How you can be financially independent within 4 years

21st October 2018

It might sound like a crazy idea to think that you could stop working for money (e.g having a job) in four years from today - no matter how old you currently are. But the truth is, it isn't as hard as you might think!

Being financially independent is all about controlling your monthly cash flow – how much passive income you have coming in verses the expenses you have going out.

Managing my monthly cash flow is why I invest in assets that generate monthly income. This income quickly replaces my earned income (from wages) and is what ultimately allows one to stop working for money.

I’m going to outline a strategy below that you could follow. This is based on a similar strategy that I am following.

Get control of your expenses

Before you even start thinking about financial independence, you need to figure out how much income you need each month to support your lifestyle. If you’re buried in consumer debt, then the first thing you will need to do, is clear that debt.

For me, the best thing money can buy is my own freedom. For example, a bigger house and newer car, while nice to have, is something that will wait until after I'm financially independent. Having a larger mortgage or car loan simply moves me further away from achieving my goal.

Ultimately, if you want to achieve financial independence the biggest question you will need to ask yourself is: can I make the sacrifice now? Expensive holidays, flashy clothes and new furniture just may need to wait a few years - but trust me, it will be worth the wait.

In fact, this sacrifice really is the biggest barrier that’s stopping most people from achieving financial independence. It isn't difficult if you change the way you manage your money, but for so many, changing their spending habits simply isn't something they are willing to change.

Provided you’re willing to make the change, here is what you need to do.

1. Start tracking your monthly spending

Divide your expenses into three main categories:

a. Basic living cost related expenses - these are expenses such as your mortgage, bills, health related costs, transportation costs.

b. Your lifestyle related costs - such as entertainment, seasonal costs (Christmas, birthdays etc), dining out expenses, takeaway expenses, household purchases and any personal costs that support your lifestyle.

c. Unnecessary costs - anything that comes up that you feel could have been avoided. These are those bad purchases that add up in the long run that you feel with a new drive towards financial independence that you could avoid. Interest on debts that could be avoided (e.g. credit card debt) should be listed here as well.

The idea of this exercise is to itemise any costs that you could avoid that could be preventing you from reaching financial independence. Work out the following:

  • How much your basic living costs are per month.
  • How much you need to support your lifestyle. A good example is, you may play a sport or have certain hobbies - this is part of who you are, so you don't want to give that up.

Once you have the numbers, see if you can turn this into some sort of budget for next month and start tracking your performance each and every month. I find myself a lot more comfortable about spending money when I know my budget - it feels great being in control of my expenses.

2. Start paying yourself first

You have likely heard of this saying before, but often there is confusion over what this actually means. Paying yourself first doesn't mean paying your bills or mortgage before anything else. It actually means your first transaction after a pay day should be into your savings or investments. After all, if you pay your mortgage first, you’re not actually paying yourself first - you're paying the bank first!

To be financially independent, you’re going to have to learn how to be an investor - there is no getting around it. These days, the return on savings accounts are less than the inflation rate, so becoming an investor is the only way to make your money start working for you.

I'm not going to go into specific investments in this article, but I will say that I target a monthly return from my investments of 5% per month overall. It is difficult to find investments that generate this level of return, but I've found that by splitting my portfolio between peer-to-peer lending, forex managed trading and investing in businesses, I've been able to achieve these levels of returns to date.

Even if you were to target a very modest return of 2% per month, you would be financially free within 10 years.

My calculations are based in needing disposable income of €4,000 a month after tax to support my lifestyle. If you need more or less, your figures could be adjusted accordingly.

So how much do I need to aim to invest each month? Based on my calculations if you can invest €1,000 a month you will be financially independent within four years if you target a monthly return of 5%. This would give you €6,000 per month, leaving €4,000 a month to cover your lifestyle after taxes (assuming a 33% tax rate).

Here is a summary of how long it will take to be financially independent from investing €1,000 a month, depending on the level of return you target per month:

Monthly return Total months Portfolio balance* Monthly withdrawal
5% 48 (4 years) €124,000 €6,200
4% 60 (5 years) €154,000 €6,170
3% 77 (6 years, 5 months) €206,000 €6,180
2% 120 (10 years) €304,000 €6,080

* The less your monthly return, the larger your portfolio balance will need to be to cover the €6,000 per month drawdown.

In future articles I will cover in more detail what I invest in, but for now, ask yourself the following question - can your lifestyle be adjusted so that you could start putting aside €1,000 per month?

As I said above, becoming financially independent is all about prioritising. Can you adjust your lifestyle to make financial freedom your number one priority?

As a follow up to this article, take a look at this article from Robert Kiyosaki, author of Rich Dad, Poor Dad on the power of paying yourself first.

My name is Michael Houghton and I blog a few times a year on various topics, related to entrepreneurship, investing and financial education.

Sign up to my newsletter below to keep in touch with my latest articles.