7 Ways to Achieve Financial Independence - Retire by 40 (2024)

Financial Independence is the ultimate goal in personal finance. Financial independence means you can do whatever you want without having to worry about money. Work will become optional and you’ll be the master of your destiny. Who wouldn’t like that? It is a worthwhile goal to shoot for.

Of course, most families have to take care of the basics first. The average US household has plenty of debt and not much savings. The 2020 coronavirus pandemic shows how vulnerable most households are. Many households are in big financial trouble after being out of work for a couple of months.

With all these problems, it is understandable why financial independence isn’t on the average person’s radar. Of course, our readers are way above average. If you’re reading this, you are well on the way to achieving financial independence. Even if you aren’t close yet, you already took the first step to educate yourself. Once someone makes financial independence a goal, amazing things will follow.

So how do you achieve financial independence? First, you have to take care of the basics. Consumer debt is a huge problem and you need to work on that first. It’s not easy, but you know it is possible because a lot of people have done it. After paying off those high-interest debts, you can take the next steps to financial independence. Here are 7 ways to achieve financial independence.

*This post was originally written in 2016 and updated in 2020.

1. Living a Frugal Lifestyle

The easiest way to financial independence is to control your expenses. A lot of people have no idea what they spend money on every month. They just see their paychecks come in and all that money is gone at the end of the month. I didn’t know how much I was spending on eating out until I started tracking our expenses in detail. It can be eye-opening to see where all your money disappeared to.

If you’re just starting out on this journey to financial independence, it is essential to track your monthly expenses. You need to bring it down or at least keep it steady so you will have a chance to build up some savings. Most people let their expenses creep up along with their increasing income. That’s the wrong way to do it. Instead, you need to minimize lifestyle inflation and funnel those raises into investments. The investments will generate income which will help propel you to financial independence.

Another reason why it is essential to track your expenses is because you can use it to measure your progress toward financial independence. The formula is simple. Financial independence begins when your net worth exceeds 25x your annual expenses. Of course, it would be nice to build in some margin if you’re retiring early. In that case, you should also track your FI ratio.

FI ratio = passive income/expense. This way, you know you have enough passive income to pay the bills.

Note: Living a frugal lifestyle doesn’t mean you have to be cheap. It just means you need to save and invest a large portion of your income. If you make a million dollars a year, you can live very comfortably and still save 50% of your income.

2. Grow Your Earned Income

For most people, a good career is the best way to grow their income. Some careers are particularly suited for the financial independence journey. These careers don’t take 10 years of education and the pay ramps up quickly over the first few years.

• Financial analyst, investment banking, and other high finance jobs
• Engineering and IT
• Healthcare – physicians, nurses, and more.
• What do you think is a good career for FIRE?

I think the engineering and the financial fields are perfect for early financial independence. You work hard in the beginning and promotions come quickly in those careers. In engineering, the pay scale levels off after a decade or so. After that, you need to take on more leadership roles to keep getting raises. The good paychecks are great for savers because you can start investing in your 20s. These careers have high burnout rate, though, so engineers need to prepare for early retirement just in case. I don’t have direct experience in high finance, but those people seem to make a lot of money early on in their careers.

I think a career in healthcare is great, too. Physicians, pharmacists, orthodontists, anesthesiologists, dentists, all make very high income. The lengthy education process leaves them in a big hole, though. I don’t think they could start investing until they are in their 30s. However, with the high pay, they could pay off their education debt and then start accumulating wealth very quickly. They just need to watch their spending and make sure not to ramp up their lifestyle too fast.

Anyway, you need to invest in yourself and get promoted early. Each career is different. It might take additional education, becoming an expert in a niche, working extra hours, and/or networking with the right people. Your paycheck needs to outpace your expenses so you can save and invest more.

3. Invest in the Stock Market

The stock market is a great way to build wealth. The stock market returns about 7% historically after adjusting for inflation. That doesn’t sound like much, but it will add up if you invest consistently over the decades. That’s the power of compounding and it is also why you need to invest when you’re young.

The easiest way to start investing in the stock market is to max out your 401k contribution every year. I started investing in my 401k right after I started working in 1996 and increased my yearly contribution to the maximum allowable soon after. It’s been 20 years and my retirement fund is now the biggest piece of our net worth. Compound interest really works, but you need to keep investing through both the good and bad years.

My advice is to max out your 401k first, then max out your Roth IRA, then invest in dividend stocks. If you can do that consistently every year, you will be very well off in 20 years or so. The stock market can be volatile in the short term, though.

