What is Financial Independence
Financial Independence is earning from your assets (investments and/or pension funds) an income which is sufficient to cover your annual expenses.
Your annual expenses should include both a) necessary expenses and b) expenses required for the things you value most in life.
Necessary expenses cover your essential needs.
Things you value most in life can be your entertainment, favourite activities, holidays etc. These generally include everything that makes you happy in life.
You become financial independent when the assets you have built earn you enough to cover these expenses each year.
Financial Independence is the final stage of your financial journey.
It allows you to enjoy your life!
It also allows you to dedicate your time, your most valuable asset, to the things you really like and feel passionate about!
Financial Independence -
An example
FILIP has annual expenses of GBP/USD 40,000.
FILIP will reach Financial Independence when she/he builds an asset portfolio (investments and/or pension funds) of GBP/USD 1 million, which earns him/her a real return of 4%.
Although some of the income will be tax free, a portion of this earned income will be taxed at the prevailing tax rates. At these levels of income a 20% tax rate is realistic based on the current tax rates.
Therefore FILIP will eventually need an asset portfolio of GBP/USD 1.25 million. This portfolio will earn him/her a 4% real return, or gross income of GBP/USD 50,000. This level of income taxed at 20% will leave him/her with a net income of GBP/USD 40,000.
We have prepared some detailed examples, clearly describing the assumptions we used.
Our examples explain a) the rates of saving and investment needed and b) how long it can take to reach Financial Independence.
Feel free to check them out in the link below.