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How to Become Financially Independent

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Congratulations! You’ve made the most critical step in the entire process – searching out how to become financially independent. In my book, I explain how I made several money mistakes over and over before finally making the decision that enough is enough. To be sure, achieving financial independence has to be a priority if you want to be successful.

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In order to learn how to become financially independent, you need first to know your financial independence number.  Then, you generate a monthly surplus and invest it until you’ve reached your financial independence number.  And, once you reach it, you’ll be financially independent and can retire early.

If Only I became financially independent by…

One of the ideas I often had, was “if only I won the lottery.” Or, “if only I made more money,” then I could someday free myself of a day-to-day job. Unfortunately, the “If only” idea just doesn’t work without action. Surely, if there were a magic ball that would tell me the next week’s lotto numbers, it might make things easy.

The fact is, I’m here to tell you that it isn’t so. You see, you don’t need to win the lottery or get a raise to become financially independent. Yes, it would certainly help, but unless you know how to build a monthly surplus, and maintain it, there’s no way you can ever achieve financial independence.

Learning How To Become Financially Independent

So if winning the lottery or getting a raise isn’t the key, then what is?  Simple! Reduce your monthly expenses, and start building a monthly surplus. Sound easy? It is! But, habit is hard to change. Luckily, money is its motivator. For example, when you have more money month after month frees your mind to think about more important things, rather than what needs to get paid.

Choosing to become financially independent and follow this course is the first step in achieving the life you always wanted to live.

Read on as we will cover the essential points to achieving financial independence (F.I.).  Examples of topics will be cash flow management, debt reduction strategies, and knowing (roughly) how much you’ll need to become financially independent.

The very first step, however, has already been done.  You got this far.  Then, the next step is to introduce yourself in our private, members-only Facebook Group.  There, in the group, you can discuss what you are learning, ask questions, and learn more from each other’s specific perspectives.

Related read: How to Ensure Financial Security

What Is Financial Independence?

In my book, The Financially Independent Millennial, I define financial independence as having more PASSIVE INCOME than you have monthly expenses.  Simple huh?

It’s essential to know the distinction between passive income and active income.  Active income is income earned from the occupation in which you are “actively involved.” For example, if you go to work every day, the income you make from that is considered “Active.” Unfortunately, you are limited with how much you can make with active income, as there are only “so many hours in the day.”

Passive income, however, is the income you earn without being actively involved.  Indeed, becoming financially independent requires that you have a passive income!  Passive income is the income you want to have!

Examples Of Passive Income Include:

Pension income, dividends from businesses, stocks, bonds, Rental Income, Royalties, Interest from CD’ s/GIC’s/Bonds, etc.

So you see, the key is to focus on having more passive income than you NEED.   Passive income is the key to Financial Independence.

Taking Back Control Of Your Cash Flow And Become Financially Independent

Let me tell you a SECRET (but seriously, don’t tell anyone) Becoming F.I. is not about earning more money. It’s about spending less.   Write this down and REMEMBER it!

So how do I get on top of my financial house?  Simple, it starts with simply knowing your monthly surplus.

But how?  The easiest way to find out your monthly surplus is to have a look at your income and expenses for the last 2-3 months on paper. Or better yet, by putting it all on a spreadsheet.  Categorize your expenses.  Include any/all income.

Your surplus is simply your income minus expenses!  It is essential to become Financially Independent.

Rick Orford

Related Read: How to Avoid Emotional Spending

Download My Spreadsheet

Sounds like a lot of work?  No, I did most of the word and a pre-filled spreadsheet for you. You can download my example budget spreadsheet here and follow along.

As you can see, I pre-filled two months of Income & Expenses.

Now it’s your turn to download your income + expenses from your online banking and put them all here in the spreadsheet.

*Tip:  If you use a credit card, do not include the payments TO the credit card. Instead, set up categories for the credit cards as makes sense to you.  For instance, if you paid $480 from your checking account to your credit card, don’t count this $480 in your expenses. Instead, add up each category of costs in your credit card and insert them on the spreadsheet.  So if you spent $300 on clothes and $180 on restaurants – those are the figures you’ll use.  Interest charges are also an expense.

Do this for the past two complete months—ideally 3.  And, by the end, you will start to see a pattern.

