Understand Wealth, and Become Financially Independent.

Some insights can help you achieve financial independence, such as understanding what wealth is, identifying your goals, and potentially investing. TableofContents Expand TableofContents IncomeIsNotWealth Long-TermThinking AssessingYourBalanceSheet ReachingaGoal CreateSurplusFundstoInvest RememberThatTaxesMatter—aLot TakeControlofYourTime GradesDoNotCorrelateWithWealth FindaComplementarySpouse InvestinNicheMarkets SupportYourProductiveRelatives FrequentlyAskedQuestions(FAQs) FinancialIndependenceFAQs TheBalance Budgeting HowtoBecomeFinanciallyIndependent •••  HeroImage /GettyImages By JoshuaKennon FullBio Twitter JoshuaKennonisanexpertoninvesting,assetsandmarkets,andretirementplanning.Heisthemanagingdirectorandco-founderofKennon-Green&Co.,anassetmanagementfirm. Learnaboutour editorialpolicies UpdatedMay03,2022 Reviewedby ChipStapleton Reviewedby ChipStapleton FullBio LinkedIn ChipStapletonisaSeries7andSeries66licenseholder,passedtheCFALevel1exam,andisaCFALevel2candidate.He,andholdsalife,accident,andhealthinsurancelicenseinIndiana.Hehaseightsyears'experienceinfinance,fromfinancialplanningandwealthmanagementtocorporatefinanceandFP&A. Learnaboutour FinancialReviewBoard Thereareseveralmythsandmisconceptionswhenitcomestofinancialplanning,andindividualscantakeinalotofadvicefrommanygoodandnot-so-goodsources.Mistakescanrangefromconfusinghighincomeswithwealth,tonotknowingtheimportanceoftax assetplacement whenchoosingyourinvestments.Reviewthesekeyinsightsthatcanleadtoamorefinanciallyindependentlife. UnderstandThatIncomeIsNotWealth Mostpeoplebelievethatthekeytohavingwealthisahigh-payingjob.Yes,it'seasiertoamassassetsifyouhavemoremonthlyincome,butonekeytoincreasingyournetworthistospendlessthanyoumake.Ultimately,spendinghabitsarethereasonaprofessionalathletemaking$20millionayearcanquicklygobankrupt,whileabusdrivercanretireamulti-millionaire. Youneedtounderstandthedifferencebetweenincomeandlong-termwealthinordertoescapethespendingtrap.Incomeisanobviouscomponentofwealth,butit'snottheonlyfactor.Manypeopleseewealthastheirtotalnetworthatanygiventime.Inotherwords,wealthcanbethoughtofastheequityonyourbalancesheet—your​assetsminus liabilities. Long-TermThinking Thinkinglong-termisanimportantcharacteristicofaccumulatingwealthandachievingfinancialindependence,regardlessofyourincomelevel.Thereareseveralconsiderationsforlong-termwealth,andthey'lldifferforeveryone. Youhavetoputinlonghoursafteryearsofeducationandspecialtytrainingtogetapaycheckifyou'readoctororlawyer,butthatpaycheckdoesn'tnecessarilytranslatetowealth.Helpingtoensureyourjob’ssecurity,takinginitiativetoachieveapromotion,ortakingstepsthatwillresultinhighercommissionscanallbefactorsforwealthandwaystomovetowardfinancialindependencewithlong-termthinking. Sidegigs,privateinvestments,andahostofothervariablescanalsobewaystothinklong-termandaccumulatewealth.Theymightincludeaportfolioofprivatebusinesses,stocks,bonds,mutualfunds,realestate,patents,ortrademarks.Someofthesecashgeneratorscanbereliedonforlong-termincomeinadditiontoyourjob,orjustascashgeneratorsthatcanpullinmoneywhileyoutakelongvacations. AssessingYourBalanceSheet