How To Achieve Financial Independence

A growing number of women say that achieving financial independence is their No. 1 financial goal, according to a Fidelity Investments Survey. Fifty-eight percent of women surveyed said that they wanted to feel secure and not worry about money.

However, only 36% of respondents to REAL SIMPLE and Investopedia's 2024 Her Money Mindset survey said that they held a retirement account, while only 71% said they held a savings account. And 54% said that they struggled to pay at least one major expense. 

Whether you're hoping to go full FIRE (financial independence, retire early) or just want to feel more on top of your expenses and planning, this guide will offer practical steps to get you where you want to go. 

What Is Financial Independence?

“Financial independence means different things to different people,” says Walter Russell, an Ohio-based financial planner. “Some see it as (being) free from needing a regular job because they have money from other sources. Others think of it as not owing money to anyone, which makes them feel secure and in control.” 

Russell continues, “For some, it's about being prepared for retirement and knowing they'll be okay financially when they stop working. It can also mean having the freedom to start businesses or live wherever they want. It's all about feeling confident and in charge of your money and future.”

No matter your definition of financial independence, your end goal probably looks like freedom and autonomy. Your path to that destination will vary depending on your values, resources, and preferences.

Financial Self-Sufficiency

At a basic level, financial independence means having sufficient income and savings to cover living expenses. If you're financially self-sufficient, you have the resources to fund cost of living. 

For Brock and Becky Waterman, better known as the FIRE Travel Family, financial independence meant pulling off a wedding on a shoestring budget, selling their home, and leveraging geographic arbitrage to live on less—even with three kids in tow. 

“[During COVID] I ran the numbers to see where we were, and we figured out if we sold our house and most of our [possessions] and our vehicles...we could go ahead and be financially independent and not have to work," says Brock Waterman. 

After cutting health care costs (almost $2,000 per month because the Watermans owned their own business), child care costs (almost $15,000 per year), and property taxes and insurance, the Watermans had reduced their expenses by more than half. 

Originally from Wisconsin, Waterman says that living in an RV and homeschooling their kids is an unconventional choice for his family. But they were motivated to spend more time with their kids; financial self-sufficiency helped them achieve their goal. 

While some people aim for financial independence by working for many years to amass significant savings, the Watermans chose to do the opposite and cut expenses in order to enjoy life now. Dividend-paying stocks, some savings, and a few certificates of deposit have sustained the family thus far, making their decision to travel the world with their kids a no-brainer.

Freedom From Employment

Many associate financial independence with not needing traditional full-time employment or a paycheck. Passive income and dividend assets can help power financial independence plans.

“Investing 10-15% of gross income for retirement and putting another 20% of your after-tax income toward investing or other financial goals is a fantastic, back-of-the-envelope calculation for most people,” says Anna N’Jie-Konte, a certified financial planner and president of Re-Envision Wealth, when asked what steps she advises people to take to achieve financial independence.  

While some people can live on savings alone, most have to consider ways they could access cash fast if their circumstances change. Being self-employed or willing to work in a high-demand field as needs arise can make financial independence more accessible even without amassing much savings.

Autonomy Over Amounts

Most people think that financial independence requires a high net worth or large windfall. Konte says financial independence is achievable at lower income levels, too.

“Many financial planning studies show that in some respects it's actually easier to reach financial independence when you are middle-income because Social Security makes up a greater percentage of your retirement income need, therefore you need to save less of a nest egg on your own,” she says.

Brock Waterman agrees. He encourages people aiming for financial independence not to focus on a target savings or investing number. “When we worked for ourselves, we were paying a little over $2,000 a month, so $24,000 a year, for health care,” he says. 

After Becky Waterman closed her massage business and he stopped working, they were able to access subsidized health care because they make less annual income. Brock Waterman estimates that they paid $3,000 or $4,000 for premiums the first year. This year, he says, the family paid only a few hundred dollars on health care.  

Three years into financial independence, he encourages people to take the leap if they really want it, rather than waiting to hit a specific set number goal.

Building Long-Term Security

Whether it is fear of an emergency or ambitions to send kids and grandkids to college, long-term security can keep people locked into income-generating jobs that they don’t love. But financial security is just as much about what you want to spend your money on as it is about what you don’t.

For example, the Watermans decided against saving for four-year college educations for their kids. Instead, their long-term vision includes setting aside $10,000 to $15,000 per kid to invest in their vocational training, skills building, or launching their own business. 

“They'll have the money for community college, and if they decide they want to go to a four-year college, that's going to be something they're going to have to make a decision for themselves,” Waterman explains. 

Russell adds that discipline in saving, investing, and living below one's means plays a more significant role regardless of income level. 

“Focus on increasing the savings rate and maximizing investment returns through strategic allocation,” he advises. “High-income earners should avoid lifestyle inflation and prioritize long-term wealth accumulation through prudent financial management and investment strategies.” 

