During these days I realized that I started this series for children and youth with an introduction for adults, then I continued to discuss savings and investments and forgot the most important thing; to give definition and purpose to financial independence.
The purpose of this series of blogs for children and youth is to share knowledge and provide relevant tools so that in the future you feel safe and / or comfortable making financial decisions that affect you as an individual, your family and your community. It is important that you obtain basic knowledge of how to manage a budget, savings, investments, expenses and payments if you want to reach financial independence.
Personal Finances
Before understanding financial independence, we must understand personal finances. Generally, once you reach the age where you are allowed to work, you get a part-time or perhaps full-time job. Once you start generating income, you decide that you want some things to improve your quality of life: car, new clothes, new phone, accessories, restaurant meals, etc. All this is amazing, but what you must acknowledge is that once you receive income you must pay yourself first. Paying yourself first means putting money into savings and investments before getting into debt or extra expenses.
Income: we usually generate income by getting a job but you can also offer your products or services through the internet. Examples, books, music, tutorials, art, etc.
Debt: the most common are auto loans, personal loans, student loans, and credit cards.
Fixed expenses: rent, cell phone, grocery shopping, utilities such as water and electricity.
Variable expenses: clothing, accessories, restaurant meals, etc.
What is financial independence?
Financial independence means having enough money to cover your financial commitments without having to work or depend on others. A simple definition for financial independence is having enough passive income to the things you enjoy.
There are many adults wishing we had more time to do what we want, but with all the financial commitments we have, we simply cannot leave work or do what we want because we need to continue to generate income to pay our expenses and debts.
While I write this blog and others, please note that I am aware that not all homes and families have the same resources and that sometimes our environment can affect our goals and our relationship with money. The best we can do is educate ourselves and do our best.
Here’s a guide of four things that certainly affect your relationship with money:
- Family finance: what is the financial situation in your home and environment?
- Financial education: how educated are you and the people around you to face an independent life and manage our finances?
- Financial behavior: how do you feel about money and what is your behavior towards money?
- Relationship with money: what is your relationship with money?
How to obtain financial independence?
Financial independence is obtained when you can generate passive income and this income covers all your needs. You can also gain financial independence when you have enough savings and investments to cover your expenses without having to work anymore. In other words, you gain financial independence when you no longer depend on income from a job to continue paying your daily expenses.
The key to financial independence is that our income is greater than our expenses and even better if they are passive income. Passive income is income that continues to be generated while you sleep. You don’t have to go to any job to get paid.
Pilars of financial independence
- Invest: use your money to invest. Still not working? You can start investing the money you receive as a gift or allowance.
- Low fixed expenses: children and young people usually do not have fixed expenses because these are covered by adults. Fixed expenses are those that do not vary and we need pay for these to live. Examples of fixed expenses are: rent, utilities, telephone, etc.
- Low variable expenses: variable expenses are those expenses that we can increase or decrease depending on our consumption. Examples of variable expenses are: restaurant meals, accessory clothing, entertainment, etc.
- Multiple sources if income: Identify ways to generate income in different ways. Income is not only generated by working. There are different ways to generate income such as selling items or services online.
- 4% rule: this is a bit complicated but basically it is a rule that says that once you reach retirement, you can only live using 4% of the money from your investments.
Why is financial independence important?
The importance of financial independence is in the definition. Simply doing what you want with your time and money is priceless. It is not the same to work because you need to rather than because you want to. Add to this being able to cover all financial commitments without headaches, totally priceless. Many adults find themselves in a situation, every month, in which their expenses are greater than their income or perhaps they decide to use the money for what is necessary rather than for things they want.
Benefits of financial independence
Learning how to manage your money properly gives you freedom, you can use your money and other resources for things you want and not to live paycheck to paycheck or have a lot of debt like most adults. Financial Independence allows you to:
- Open your own business
- Work in what you like and not on what fits your financial commitments
- Make personal decisions based on your interests
- Live debt free
- Not having to actively work until age 65 or beyond
Next Steps
- Discuss the topic of financial independence with your family.
- Help create and execute a family plan to reach financial independence.
- Share this information with your family and friends.
- Got questions? Reach out through social media.