Takealookatyourpersonalfinancialstatement.Youmightalreadyhaveorganicinvestmentsthatyoucanrelyoninyourquestforfinancialindependence.Oftentimes,thisiswealththatgenerates capitalgains,income,anddividendswithoutlabor.Themoreoftheseinvestmentsyoucanafford,thesooneryoucanfullyachievefinancialindependence. ReachingaGoal Therealvalueofyourincomeispartiallydeterminedbytheamountyoucaninvesttoachieveafinancial-independencegoal.Settingthisgoalcanbeimportantforkeepingyourperspectiveonincomeincheck.Afteryoureachyourgoal,youcansuccessfullymaintainthelifestyleyouwantwithoutworking. Workingwithafinancialadvisercanhelpyoutosetagoalforwealthaccumulationthatallowsyoutomaintainyourstandardoflivingwithoutanadditionalpaycheckandachievefinancialindependence.Thisgoalcanbelofty, however,becausemostpeople’sannualspendingincludesalonglistofbudgetitems,suchasmortgage,carpayments,clothing,collegetuition,entertainmentexpenses,andmore. CreateSurplusFundstoInvest Theonlywaytotakeadvantageofinvestmentopportunitiesistohavethemoneytoinvest.Thereisacertainpointinsuccessfulinvestingwhereyoureachcriticalmass,andthereturnsgeneratedonyourassetscanchangeyourlife. Earninga10%returnon$10,000willonlynetyou$1,000beforetaxes—hardlyearth-shattering.Thesamereturnona$1,000,000portfoliois$100,000,whichhasfarmoreutilitydespiterequiringthesameeffortandresearch. Amassingwealthandbecomingfinanciallyindependentisaslowprocessthattakestime.Youdosmallthingseveryday—cutyourexpenses,generateextraincome,andputthemoneyintobrokerageandtax-deferredretirementaccounts.Itbeginstoamounttosomethingwithtime. Youcanreactonalargerscalethanyourpreviousinvestmentsaseachnewopportunityappears.That'scalled "compounding."Theinterest,dividends,andcapitalgainsyourmoneyhasearnedbegintogeneratetheirowninterest,dividends,andcapitalgains,andaprofitablecyclecontinues.It'show$10,000cangrowto$331,000over50yearsata7%annualreturn. RememberThatTaxesMatter—aLot Notallincomeisequal.Whereandhowyouholdyourassetscanmeanthedifferencebetweenbeingsomewhatwell-offandexceptionallyrich. Thosewithlittleornowealthgeneratealotoftaxableincome,whilethosewhoendupfinanciallyindependentgeneratelargeunrealizedgainsintheformofrealestateappreciation,unrealizedcapitalgains,andprofitsmadethroughtax-advantagedortax-freeaccounts,suchasanIRA or 401(k). Aphysicianearning$250,000peryearwillbetaxedheavily,probablypaying$95,000intaxesforanetincomeof$155,000.Yet,hewouldn'tpayasinglepennyintaxesifhehadearnedthesameamountfromwithinapensionplanorIRA,atleastnotinthatyear.Thatmoneythatisn'ttaxedcancompoundandgrowwithintheretirementaccountuntilitiswithdrawninretirement. Moneyinatax-deferredretirementaccountwillbetaxedeventually—thetaxesaredeferreduntilretirementwhenyoumayfallintoalowertaxbracket.However,thelargeryourretirementaccount,themoresubstantialyourretirementincome,andwealthyretireescouldfindthattheystillhavesubstantialtaxbills. TakeControlofYourTime Gainingcompletecontroloveryourtimeisoftenonefactorinachievingfinancialindependence.Youmaynothavetotallyreachedtheinvestinggoalthatallowsyoutomaintainyourlifestylewithoutanadditionalpaycheck,butifyouhavethefreedomtospendyourtimeasyoulike,thatmightbethemostpowerfuldefinitionofwealthforyou. Ifitfeelsasthoughyou'reunwrappingagifteachmorningwhenyoushowuptotheoffice,jobsite,practicefield,orstudio,you'reontrackforachievingfinancialindependence. Youhaveahugeadvantageoveryourcompetitionifyoufindtheprofessionthatgivesyoupleasure,andyou'redisciplinedinmanagingthebusinesssideofitbycontrollingcosts.Youmightcontinuetoworkeight,ten,ortwelvehoursaday,fortwo,four,ortenyearslonger,becauseyoulovetheprocessandproductitself,notbecauseyouneedto. KnowThatGradesDoNotCorrelateWithWealth