At the bottom of the spreadsheet, you will find your surplus.  As I said earlier, this is the most critical part of this lesson.  Know your surplus.

Identifying Areas To Cut Expenses On Your Way To Financial Independence

If you’ve made it this far, give yourself a big pat on the back.  Seriously, you’ve done more than most – I believe you can truly help yourself get to a better place financially.

Did you list at least one month of expenses and income, right? Great!

And you know your surplus (or deficit), right?

Your monthly surplus is essential stuff!

Now we need to figure out how to increase that surplus. If you have a deficit, you’ll want to work to turn it into a surplus ASAP.  While your instinct might be that you have to get a better job (i.e., a higher paying one) or work more, the simple fact is:

“It doesn’t matter if you make $50,000 a year or $150,000 a year.  Unless you spend less than you make, you’ll never get ahead.”

Rick Orford

Are You The Chicken Or The Egg?

It’s kind of like the old chicken and egg story.  But how do you start? First, you need to be cutting the budget. Oh, yes, this is going to be fun.  Keep telling yourself that, and it will!

You have to cut the budget. Yep, that’s right. Cutting the budget is all that’s needed to generate extra money at the end of every month.  You see, money that you can use to pay down debt, build an emergency fund, earmarked for a large purchase, or invest. Eventually, the last two will be your monthly goals. But how?

Now that you have a spreadsheet set up with at least two months’ expenses detailed, now we need to look at where we can cut out some costs.

Example Budget Spreadsheet

Cash Flow Plan
Target December January February
INCOME (Monthly)
Working Salary (Fixed) $5,618.09 $5,618.09 $5,618.09 $5,618.09
Rentals Income (Duplex) $1,300.00 $1,300.00 $1,300.00 $1,300.00
TOTAL INCOME $6,918.09 $6,918.09 $6,918.09 $6,918.09
EXPENSES (Fixed Monthly)
Rent / Insurance $1,750.00 $1,750.00 $1,750.00 $1,750.00
Mortgage for Duplex, Taxes $604.82 $604.82 $604.82 $604.82
Electricity – Primary Residence $105.00 $104.51 $104.51 $104.51
Cell Phone $90.00 $88.35 $88.35 $88.35
Cable TV & Internet $150.00 $144.39 $144.39 $144.39
Groceries $700.00 $664.35 $664.35 $664.35
Restaurants $700.00 $1,480.99 $940.18 $968.12
Credit Card A+B+C $220.00 $220.00 $220.00 $220.00
Car Expenses $330.00 $330.00 $330.00 $330.00
Student Loan $475.81 $475.81 $475.81 $475.81
Shopping $700.00 $1,981.71 $1,745.11 $1,898.41
TOTAL EXPENSES $5,825.63 $7,844.93 $7,067.52 $7,248.76
Surplus (Deficit) $ 1,092.46 $ (926.84) $ (149.43) $ (330.67)

In this example, you will see a TARGET column, in addition to the monthly columns.  Indeed, the target column is your goal for the month. In this example, the goal is to achieve $1,012.46/mo ($12149.52/yr) in surplus income.  Next, start filling in the past three months of income and expenses. As you can see, in December 2018 and January, there was no surplus.  The example person spent $886.84 MORE in December than they earned. If this is like you, don’t worry, it’s not an uncommon issue and is generally easily fixed.

Related read: Don’t Miss These 16 Investments to Avoid In Retirement

Determine Your NEEDS And WANTS

The first thing you need to think about when cutting expenses is to determine your NEEDS and WANTS.

Needs are things like food, rent/mortgage, utilities (like Electricity).

Wants are all the things that make us feel like we’re keeping up with the jones, for example, fancy restaurants, clothing, expensive holidays, etc.  To be sure, wants are what I call financial independence killers!

The Secret To Becoming Financially Independent

SECRET: If you want to retire at 65 or 67, and are in your 30’s – you can save & invest 10-15% of your income, and you’ll probably be ok.  But if you want to retire earlier, much earlier, you’re going to have to ratchet up your savings to 50% – 60% of income.  

Don’t think it’s achievable?   Think again!  In the coming days, I’ll show you exactly how to do it – and I know you can do it!

Here’s how you start.  First, organize the expenses section of your spreadsheet into needs and wants.  And for the next month, stick to just your needs as much as you can.  

