The three lines to financial independence

What does financial independence mean?

It means different things to different people.

My definition is ‘the ability to meet all our expenditure needs from our own financial resources without relying on a job, a business, the government or family.’

Becoming financially independent means making three switches.

The first switch is from Spending to Investing.  As our income goes up our expenditure tends to go up. Parkinson’s Law says that “expenditure rises to meet the money available.” At times some of our expenses will come down automatically e.g., education costs end when children finish school, loans get extinguished, and we don’t have to make the payments anymore. Diverting the money saved by the reduction in expenditure to investing is crucial to building up wealth.

The second switch is from Active Income(income that we work for) to Passive Income(income that comes from investments). As our level of Passive Income goes up, we get the option of reducing the number of hours we work.

The third is moving from Income Wealth to Asset Wealth. Having a profitable business or earning a big salary is great, as long as we start channelling some of the monies earned from them into financial assets, which will produce income in the future. It is part of “it does not matter how much you earn; it is how much you keep.”

The choices we get by being financially independent mean we can give up work but, in my experience, very few people dothey chose what work they want to do, and the life they want to lead.

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