Those building blocks of financial discipline ensure financial independence for the long haul.

Why Women Can Benefit Greatly From Financial Independence

While financial independence serves everyone, research shows it holds special significance for women, who typically earn less than men, live longer, and have greater caregiving responsibilities.

According to 2022 data from the U.S. Census Bureau, women employed full-time and year-round had median earnings of $52,360, while the median earnings for men employed full-time and year-round were $62,350.

While progress has been made over time in closing this gender wage gap, the disparities between the earnings of men and women persist. 

Women Live Longer 

The latest data from The World Bank shows that in 2021,  life expectancy at birth was 79 years for women in the United States and 74 years for men. This represents a 5-year difference, with women having a higher life expectancy compared to men. Yet lower wages and long stints without income due to child rearing and caregiving put women at risk of having less cash during their golden years. 

According to estimates from Fidelity Investments, the average 65-year-old woman can expect to spend about $157,500 more on medical bills throughout retirement than the average 65-year-old man. Longer female life expectancies correlate with a need for larger retirement savings and income to cover additional years of living expenses and health care costs.

Navigating Caregiving Duties

“With added responsibility comes additional costs and cash flow pressure,” Konte adds. Women disproportionately shoulder unpaid caregiving duties for children and adult dependents.

A 2023 MetLife study found that most caregivers are women, and women providing care to a parent lose as much as $120,000 in lifetime wages due to working fewer hours. If a woman leaves the workforce entirely to provide care, the study found the lost wages rise to around $142,000. Caregiving for kids, spouses, and parents contributes to career impediments, lower savings, and higher out-of-pocket care expenses for women than men.

Research from AARP shows that Latinx and Black caregivers spend higher percentages of their income on care expenses than white caregivers. So, whether it's earning power, longevity, or caregiving norms, women encounter unique financial challenges that make financial independence difficult to achieve but even more meaningful for disrupting cycles of inequality. 

10 Steps to Financial Independence

Achieving financial freedom rests on embracing an intentional money mindset, goal-focused strategies, and smart financial behaviors over time. It's a lifestyle shift rather than a quick fix. Here are 10 key steps that are an important part of any financial independence journey.

Step 1: Define Your "Why"

Defining your "why" gives meaning and motivation to stay disciplined while working toward your unique vision of financial freedom. Whatever your answer, revisit this when you need inspiration to stick to the path.

Step 2: Assess Your Finances

Gaining clarity around your current financial situation identifies opportunities for improvement and savings needed to reach independence.

To assess your current financial situation: 

• Start by tallying your monthly income from all sources, including your salary, side hustles, and any passive income streams. 
• Next, list out your monthly expenses, making sure to account for both fixed costs like rent or mortgage payments, as well as variable expenses such as groceries and entertainment. 
• Don't forget to factor in one-off annual bills, such as insurance premiums or property taxes, as these can significantly impact your overall financial picture.

Once you have a clear understanding of your income and expenses, it's time to calculate your assets and liabilities. Your assets include any savings accounts, investment portfolios, and property values. On the other hand, your liabilities encompass all forms of debt, such as credit card balances, student loans, and mortgages.

To calculate your net worth, subtract total liabilities from total assets. This formula provides a snapshot of your current financial health and can serve as a baseline for setting future financial goals. Understanding your tax scenarios is also crucial, as this can influence your investment strategies and overall financial planning.

Doing a thorough assessment may uncover excess spending that could be saved or invested to reach financial independence sooner. This intelligence becomes the baseline to set goals against and track progress over time.

Step 3: Craft Your Financial Independence (FI) Number

Although the Watermans discourage it, many people start their financial independence journey by coming up with a number—an ideal savings, investing, or net worth number that would make them feel that full-time work was truly optional. Quantifying your number motivates saving and investing decisions.

To determine this:

1. Estimate your annual retirement living expenses
2. Factor one-time goals like buying property
3. Increase for expected inflation over time
4. Calculate investable assets needed to generate that income

Although the future remains unpredictable, having an estimate keeps your financial behaviors aligned with your target.

Step 4: Automate Saving and Investing

“For individuals aspiring to achieve financial independence through investing, several fundamental principles can guide their journey,” says Russell. Starting early and investing consistently harnesses the power of compounding returns over time.” 

Diversify investments across different asset classes to mitigate risk and improve long-term growth. “Rebalancing the portfolio periodically ensures alignment with financial goals and risk tolerance. Continual education about investing strategies and market dynamics empowers individuals to make informed decisions and adapt to changing circumstances on their path to financial independence,” he adds.

He says investing may require the help of a team—a financial advisor, a tax strategist, and an attorney—whose expertise can help you achieve financial independence even sooner.

Step 5: Create a Debt Repayment Plan

Some definitions of financial independence entail being completely debt-free. But, for some people, debt doesn’t derail the dream. 

