Find out which stage of Financial Independence you are in and focus your effort on moving to the next stage.
The Four Stages of Financial Independence
Stage 1 – Get out of the Pit
When you are in Pit first thing you need to do to come out is to stop digging further in, seems common sense.
Not in terms of money, people take on more debt at even higher interest to repay previous debt and they just keep on digging the debt hole.
The underlying problem in this stage is people are spending more than they earn. So either earn more or spend less.
If both can be achieved i.e. earning more and spending less its a win win, will help you get your Financial Independence sooner than latter.
Stage 2 – Create Launch Pad
The stage where you are saving at least 10% of your annual income, no consumer debt, retiring your Education Loan. Have enough contingency fund.
You are adequately insured for your life. You have Medical Insurance if not covered by employer or government.
Stage 3 – Climb fast on the Independence Ladder
This stage is marked with you having high savings rates upwards of 30% of your annual income, Investing in products which has returns greater than GDP + Inflation.
Retiring the home loan.
Stage 4 – Set yourself Free
At this stage you no longer have to rely on actively earning to pay for your expenses. Your investment can take care of your needs.
As a thumb rule you are financially free when you saved upto 25 times of your annual expense. The multiple will change from person to person this is just guiding number.
It depends on how you will pursue your life post Financial Freedom, what is the inflation rate in country you Live, will your expense go up drastically etc.
You need to customize your savings accordingly, I am sure once you have achieved 25x you will be very capable to navigate the rest.
Where I am Currently:-
I became Financially Independent in year 2020 and left my active job in Nov of that year. Now I am pursuing my passion for Stock Markets and PortfolioBuddy is initiative in that direction. I want to spread awareness about Financial Independence and want to show people that how Equity as asset class is best and if invested correctly in this asset class they can speed up their Financial Independence Goals. In case you are new here check our Products.
This article was first published on my RichLife blog.