4. Invest in Rental Properties

The stock market is great, but it can take years before you accumulate a significant amount in your portfolio. One way to build wealth quickly is through rental properties. I’m not an expert in this field, but here is a sample blueprint for becoming a real estate mogul.

1. Buy a starter home and rent it out when you move.
2. Buy a few more rental properties.
3. Build cash flowing rental business and then get commercial loans to expand.

Once you’ve shown that you are a good investment, the banks will be happy to work with you.

I admit that I’m not a great real estate investor. You need to build a team and that’s not my forte. We have been pretty lucky with our rental because the Portland real estate market has been on good over the years. Our property is making a little money every month and the price appreciation is padding our net worth. I don’t think I can make the jump from #2 to #3 above, but a lot of other people could. Maybe you’re one of them.

If you don’t want to be a landlord, you can invest in real estate with REIT or try real estate crowdfunding. I started investing in real estate crowdfunding in 2016 and it’s been good. I haven’t lost money on a deal yet. However, 2020 will be a big test. The coronavirus hammered the economy and everyone is hurting. Some tenants can’t pay rent and some projects already suspended payout. This will hurt the ROI, but I’m still optimistic. In the long run, the economy should recover and those projects should come back.

You cansign up with CrowdStreet through this link if you’re interested in real estate crowdfunding. You can browse the investment listing and see if there are any interesting projects.

5. Start a Business

Building a business is probably the most difficult way to achieve financial independence. You have to work really hard and you probably won’t make much income for years. There is no guarantee that you’ll be successful either and many entrepreneurs never make it big. However, the payoff can be huge. Check the 100 wealthiest people list and you’ll see entrepreneurs dominating the list.

For most of us, starting a business is a very daunting proposition. I’m sure most people would hesitate to give up their regular paychecks and jump in with both feet. However, there are a lot of businesses you can start on the side now. I just heard a story on NPR about someone who started an eBay store and they make a very nice living. They drop ship the products from Amazon and assume very little risk. That’s just one way to start a business on the side. With all the new technologies in place, there are all kinds of interesting ways to start a side business.

I don’t recommend blogging as a business, but some people are making over $50,000 per month with their blogs! You never know what will work. Actually, blogging probably fits better in the next point.

*2020 might be a good time for some people to try starting a business. If you’re laid off and can’t find a job, why not try something new?

6. Create Intellectual Properties

Another great way to create passive income is to create intellectual property. Ernie Zelinsky wroteThe Joy of Not WorkingandHow to Retire Happy, Wild, and Free years ago and his books still generate over $100,000 per year for him*. I think this is the way to go for creative people. If you have a particular skill or talent, you may be able to turn that skill into usable products that would be purchased by those who want to learn from you. If those products have lasting value, you can earn royalty income for years.

*2020 is a tough year for Ernie. His book sale is down, but he isn’t discouraged. He is self-publishing a new book: The Lazy Person’s Guide to Success – Financial Independence and Personal Freedom Too! That’s amazing.

7. Earn a pension

Pensions are becoming rarer, but there are still jobs where you can earn a pension after 20 years. Police officers, firefighters, government public sector jobs, and military personnel are some of the professions that can help you reach financial independence. The pension plans for firefighters and police officers are local and varies widely, but I think most can receive a partial pension after 20 years of service. The military also has a good pension plan. Military personnel can retire after 20 years with 50% of their basic pay with healthcare coverage. However, some of these are high-risk jobs that might not be a good fit for everyone.

Readers suggestions

• Inheritance
• Marry rich
• Make it big in the entertainment industry – Needs a lot of talent and luck.
• Win the lotto!

These are great ways to get rich, but I don’t think they are really valid. You don’t have much control over these and the sudden increase in wealth makes it difficult to adjust. That’s probably why so many lottery winners become bankrupted a few years later. Marring rich is good if you can do it. 🙂

How we achieved financial independence

Our path to financial independence is primarily through the combination of modest living and investing. We are naturally frugal and never spent more than we made. We saved and invested in the stock market over many years and it added up. We also invested in rental properties, but we were already well on our way to FI by then. Lastly, this blog also brings in a little income to help pay the bills. Retire by 40 is a small business and a creative outlet. Hopefully, I can continue to build the IP and expand it in the future.

Start your journey

Financial independence can be a long journey, but you can get there in less than 20 years. There are many ways to achieve financial independence and almost anyone can take one or more of these paths above. You just need to make financial independence your goal and start working on it. I don’t think anyone ever regret starting this journey so don’t put it off.

What’s your path to financial independence? Is there another good way to get there?

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