5 simple steps to Financial Independence

Financial Independence seems like a big mountain to climb when you are first starting out. The end goal seems so far off and unattainable and you want to do anything but think about it. But thinking and more importantly doing something about it is essential if you are always dreaming about how wonderful it would be if you were free of your chains!

Fortunately getting started on this journey is hard but not impossible. It helps to have a framework to follow with clear steps:


Before you even think about investing you need to focus on building up an emergency fund that will give you 3-6 months of living expenses. This is just to account for the unexpected events of life. If for example, you lose your job, your emergency savings need to be able to support you until you find a new one.

The emergency fund should not be in illiquid investments (such as real estate) or volatile investments (like stocks or bonds). This is because at the time you need it most these investments can not be withdrawn fast enough. They might also be down and it might not make sense to sell investments when they are low. The best vehicle is usually a bank savings account or a money market account.


Next, focus on paying off high interest rate loans such as credit cards or personal loans. Typically student loans or mortgage loans are around 2-6%. Personal loans or credit cards can be 10-20% or even more.

To identify if a loan is high interest or not, look at the opportunity cost. If the money were to be invested, would you be getting a lower return than the loan? If so the loan should be paid off as soon as possible. Something like mortgage or education loan might be ok. But most credit card interest rates are really a bad deal. You will almost always be much better off by paying those off early.


As we look at in the article on how soon can we retire, the higher the savings rate, the faster you are financially independent. Identify the expenses that are absolutely essential and the ones that are not. One question you should ask yourself is “how many years am I willing to delay retirement for the sake of this spending”. For example, by increasing your savings from 20% to 30%, you shave 9 years off of your time to retirement

Places where you should particularly pay attention:

  • upgrading your lifestyle when you get a promotion or raise
  • leasing cars or buying brand new cars instead of a used car. These days even used cars are super expensive. Can you live close enough and commute to work with a bicycle?
  • Renting a house rather than buying makes a lot of sense contrary to popular opinion
  • pay attention to subscription costs that catch up to you. A Netflix subscription of $10 is much more affordable than the average cable package of $200+ /month.


Most sources of financial information tell you it’s a good idea to have a combination of stocks and bonds in your portfolio (for the sake of simplicity I am ignoring other asset classes which we will cover later). What the ratio is between those two is your asset allocation based on your risk appetite . The typical advice is to take a look at your risk appetite and choose more stocks as you are younger and gradually increase the amount of bonds as you grow older. For somebody on the path to FIRE however, if you are still many years away from retirement (or needing to withdraw from your FIRE fund for living expenses), it makes sense to have the vast majority (90%+) of your funds in stocks , specially low cost index funds.


Once you have solidified your investment strategy, and have it running on auto-pilot, adopt a hands off approach.

  • Do not dip into your funds for anything but the most extreme reasons
  • Do not pay attention to the current market conditions to get spooked and withdraw all your money into cash
  • Do not stop investing even for brief periods. The best results are when you are consistent month in and month out for the long term

If you can stick to these 5 steps consistently, before you know it, you will be well on your way to Financial Independence!

That pit in your stomach when going to sleep on Sunday knowing you have to be back at work for another week ? Things are much more bearable if you know you are doing something about it and one day soon you will be able to break out of these shackles!