Here are signs that you’re financially independent

Here are signs that you’re financially independent

Almost everyone I know wants to become financially independent at a certain point in their lives. But have you ever wondered what financial independence actually means? It’s often defined as this: you’ve saved enough to support your current spending habits for the rest of your life, sans the need to earn more money. Here are specific signs you’ve attained financial independence.

You have good cash flow

It’s having enough passive income to pay your living expenses, where the passive income covers your living expenses well enough that working has become optional. Some sources of passive income include rental real estate, royalties from intellectual properties like books and music, trust fund, dividend and interest from investments, and pension.

Your net worth is more than liberating

Your net worth is the value of everything you own. Divide it by your annual expense, and if the number is 25 or more, than you’re close to being financially independent. You can withdraw a fixed 4 percent from your asset, annually adjust for inflation, and your portfolio should last your lifetime.

Your investments are more than enough

Based on a conservative 2.5 percent to 5 percent annual return, a household would require investments from $1.2 million to $2.4 million in order to be considered financially independent. Once you have achieved at least $1.2 million in investable assets and no longer seek to work again, you won’t even have to shoot for an overall return that’s much greater than 5 percent.

There are, of course, tradeoffs and meaningful steps to be taken to get to this point. These can be summed up as follows: spend less, earn more, and invest wisely.

Ahmed Nashaat is a student at UCLA who is studying to become an accountant and financial advisor. He has always loved working with numbers and seeks to help people manage their finances better. Read more on this page.

Tags: Financial independence, investment, money, finances

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