10 Steps to Financial Independence and Early Retirement

If escaping the rat race interests you, then here are 10 steps to help you make that a reality.

With retirement age on an upward trend here in the UK, it is expected that by 2037 that the average age will be 68 before you can afford to stop working. However, by making smart decisions today, there is no reason why you couldn't bring this forward by a decade or two. There are plenty of people who have been able to achieve financial independence in their 40s and retire early. Financial independence allows you to have the freedom and flexibility to live your life on your own terms. If escaping the rat race interests you, then here are 10 steps to help you make that a reality.

Understand your motivation– Before you embark on any life goal, it is important you clearly understand why this is important to you. Achieving financial independence requires drive and determination over the long run. One of the key challenges is staying committed and to not make short term decisions which take you away from your goal of being financially free.

Reasons for wanting to be financially free, can vary from person to person. It may be because you want to spend time with your family or perhaps you want to travel the world while you're young enough to enjoy it. Oher reasons could be that you dislike your job and really do not want to be spending another 20 to 30 years building a career in something you don't find fulfilling. Whatever it is, make sure it is clear in your mind and that the reason is compelling enough to motivate you to stay focused in making this a reality for yourself.

Get the right support- Now that you are clear on why you want to make this happen, it's important you have the right support infrastructure to help you make this a reality. This will again vary from person to person and it is a lot more important if you live in a shared household where how your income is spent is not solely determined by you. This may involve sitting down with others in your household and explaining why this is important to you. You may want to speak to close friends and family to also let them know that this is something you are aspiring towards.

The benefits of this are twofold:

• You will need the support and buy in from those who influence how you manage your money
• The more you make others aware of your goals, the more likely you are to commit to it over the long run

If the majority of your friends and family like to go out lots and spend money on things they can't afford, then it's likely that you will get sucked into doing the same just to keep up.

Do the maths– To become financially independent, you need your income to cover all your expenses. To help you calculate this you can use an online early retirement calculator such as Networthify and Fire Age Calculator to help you. It is important that you know how much you need to save each month and ultimately how much passive income you need to generate from investments to make this a reality.

Track your finances – Understanding your net worth and your spending are very important ways of understanding where you are financially and whether you are heading in the right direction. To calculate your net worth, you need to add up your assets and subtract your liabilities. Assets will include things like equity in your home, savings and investments. Liabilities are essentially any outstanding debts that you have, such as your mortgage.

Personal Capital is a free app that you can use to track your net worth. You can use apps like Yolt, Money Dashboard and Emma to track your spending.

Control your expenses – The less you spend, the more money you have to save and invest for the future. Getting in the habit of living a more affordable lifestyle and not spending everything you earn is a key step towards reaching financial freedom. Here are some of our top tips to help you become a super saver.

Build your emergency fund – Start saving so that you have enough to cover 6 months of living expenses, just in case the unexpected happens. Sprive recommends that you have this cash easily accessible in a high interest savings account.

Pay off your debt – Start off paying off the debts that are charging you the highest interest rate first e.g. personal loans, credit cards, student loans. This will avoid interest building on those debts, which will allow you to have more cash to help you be debt free sooner. If you just have your mortgage outstanding, please read our article on the benefits of paying off your mortgage early here.

Start investing and build passive income – With the extra money you are now saving by reducing your expenses and debt, you can start to build your investment portfolio. If you are new to investing, would suggest you spend the time to build your knowledge or use a financial advisor to help you. The more you understand the options available to you on how you can make your money grow, the better equipped you will be in making financial freedom a reality. Using as much of your £20,000 ISA allowance as you can to invest, to earn tax free returns is also advisable. Just investing £5,000 each year with 6% annual return over 30 years can grow into a couple of hundreds of thousands of pounds. In addition to investing, there are other ways to start generating passive income which you can read more about here.

Increase your income – The more you earn, the more you can invest, which has a greater compounding effect in terms of your earning potential in the future. This will accelerate how quickly you can reach financial independence. The most common ways you can do this without getting a second job, is advancing your career, asking for a pay rise or switching jobs. If you are able to combine your income with a partner in helping to achieve your goal then that is another way to get there more quickly.

Avoid lifestyle creep – One common challenge to retirement plans is that, as your income and overall wealth increase over time, your standard of living (living expenses) also starts to increase. By continually changing the goal post, it can mean that you have to earn more to fund your higher cost of living, which may hinder your ability to retire early or at the right retirement age.

Retiring early requires a proactive approach to saving and investing, as well as discipline and sacrifice. It can be tempting to spend now rather than save for the future, but taking the long-term view is essential. It's important to have a clear plan for generating income during retirement, whether that's through passive income streams, part-time work, or freelancing.

It also comes with uncertainties and challenges, such as the unpredictability of future financial needs and the impact of inflation on retirement savings. It's crucial to have a solid understanding of your post-retirement income sources to ensure that you can maintain your desired lifestyle and cover unexpected expenses. Ultimately, retiring at the right retirement age and achieving financial independence requires careful planning, smart investing, and a willingness to stick to a long-term strategy.