The Two-Step Path To Financial Independence

If you’re interested in financial independence, whether you want to see if you can accumulate enough capital to retire early or just want the kind of financial stability that lets you live your life as you choose, there’s a two-step path to getting there.

First, as CNBC recently reminded us, you’re going to want to calculate your net worth—which you can theoretically do in 30 minutes.

There is a lot you can get done in a half-hour. Binge your favourite sitcom, take a nap or finish a chapter of a book. You can also take the first step to financial independence in under 30 minutes.

Do you know your net worth?

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Your net worth is essentially the sum of all your assets, minus your liabilities. Your assets could include cash, cars, houses, retirement accounts, investment properties and other valuables, like art and jewellery. Your liabilities are long term debt, mortgages, student loans, credit card balances, and other personal loans. Figure out the difference between what you own and what you owe. That’s your net worth.

If you’re using a personal finance software program, it probably won’t even take the full half hour. I use YNAB, and my current net worth is $US169,423.03 ($252,042). That’s $90,000 higher than it was in May 2019, the last time I wrote about my net worth for Lifehacker.

This brings me to the second step on the path towards financial independence—which is, of course, to figure out how to increase your net worth.

Maybe that means figuring out how to earn more money.

Maybe it means figuring out how to reduce expenses or pay down debt.

Maybe it means avoiding—or even selling—some of the classic consumer goods that appear on the surface to be assets but are actually liabilities. (I’ve been living in Cedar Rapids, Iowa for just over two years and I still haven’t bought a car.)

But what it really means, beyond all of the “earn more, spend less” platitudes—which I know are easier said than done—is more along the lines of asking yourself what kind of life you want to live.

And then asking yourself both what that kind of life might cost, and what it won’t cost. Which expenses should be included, and which ones can be skipped. What you might need to start saving for, one year and five years and ten years from now.

Find out what that kind of life is worth to you, and then start building the net worth to match.

In my case, the FIRE calculators suggest that I’ll be completely financially independent while maintaining my current standard of living once my portfolio hits $US500,000 ($741,813). Whether or not that turns out to be true (and I’m leaning towards it probably won’t be true), I can’t imagine a situation in which saving $US500K ends up being bad for me, financially—so I’ll keep on working towards it, whether it takes the five-to-seven years the FIRE calculators predict or whether it ends up taking a bit longer than that.

Because working towards financial independence really is two steps, over and over, and you only have to take them one at a time.