AccordingtodecadesofextensiveresearchbyThomasJ.Stanley,Ph.D.,authorof TheMillionaireNextDoor,thegradesoneearnsinschoolhavenocorrelationwitheconomicwealthandsuccessoutsidethemedicalandlegalprofessions. That'snottosayeducationisn'timportant—88%ofAmericanmillionairesdid,infact,graduatewithanundergraduatedegree—butacademicperformanceisnotallit'scrackeduptobe. Whydoparents,teachers,andcounselorscontinuetotellchildrenthattheywon'tbesuccessfuliftheyhaveaC-GPA?Statisticallyspeaking,it'sbecauseoftenthesepeoplearethemselvesnotfinanciallysuccessful,accordingtoStanley.Theythereforehavenoideawhatittakestoachievefinancialindependenceandthusbuyintothemyththatgoodstudentsgofurtherinlife. Theseparentsandteachersmeasureanalyticalintelligenceonly,notthecreativeintelligencethat'sresponsibleforsparkinginnovations,societaladvancements,andcraftingsolutionsinnichemarkets. Theyfailtorealizethatmostmillionaireswearbluejeans,overalls,orworkshirts,notasuitandtie.TheyeatatMcDonald'sandBurgerKing.Theyliveinordinary,well-establishedneighborhoods.Mostowntheirownbusinesses. Statistically,you'dbemorelikelytopredictafuturemillionaireifyouweretochooseaself-sufficientstudentinshopclasswhopaysfortheirowncar,getsdecent(butnotspectacular)grades,hasajob,andenjoyswhattheydo,ratherthanselectingsomeonefromthehonorroll. FindaComplementarySpouse Youreffortstowardabetter,financiallyindependentlifearegoingtofeellikestrugglinginquicksand,nomatterhowsuccessfulyouare,unlessyourspouseisequallydisciplined,frugal,andinvestment-oriented.Theemotional,financial,andsocialtollthatmarryingthewrongpersoncantakeonyourlifewilloverwhelmalmostanyprogressyoucanmakeinyourcareerorpocketbook. Atremendousamountofsuccessisbasedonpropertemperamentandpsychology.Howcanyoufocusonyourworkandcreatingthelifeyoualwaysdreamedofifyou'reworriedaboutthesituationathome?Youneedthekindofsupportthatallowsyoutotakerisksbecauseyouknow,nomatterwhathappens,thattherewillalwaysbesomeonewaitingforyouathomewholovesyouandsharesyouroverarchingfinancialgoals. Investin(NotSoGlamorous)NicheMarkets Billionaireinvestor CharlieMunger hasremarkedthatentrepreneurscanthriveiftheyspecializeinanoverlookedeconomicniche,muchlikeanimalsinnature.Often,thesenichesareextremelylucrativebutnotlikelytowinyoufriendsatcocktailparties. Conjureupimagesofamulti-millionaire.Whatdoyousee?High-tech20-somethingsonayacht?Molecularbiologists?Althoughthereareafew,mostofthebigmoneyisinindustriessuchaswastemanagement,pizza,clothingstores,trailerparks,andshipping. Considerthecaseof