Financial abundance

Two roads to walk to financial independence.

Wanting to not have to worry about money

In my journey to financial abundance the first major financial level to achieve for me is financial independence. Meaning I want enough income from other sources then income from working to cover my monthly financial obligations.

So how do I reach financial independence what roads do I have to cover and what strategies are available to reach financial independence.

Financial obligations first

The first thing we need to how much money we need to meet all our financial obligations. If we know our basic cost of living and add our current spending pattern, we can determine the yearly amount we need to cover our cost living.

For example our cost of living equals €30.000,- so to be financially independent we need €30.000,- a year to cover our cost of living without being dependent on income from working. So, a simplified formula is if you have 25 times the amount of money available you need to cover your yearly cost of living. In our example this means €750.000,- , when we make an average yield of 5 percent this means our money wont decrease and are able to live form the yield for the rest of our lives.

So the formula written in full: €30.000 X 25 = €750.000,- , €750.000 X 5% = €37.500,-.

The €750.000,-

I can imagine that for most €750.000,- seams unreachable and that is why we need a good strategies to reach the level of financial independence. The first strategy is to reduce the cost of living. The second strategy is to increase your income. It is possible to choose one or the other, but the quickest road to financial independence is to do both.

The first strategy the reduction of cost of living, sounds easy but can be difficult to achieve.
Important when implementing this strategy is to have insight in your spending pattern. For me it works to make an overview of the cost that are made each month. Then it is important to look at which cost we can eliminate or reduce. For example, our biggest cost at the moment is our mortgage, reducing this cost even if its by small steps reduces the amount of money we need to reach our financial independence.

Increase income, easy as that.

The easiest way to increase your income is get paid more for the work you do, simply said ask for a raise. This is of course not always possible, so we need to find ways to make a yield on our money. So for example if we start investing €300,- a month and make a yield of 5 percent we increase our income step by step.  If we consistently invest €300,- a month and make a 5 percent a year we invest over 30 years €108.000,- without any yield if we calculate the yield and take into account the power of compounding interest we could have a yield in 30 year of: +/- 132%. Meaning on the €108,000,- we invested we made a profit of €142.904,30.  To give an overview of the power of compounding interest I have put them into a graph, where invested is the money we spend so the €300,- a month, I added a yield of 5% on top of the invested money and to show what happens if we even have a better yield in this example an additional 5% so a total yield of 10%.  

4. Financial security

The financially secure is the level where we have our rainy-day fund in place and have sufficient income to invest on a regular basis. I would say that each month at the end of the month there is money left which can be spend on the growth of our financial position and or on our personal development. To put it simple there is money left at the end of the month in stead of days left at the end of my money.

At this level at least 10% of all income should be used to invest, in the ideal situation you start with investing money before you start spending. This to ensure that the investments are made. I would even say that at this level you should try to spend 10% on financial growth and 10% on personal growth.

At the financially secure level we should start getting some returns on our investments and it would be very nice to have some addition income for example from dividends or investment returns.

To conclude

To conclude combining both strategies make the chance we reach financial independence much higher. It is not for everyone and yes it will take effort and sacrifices. But I think if you really want to be financially independent and are committed to achieving this, anyone can reach their level of financial independence.