In the above Cash Flow Plan, you now have a better picture of where you’ve been spending your money. It’s also the point you need to ask yourself about how much you spend. You won’t be able to become financially independent unless you control your spending! For example, how about the other fixed costs like the Credit Card payments (Are you just making minimum payments?), Student debt, etc.  While some categories are easier to cut than others, there are almost always places to improve.

Society is generally quite knowledgeable about how much and when their income arrives, but rarely devotes more than a fraction of that time focusing on their expenses!

Related Read: One Gen Z’s Path to Financial Independence

Cutting Expenses

My favorite way to start an expense-cutting campaign is to make it into a game. Patience is key – it’s something that will take time to get right.  First, start slow and work out the easy categories first. Start with Shopping and Restaurants. Then, set a goal of cutting these categories’ worst month by 50%.  For instance, in the above cash flow example, the person spent nearly $1,500 in December on restaurants. Consider setting a goal to cut that in half (I.e., $750/mo).  And then, think about ways you might be successful in doing so. E.g., could you bring food to work (For lunch) or make your coffee at home, and bring it with you outside?

For the shopping category, ask yourself the next time you consider buying X or Y the following questions: “Do I REALLY need this” and “Can I live without it”?

Don’t Forget The Surplus

Also, consider your monthly surplus target.  The target surplus that you should have at the end of the month.  The higher the number, the better. And, if you exceed the goal, consider that a win! If your monthly surplus target is $1,000 and you have $1,200 leftover, that’s fantastic! Over a year, consider setting a surplus target of 75% of your income.  And by the end of the 2nd year, try for 50%. For instance, if your monthly household income is $7,000 – set a monthly surplus target of $3,500. It won’t be easy, so take it slow.

Earn More / Get A Side Hustle

It doesn’t matter if you make $50,000 or $150,000 a year.  Unless you’re spending less than you earn, you’ll never get ahead.  

- Rick Orford

The above quote is one of my favorites, and I feel like I say it daily.  Aside from cutting expenses, there is simply no quicker and easier way to improve your monthly surplus than getting a side hustle.  Today, career prospects are better than they (almost) ever have. Anyone who wants a job can get one. A nice benefit of this is that after a few years in your current position, you can likely move into a new / better / higher-paying role at either your current employer or elsewhere.  Consider this carefully when looking at your overall cash flow plan.

If moving up into another employment opportunity isn’t quite possible at the moment- Perhaps you love your job or where you work, or the benefits, for example, you might consider starting a side hustle.  For example, consider ridesharing, food delivery, teaching English online, becoming a local tour guide, or even just a simple part-time job! Getting a side hustle will help you increase your income.

Create An Emergency Fund

First, what exactly is an emergency fund? It’s some money set aside if “worst came to worst.”  For example, you might have lost your job or faced a significant and unexpected expense.  The emergency fund should be in the form of a savings account – but you can’t touch it unless there’s an emergency! Experts agree on an emergency fund (sitting in a savings account, not to be touched unless there’s a REAL emergency) should be six months of your necessary expenses. Indeed, that means rent/loan payments/insurance, etc.   It does not include discretionary categories such as eating out, or “new jeans” because these would be cut regardless in an emergency.

By now, you should be generating some extra cash at the end of every month. And, that is your surplus. Start by transferring your surplus at the end of each month to your emergency fund savings account, until you get to 6 months of necessary expenses.

Pay Down All (Non-Mortgage/Investment) Debt

Once you have your emergency fund set up, start by organizing all your credit cards, lines of credit, car loans, and all non-mortgage/investment debt you might have.

For example, your situation might look a little like this:

Total Owing Monthly Payment Months Remaining
Car Loan $17,000.00 $472.00 40
Credit Card A $4,000.00 $40.00 240
Credit Card B $5,000.00 $50.00 240
Credit Card C $6,000.00 $60.00 240
Student Debt $22,000.00 $275.00 120

Experts have two schools of thought.  Some believe it’s best to start with the loan/debt that has the highest interest rate.  I believe starting by paying off the account with the lowest balance. It becomes a quick win, and on to the next.  It builds confidence, and I think you’ll more than likely stick with the program. Why not give yourself a quick win?

