the office just so you have the money to pay for your daily needs.
With frugality and investing working hand in hand, you are sure to find financial independence. You see, frugality will help you keep your spending to a minimum while investing will allow you to earn money without lifting a finger. That is the combination that you need to be completely free from financial concerns.