Why Your Income Has Nothing to Do With Financial Freedom
By: Abigael Taiwo
Tags: Investing, Financial Independence, Retirement, Personal Finance, Financial Freedom

Why Your Income Has Nothing to Do With Financial Freedom

Photo by Peggy Anke on Unsplash

Financial freedom is the buzzword that has us all wanting to become millionaires, to quit our jobs, and retire on a beach somewhere exotic. But sadly, the reality for most is that this dream will never see the light of day.

It’s not for lack of trying, but it’s just the way the system is set up: to mislead you with misinformation, so you stay on the hamster wheel, paying your taxes and working well into your 60s.

What if you could break free of this system? Well, you can, and all it takes is creating a few new habits that may seem small now but with time will compound exponentially.

1. Savings Rate Vs. Income Earned

Have you ever heard the saying:

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.

— Robert T. Kiyosaki

How much of your money are you keeping every month? What is your savings rate? 10%, 20%, 50%? I personally sit around the 50% mark because I have specific goals I’m trying to reach, and I know that the fastest way to reach them is by saving at least 50% of my income.

I’m self-employed, and I don’t yet have an enormous income, but I still put away 50% of it monthly into different savings pots and investments because I know as my income grows, so will how much I save. Also, if I can double my savings percentage, the time in which it takes me to become financially independent is now cut in half.

Image from Mr. Money Mustache

If you look at the table above, you can see that by saving 50% of your income, you can retire in 17 years on a similar income to what you’re on now. This is based on the idea that you can live off 4% of your investment portfolio every year without ever running out of money. It’s the foundation of the F.I.R.E. (financial independence retire early) movement.

I plan to become financially free earlier than that and have a plan in place to reach it without having to invest every penny, but I won’t go into the details of that here. I’ve already done the math in a video I made on the subject:

But the point is to show you the simple equation of financial freedom: how much you save of how much you make is more important than how much you actually make.

2. Build Strategies You Can Obsess Over

The day I discovered I loved collecting data and tracking progress in spreadsheets is the day my financial life changed for the better.

From the gamification of tracking my net worth to adding new lines to the “Invest & Save” category in my budget because I ran out of space. I even recently created a Dividend Portfolio Tracker that tracks the yearly income from my dividend-paying stocks/funds just so I could see it increase every time I bought one more share.

These are the things that get me excited about money. You need to find a way to have fun with money too because it’s a lifelong journey and no one wants to do something that’s boring and monotonous. But if you can make it fun, then it never will be.

3. Cutting Your Spending Today Will Give You Extra Years in Retirement

You may think this goes without saying, but I’m going to say it anyway: the fastest way to reach financial freedom is to cut back on spending. It’s the simplest thing you can do now to double your income (without actually having to switch jobs).

Cutting back on your spending increases your savings rate, which we’ve already established is the most important part of reaching financial freedom. This also means you’ll need less overall to be financially free.

You don’t have to be frugal but instead, be selective. Figure out what will be important to you when you reach your goal, be it travel, experiences, relationships. Then build your plans and goals around those priorities.

4. Learning How to Invest Your Money

With the excess of free information available to us today, there’s no excuse for us not to use it to learn how to make our money work for us. It’s the one thing I wish I’d learned about 10 years ago.

If you have no money invested today, I implore you to begin that journey. Start with a book, a podcast, or a YouTube video and learn how to invest your money. This isn’t financial advice, of course, but they do say low-cost index funds are a great place to start. Trust me; it’s simpler than it seems.

How to Reach Financial Freedom

Finally, the simple formula for reaching financial freedom is: cut back your spending, increase your savings rate, invest the difference.

Let compounding growth work its magic, and in however many years of your choosing, you can be financially independent, living off 4% of your portfolio and on a beach somewhere exotic, if you want that.