“Achieving financial independence while maintaining debt is possible but requires strategic management and prudent decision-making,” says Russell. He says it's essential to differentiate between “good” debt, such as mortgages or student loans, and "bad" debt, like high-interest credit card debt. 

Russell says, “Prioritizing the repayment of high-interest debt while leveraging low-interest debt strategically can be a viable approach. However, minimizing debt levels or achieving debt-free status can enhance financial security and accelerate the journey to independence.”

To create a repayment strategy, there are two popular options: the debt snowball and the debt avalanche methods:

Debt Snowball: Pay minimums on all debt while putting any extra funds toward the smallest balance first. Once the first debt is cleared, roll its minimum toward the next smallest, and so on until all are repaid.

Momentum builds as small wins pile up. This mental boost keeps you tackling larger debts.

Debt Avalanche: With this method, arrange debts by interest rate instead of size. Make minimum payments on all while targeting extra funds at the debt with the highest interest rate first.

Paying down high rates saves money on expensive financing charges over time. However, it may take longer to see progress.

Choose the approach that best fits your financial personality and needs. The main thing is sticking to the repayment plan until you're debt-free.

Step 6: Keep a Realistic Emergency Savings Fund

Life happens. You never know when you'll be hit with unexpected home repairs, job losses, or health issues. Having accessible cash reserves prevents resorting to high-interest debt when surprises hit.

Set up automatic monthly transfers to hit the target amount in an Federal Deposit Insurance Corporation (FDIC)-insured account, preferably a high-yield savings account that you can easily tap. Once you meet your emergency savings target, redirect automated flows toward investing instead. 

Step 7: Maximize Your Human Capital

Your most valuable financial asset remains human capital. Your ability to earn over your working years through high-income skills can make financial independence even easier to achieve. Pursue education (even financial and investing education), as well as consulting or freelancing opportunities that allow you to boost your income on your terms.

Carving out time for professional development keeps your skillset marketable, even if you never choose to work again. 

Step 8: Build Multiple Income Streams

As you expand skills and connections, create diversified income channels versus relying solely on salaries and wages:

• Side hustles: Start a weekend freelancing business doing what you love. Drive for a rideshare service in your spare time. Monetize a hobby or talent.
• Online businesses: Launch a digital product, YouTube channel, affiliate marketing blog, or dropshipping store. Multiple streams leveraging the internet scale easily.
• Real estate: Invest in a rental property you can hire a manager to oversee. Real estate investment trusts (REITs) provide more passive real estate investing exposure too.
• Equity investments: Build a diversified portfolio of stocks, bonds, exchange-traded funds (ETFs), etc. over time. Dividends and appreciation compound as the principal grows.

Mixing multiple income sources protects against disruption and risk while compounding overall cash flow.

Step 9: Manage Costs and Practice Intentional Spending

Big wins also come from the cost side of your cash flow equation. Small cost savings add up. The Watermans believe in frugality, not because they’re penny pinchers but because they are intentional about what they pay for.

“You can be very ruthless … don't spend money if it's not important to you,” says Brock Waterman. Ask yourself if every expenditure moves you toward independence goals and greater life satisfaction. Does buying another pair of shoes bring lasting value? Or does a trip create deeper connections? 

For the Watermans, traveling isn’t a luxury. It’s part of their financial independence plan. Traveling to low-cost-of-living areas means they spend money on memorable adventures while world-schooling their kids. Intentional spending aligns with the deeper “why” and prevents lifestyle creep from diluting bigger life plans.

Step 10: Continuously Educate Yourself

Reaching financial independence requires lifelong learning and growth. Mastering money mechanics, investing nuances, and tax optimization strategies greatly accelerate your outcomes over decades.

Read personal finance books, listen to financial independence podcasts, attend investment seminars, and join money-minded online communities. Surround yourself with like-minded people who will teach you new, useful skillsets, rather than discourage you from reaching for your goals. 

Also, work with a financial advisor—a fiduciary who crafts a holistic plan for you. Their expertise navigates optimized outcomes not possible alone. Investment pros protect wealth too —steering you away from emotional decision pitfalls novice investors succumb to.

Frequently Asked Questions (FAQs)

The Bottom Line

The first step to achieving financial independence is defining what it means for you. True independence requires a shift to intentional money mindsets and habits over time. There’s more than one way to do this.

“I think it's important for folks to work toward multiple financial goals at once,” advises Konte. “In my opinion, retirement investing should be a nonnegotiable that we are always working toward regardless of our other financial goals. The amount will vary depending on your cash flow needs, but we should always try to do both.” 

Russell reiterates that “while a high income can expedite financial independence, it's not a prerequisite.” Smart and consistent money management, even with the assistance of a skilled team of advisors, can unlock financial independence for some families.

Each money milestone compounds into greater agency to determine how you spend your time. Financial independence tends to deliver time and geographic independence too, which offers value well beyond dollars and cents.