FINANCIAL
INDEPENDENCE

Financial freedom means different things to different people. Some plan to be financially comfortable enough to deal with short-term emergencies or to satisfy a lifestyle goal, whereas others dream of early retirement and a hassle-free future. 

This guide to financial independence through investing will demonstrate how the financial markets offer a potential way to meet these short-, medium- or long-term goals. With careful planning, it’s possible to find an answer to the question: how do you achieve financial independence?

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Developing a plan to achieve greater financial security involves addressing some relatively straightforward questions about your overall investing aims, while being realistic about your current financial situation and risk tolerance. Once a plan has been developed, many of the following steps should naturally fall into place.

Setting Financial Goals

Everyone will have different opinions about what financial independence looks like to them as an individual, but establishing personal aims is the best place to start planning for financial freedom. It’s important to also build in some tolerance regarding your targets, but without clear goals, it’s difficult to measure progress and adjust your strategy along the way.

Early retirement is a common investment goal that many new and experienced investors share. Others have shorter term aims, including the ability to alleviate pressure from their current financial situation. Some investors are looking to engage in personal development, perhaps through a career break or retraining facilitated by increased financial independence.

Regardless of your reasoning, your investments should have an overall goal, which should be decided early into the process.

Review Your Financial Health

It’s important to consider your starting position and ensure that your investment plan is built on a solid foundation. Minimising debt should be a priority before investing. There is limited benefit to earning an 8% annual return on the cash placed into investments if an outstanding loan charges 10% per annum.

Maintaining an emergency fund is also important. Holding back some cash reserves can protect returns on longer-term investments, as it lowers the risk of you becoming a forced seller at a time when market prices are low.

Start Investing

Once you’re ready to start investing for financial freedom, the date by which you want to achieve your target will determine what kind of assets you want to invest in. For example, high volatility assets, which are known for extreme short-term price moves, are widely considered a better fit for those with longer investment time horizons, as these investors are more likely able to ride out short-term price volatility.

If you’re still deciding exactly what financial independence looks like to you, it’s perhaps also worth considering the other reasons for investing, such as the potential for lessening the impact of inflation or creating a passive income.

Growing your wealth and potentially achieving financial freedom requires discipline and patience, but investing doesn’t have to be complicated. Learning the key investing terms is a great place to get started, if you want to best position yourself for success.

Setting Investment Budgets

Investing requires discipline, because putting money aside in the hope of growing your wealth in the future involves an element of sacrifice. There are tried-and-tested techniques that can help you to embrace that aspect of the investment process. 

For example, the 70/30 method is a technique that involves spending 70% of earnings and investing the remaining 30%. 

Alternatively, the 50/30/20 plan splits net income three ways: 50% goes on essential spending, 30% on luxuries — or “wants” — and 20% is saved and invested.

Investing in lower risk assets that are less likely to fall in value or make significant returns could be a good option for investors reluctant to forego spending today.

Investing for Early Retirement

Investment aims are unique to each individual, but once you’ve come up with a roadmap to financial independence, you’ll likely find that others are in a similar situation. It is, therefore, possible to benefit from the experience of others, perhaps through copy trading, which involves following the ideas and decisions of another trader.

Alternatively, for those interested in saving heavily with the intention of retiring early, studying the Financial Independence Retire Early (FIRE) program will grant you access to the ideas of like-minded people.

Final Thoughts

Achieving financial independence and securing a comfortable lifestyle requires more than just a steady income. After giving some thought to the planning stage of your investment program, your assets then need time to grow. This explains a piece of advice that is commonly passed on to new investors: start investing as early as you can.

Visit the eToro Academy to learn about ways to achieve financial freedom.

Quiz

FAQs

What types of assets can I invest in?

There are a range of assets available to invest in, including stocks, bonds, ETFs, commodities and cryptoassets. The convenience, variety, liquidity and cost-effective nature of the financial markets make them an obvious choice for investors. Alternatively, you could consider investing in different markets, such as property assets.

What kind of returns can I make through investing?

The S&P 500 stock index is often used as a benchmark measure of investment returns. Between 2002 and 2022, the average annualised return of the index was 8.19%. Between 2012 and 2022, the average annualised returns were 12.84%. Nothing is guaranteed in the financial markets, and it is always possible to lose money on your investments, but this is a good indicator for beginner investors.

What is asset allocation?

Asset allocation is the process of deciding how much capital is to be invested in different financial instruments. You can adjust your asset allocation, rebalancing your portfolio, in response to changes in market conditions or your investment aims.