SamWalton.HebuiltatinydimestoreinacornerofArkansasintothebiggestretailerintheworld,amassingafamilyfortuneofmorethan$191billion. There'snothingparticularlyexcitingaboutselling50-centflip-flopsandbottlesofcheapcologneinsmalltowns,butWaltonwasonamissiontobringaffordablegoodstoeverydayAmericans.Hewasamanpossessedwithvision.Hebuilthiscompanyonestoreatatime—onemightevensayonecheckoutatatime—withnofanfareorredcarpetwalks. Businessownersrepresentadisproportionatelylargesegmentofthemillionairepopulation.There'sagoodchancethatthebiggesthardwarestoreownerorplumberinyourtownhasanetworthmanytimesthatofthehighest-paiddoctor.Partofthereasonisaconceptwe'vediscussedcalled"capitalizedearnings."AnotherreasonisonethatDr.Stanleymentionedinhisbook. Doctors(butnotplumbers)arepressuredtobuystatussymbolstoconvincetheirpatientsthatthey'resuccessful.Overdecades,theresultismillionsinadditionalwealthfortheguywhouncloggedtoiletsinsteadofarteries.That'snotsomethingyoulearnaboutinschool. SupportYourProductiveRelatives Itisalmostalwaysamistaketoprovidegiftsofcashandsupporttothoserelativeswhoareunabletogeneratehighincomesontheirown,orwhoareconstantlyinfinancialtrouble. Considertheincentivesystemyousetup.Onesonbecomesaphysician,andonedaughteranattorney,andyousaytheydon't"need"yourmoney.Atthesametime,youprovidefreerent,board,andbailoutsfortheirsibling,whositsathomeincreditcarddebtbutrefusestolookforwork.You'vemanagedtoeffectivelyturnthatchildintoafinancialandcreditjunkie.It’sunlikelythey'llevergetovertheiraddiction. Thechildmighttellyouthattheyonlyneedonemoreloan,butthefundamental,underlyingproblemistheir inabilitytomanagemoney.Thesupportyougivetoyourrelativesshouldhelpthembecomefinanciallyindependentthemselves,notcreateadependenceonyou,whichisonewaytoensurethatyou'llneverhavefinancialfreedom. FrequentlyAskedQuestions(FAQs) Whatisfinancialindependence? Thereisnosetdefinitionof"financialindependence."Somemightconsiderithavingenoughincome-generatinginvestmentstonolongerhavetowork.Othersmightconsideritnolongerhavingtodependonotherstomeettheirfinancialneeds.Itcouldalsobelivingwithoutdebtandhavinganincomethatcaneasilycoverexpenses. WhatisanIRA? AsimpleorRothindividualretirementaccount(IRA)isatax-advantagedaccountforretirementsavings.TraditionalIRAcontributionscanbedeductedfromyourincometaxesifyoumeettherequirements.RothIRAsallowyoutocontributeafter-taxfundsifyoumeetcertainincomerequirements,whichmeansyoucanwithdrawfundstax-freeinretirement. Whatisa401(k)? A401(k)isaretirementsavingsplanofferedbymanyemployers.Youcontributeapercentageofyourincomepre-tax,andtheemployermaymatchsomeofthefunds.Youdecidehowyouwantyourcontributionstobeinvested,choosingfromoptionsprovidedbytheplanadministrator. ArticleSources ThomasJ.Stanley."TheMillionaireNextDoor:TheSurprisingSecretsofAmerica'sWealthy."TaylorTradePublishing,1998. RamseySolutions"TheNationalStudyofMillionaires."AccessedJune11,2021. GuruFocus."ValueTalk:Buffett’sPartner,CharlieMunger."AccessedJune11,2021. Bloomberg."TheWorld’sWealthiestFamilyGets$4MillionRicherEveryHour."AccessedJune11,2021. Share Tweet Share Email DoRothIRAsWorkasTheyShould?NotExactly ACompleteBeginner'sGuidetoSavingMoney WhatIstheFIREMovement? WhyYouAbsolutelyNeedToInvest HowMuchMoneyDoesItTaketoBeRich? LearnHowtoBecomeRichandFindYourPathtoFinancialFreedom BestFinancePodcastsof2022 Millionaire PaxWorldMutualFunds WhatIsaNetWorthStatement? WhyTax-DeferredAccountsCanPresentProblemsWhenYouRetire HowtoSet(andKeep)RealisticInvestingGoals HowtoMinimizeTaxesWhenYouHaveaHighNetWorth TransferringWealthWithLifeInsurance WhenShouldIBecomeFinanciallyIndependent? WhatIsaPortfolio?