So I’d start with attacking Credit Card A.  Assuming, again, that your monthly surplus is $1,000, it would take only four months to get paid off in full.  And once that’s paid, move on to Credit Card B, then C, then the Car Loan, and then Student Debt. In time, you’ll become a pro at this, and it’ll get easier and easier to accomplish.

Watch Your Credit Score. Improve On It.

By now, you’ll have reduced expenses, created a surplus, and started paying down debt.  Fantastic! One thing you may be surprised to know is that your credit score will have likely improved, perhaps a little.  It’s true! As long as you’re not late making your payments, or applying for more credit, your score would have likely improved!

Since a portion of your credit score gets made up of % credit utilization, I.e., If you consistently maintain balances over >30% of your credit limit, your score will suffer.  Since your credit balances have an opposite effect on your credit score, your credit score goes UP when your balances go DOWN. Why might this be important? Lenders look at your credit score as a risk factor when determining whether or not to grant you the loan in addition to setting your interest rate! In other words, a higher credit score will generally mean you pay less interest!  Paying less interest means a higher monthly surplus!

Start A Small Business

Starting a small business is one of my all-time favorites to increase income. Also, it can make you the most money. And, I believe just about anyone can do it.  Find a product or service that you can sell to others (People or businesses) on a consistent monthly basis.  Make it subscription-based. For example, customers pay you a set amount every month (Automatic payments, i.e., via Paypal Subscriptions, are a favorite of mine). Then, in your business plan, make sure to consider how it might be scalable (I.e., what happens if you suddenly got 10x the customers, or 100x).

Perhaps the product is a newsletter that gives the reader value on a particular topic. Or, maybe it’s a service like bookkeeping. Bookkeeping is hot in 2021! Whatever it is, keep your expenses low, watch your dollars, and make a goal of eventually making it a hands-free business, or do like I did and sell it for seven or even eight figures!

Your Monthly Surplus Money Needs A Job

Make it a habit to invest your monthly surplus money regardless of the current market conditions. Buy Stocks, or save down the down payment on a rental property, etc.  Look for passive income opportunities, for example, dividends or rental income and keep reinvesting that income + your monthly surplus. Through the power of compounding, your money will start to grow faster than a speeding bullet.

Mini Goals On Your Way To Financial Independence

Now, let’s work on something a little lighter:  your goals, dreams, and aspirations. It’s not fluff, but rather, it will become the REASON for your desire to be Financially Independent. So let’s break this down.

Ask yourself: what do you want in life?

No, it’s not a million, or ten million dollars. No, the amount is what you’ll need to get to that point, eventually. And it will be different for everyone.

Consider Your Wants/And Desires

  • Is it to pay off your debts?
  • Put your kids through school?
  • Perhaps retire early?
  • Maybe be able to travel once a year, or twice?
  • Or ???

How To Pay Down Debt And Become Financially Independent

Debt reduction is the natural next step in the program.  Certainly, generating a healthy surplus is essential to eliminate monthly debt payments. Also, the surplus will be the key if you need help getting out of a debt spiral. Plus, the first step in debt reduction is to identify what is good debt vs. bad debt.

Good Debt

Good debt is anything that has an asset attached and, ideally, has equity and can get sold.  For example, good debt is a secured loan with a reasonable (non-predatory) interest rate.  Yes, loans that often match these criteria are mortgages and, to some degree, car loans.  Many who are financially independent continue to leverage and maintain good debt.  For example, a smart investor might have a mortgage on a rental property and pay 4% interest to the bank. All while earning 10% from the rental income.

Bad Debt

Bad debt is a loan account that carries high-interest rates (i.e., over 15%). Indeed, bad debt is unsecured (i.e., does not have any asset attached that you can sell), and can often feel like is never-ending.  Credit cards (due to their high-interest rate), and student loans (due to their high, unsecured balances) often come to mind.  They can seem like endless obstacles that can’t get overcome.  Further, bad debt will undoubtedly play a role in preventing someone from becoming financially independent.

Having said that, there’s an exception to using unsecured debt. If you are buying an asset that holds value and can be sold, then, using a credit card or line of credit may be okay. In this case, you’ll need to pay attention to the interest rate.

Debt Snowball Method Is A Good Step In Becoming Financially Independent

There are a few ways to attack household debt, and my absolute favorite is the Debt Snowball (My preferred way) method.

How Does It Work?

