Different Paths You Can Take Toward Financial Independence

Posted by Home Morgage | Personal Finance | Friday 26 February 2010 9:18 am

Financial independence is a term typically used to describe a state where you have sufficient assets to live a certain lifestyle indefinitely without having to work or be employed. Whether your income is derived from interest on savings, investment income, real estate income or something else, it really doesn’t matter. The key is that you’re financially independent. What an incredible goal. Financial independence or financial freedom is something most everyone would admit to desiring. The question becomes how to reach this level of independence. Let’s look at the various paths one might take.

Path #1 – Extreme Frugality

While many would say they would love to not have to work anymore, most would refuse to downsize their current standard of living. Some people, however, are more than willing to trade a standard of living for the ability to be financially independent.

The extreme frugal crowd will typically implement a bare bones lifestyle so that they can sock away massive amounts of money while working. Then, when they have enough money to be able to live on interest from such a sum of money, they simply stop working but keep the frugal lifestyle. After all, they’re already used to it.

Path #2 – Entrepreneurship

This is probably one of the more common approaches to financial freedom. Starting a successful business is a great way to achieve significant levels of wealth and/or financial independence. With that said, most businesses don’t reach such a level, but I would guess that the majority of people who are financially independent actually took the entrepreneurial route.

In a difficult economy with fewer business prospects and tighter lending standards, being an entrepreneur is not easy. The brightest opportunities lay in businesses that innovate and find new methods or technologies to solve problems.

Path #3 – The Successful Investor

The last path to financial independence that I’d like to look at is the concept of generating large investment returns over time. If you work hard at your investing skills and contribute significant portions of your income toward an investment portfolio, you can grow a large portfolio of sound investments over time.

While most people will dismiss the idea of beating the market or trying to do anything other than passive, diversified investing, there are plenty of examples of people beating the market. The key thing to understand is that you don’t have to beat the market by 20 percentage points to grow a portfolio. Beating the market by even a couple percentage points on average will result in massive growth for a portfolio. Obviously, this is easier said than done, but there are ways to hone your investing skills over time so that you can do your best to increase your rate of return.

A large investment portfolio built over years of work and contributions can easily result in financial independence. Many people live off the dividend income from their investments. While you’re building your portfolio, be sure to reinvest dividends in an effort to grow the overall portfolio.

Other Paths

Other routes to financial independence might include real estate or maybe working at a start-up company that hits it big. Do you have any other suggestions or paths to financial independence that you might be pursuing? Add your feedback and comments!