Start by listing all your debts (everyone) in order.  Eg. Mortgage, car loans, student loans, lines of credit, credit cards, etc.  Organize them by the balance outstanding.  Typically, the mortgage, for example, will have the highest balance.  Also, your current level of financial understanding will certainly pop!

Your list might look something like this:

  • Mortgage – $240,000
  • Car Loan – $18,000
  • Credit Card A – $6,000
  • Credit Card B – $2,000

With the snowball method, my recommendation is to start attacking credit card B.  Indeed, it has the lowest balance and, therefore, can get paid off the quickest.  Then, once you have that one knocked out, you’ll have an instant feeling of accomplishment. Not to mention, a monthly payment that you can then put toward the next debt – Credit Card A.  And so on. Sure, credit card A might come with a higher interest rate than credit card B, but, psychologically, it will keep you better motivated.

Strategies To Improve Your Income

Now that you learned about the first method to increase your surplus (paying down debt), we need to focus on the other part of the equation – increasing your income, and one quick way to do it is to start a side hustle.  To be sure, side hustles are crucial to paying off debt and becoming financially independent.

I suggest side hustles as a temporary means of achieving a goal.  For example, goals can be paying off debt, or reaching your Financial Independence Number.  To be sure, the side hustle is just a short lever you can use on your path to becoming financially independent.  However, you don’t have to rely on it forever.  Because, when you are financially independent, you want to rely on your PASSIVE INCOME.

What’s A Side Hustle?

Side hustles are a part-time jobs.  Ideally, you can start a side hustle from home, but others require that you “go out and work.” For example, side hustles can be driving or a ride-sharing company, or teaching something online. If you’re for how to become financially independent, here are the Top 30 side hustles for 2021 you can start doing today to earn an extra $1000.

Whatever it is that you do, make sure you turn a profit and apply 100% of it to your goal (I.e., debt reduction, etc.).  Then, in no time, you can reduce debt and create a passive income stream.  And finally, financial independence will start to become a reality.

Have you ever wanted to start something on the side?  Feel free to leave a comment below, as I’d love to hear about your ideas!

Financial Independence Number

Your Financial Independence Number is one you’ll need to know as a general baseline that you’ll need to be “Financially Independent.”  To be sure, your Financial Independence number is equal to your annual expenses (needs and wants) times 25. Or, you can multiply your monthly needs and wants by 300. So if you say your monthly expenses are $4,500/mo, then the amount you need to be Financially Independent is $1,350,000.  This money will need to get invested in a conservative portfolio of dividend-paying stocks, and a combination of short & long-term bonds. Then, the dividends become the passive income that you’ll live on, thus making you Financially Independent, as I describe in detail in my book, The Financially Independent Millennial.

So by now, you’ve learned about the different types of income, different types of debt, and methods to pay it off quickly.

Today, we look at what it takes to become financially independent.   To be sure, while there is no exact science, experts (and I) agree that your passive income needs to exceed your minimum monthly expenses.

The 4% Rule

Need to know: The 4% Rule is the conservative withdrawal rate that experts agree can be withdrawn from your investments in “retirement” without touching the principal.

How do you calculate it?  To get your financial independence number, multiply your annual expenses (needs and wants) by 25.

For example, your minimum expenses look like this:

Mortgage/Rent/Insurance/Maintenance: $2000/mo Food/Restaurants/Shopping $1000/mo Car/Gas/Insurance: $600/mo Misc/Travel/Discretionary $400/mo

In this (albeit minimal) budget, you would add up the monthly expenses ($4000), and multiply by 12 to get the annual figure, and then 25.   Also, in this example, you can achieve financial independence with $1,200,000 invested.

With this amount of money invested, it should generate enough income to sustain a 4% withdrawal rate.

Investing Your Surplus Is The Key To Becoming Financially Independent

You can invest in many different things.  For instance, you can invest in a rental property, or you can invest in stocks that pay dividends, CD/GIC’s, and so on.  Also, I recommend consulting with an investment professional who has some form of fiduciary duty to best assist you further with investments.

Final Thoughts On Becoming Financially Independent

The path to financial independence is usually a slow and boring process. Getting rich quick is not the norm. And, I might even say, unless one learns the money skills needed to maintain a healthy retirement, getting rich quickly could lead to burning through the money just as fast.

Article By Rick Orford, The Financially Independent Millennial