How to Become Financially Independent

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There are several myths and misconceptions when it comes to financial planning, and individuals can take in a lot of advice from many good and not-so-good sources. Mistakes can range from confusing high incomes with wealth, to not knowing the importance of tax asset placement when choosing your investments. Review these key insights that can lead to a more financially independent life.

Understand That Income Is Not Wealth

Most people believe that the key to having wealth is a high-paying job. Yes, it’s easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make. Ultimately, spending habits are the reason a professional athlete making $20 million a year can quickly go bankrupt, while a bus driver can retire a multi-millionaire.

You need to understand the difference between income and long-term wealth in order to escape the spending trap. Income is an obvious component of wealth, but it’s not the only factor. Many people see wealth as their total net worth at any given time. In other words, wealth can be thought of as the equity on your balance sheet—your ​assets minus liabilities.

Long-Term Thinking

Thinking long-term is an important characteristic of accumulating wealth and achieving financial independence, regardless of your income level. There are several considerations for long-term wealth, and they’ll differ for everyone.

You have to put in long hours after years of education and specialty training to get a paycheck if you’re a doctor or lawyer, but that paycheck doesn’t necessarily translate to wealth. Helping to ensure your job’s security, taking initiative to achieve a promotion, or taking steps that will result in higher commissions can all be factors for wealth and ways to move toward financial independence with long-term thinking.

Side gigs, private investments, and a host of other variables can also be ways to think long-term and accumulate wealth. They might include a portfolio of private businesses, stocks, bonds, mutual funds, real estate, patents, or trademarks. Some of these cash generators can be relied on for long-term income in addition to your job, or just as cash generators that can pull in money while you take long vacations.

Assessing Your Balance Sheet

Take a look at your personal financial statement. You might already have organic investments that you can rely on in your quest for financial independence. Oftentimes, this is wealth that generates capital gains, income, and dividends without labor. The more of these investments you can afford, the sooner you can fully achieve financial independence.

Reaching a Goal

The real value of your income is partially determined by the amount you can invest to achieve a financial-independence goal. Setting this goal can be important for keeping your perspective on income in check. After you reach your goal, you can successfully maintain the lifestyle you want without working.

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Working with a financial adviser can help you to set a goal for wealth accumulation that allows you to maintain your standard of living without an additional paycheck and achieve financial independence. This goal can be lofty, however, because most people’s annual spending includes a long list of budget items, such as mortgage, car payments, clothing, college tuition, entertainment expenses, and more.

Create Surplus Funds to Invest

The only way to take advantage of investment opportunities is to have the money to invest. There is a certain point in successful investing where you reach critical mass, and the returns generated on your assets can change your life.


Earning a 10% return on $10,000 will only net you $1,000 before taxes—hardly earth-shattering. The same return on a $1,000,000 portfolio is $100,000, which has far more utility despite requiring the same effort and research.

Amassing wealth and becoming financially independent is a slow process that takes time. You do small things every day—cut your expenses, generate extra income, and put the money into brokerage and tax-deferred retirement accounts. It begins to amount to something with time.

You can react on a larger scale than your previous investments as each new opportunity appears. That’s called “compounding.” The interest, dividends, and capital gains your money has earned begin to generate their own interest, dividends, and capital gains, and a profitable cycle continues. It’s how $10,000 can grow to $331,000 over 50 years at a 7% annual return.

Remember That Taxes Matter—a Lot

Not all income is equal. Where and how you hold your assets can mean the difference between being somewhat well-off and exceptionally rich.

Those with little or no wealth generate a lot of taxable income, while those who end up financially independent generate large unrealized gains in the form of real estate appreciation, unrealized capital gains, and profits made through tax-advantaged or tax-free accounts, such as an IRA or 401(k).

A physician earning $250,000 per year will be taxed heavily, probably paying $95,000 in taxes for a net income of $155,000. Yet, he wouldn’t pay a single penny in taxes if he had earned the same amount from within a pension plan or IRA, at least not in that year. That money that isn’t taxed can compound and grow within the retirement account until it is withdrawn in retirement.


Money in a tax-deferred retirement account will be taxed eventually—the taxes are deferred until retirement when you may fall into a lower tax bracket. However, the larger your retirement account, the more substantial your retirement income, and wealthy retirees could find that they still have substantial tax bills.

Take Control of Your Time

Gaining complete control over your time is often one factor in achieving financial independence. You may not have totally reached the investing goal that allows you to maintain your lifestyle without an additional paycheck, but if you have the freedom to spend your time as you like, that might be the most powerful definition of wealth for you.


If it feels as though you’re unwrapping a gift each morning when you show up to the office, job site, practice field, or studio, you’re on track for achieving financial independence.

You have a huge advantage over your competition if you find the profession that gives you pleasure, and you’re disciplined in managing the business side of it by controlling costs. You might continue to work eight, ten, or twelve hours a day, for two, four, or ten years longer, because you love the process and product itself, not because you need to.

Know That Grades Do Not Correlate With Wealth

According to decades of extensive research by Thomas J. Stanley, Ph.D., author of The Millionaire Next Door, the grades one earns in school have no correlation with economic wealth and success outside the medical and legal professions.

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That’s not to say education isn’t important—88% of American millionaires did, in fact, graduate with an undergraduate degree—but academic performance is not all it’s cracked up to be.

Why do parents, teachers, and counselors continue to tell children that they won’t be successful if they have a C- GPA? Statistically speaking, it’s because often these people are themselves not financially successful, according to Stanley. They therefore have no idea what it takes to achieve financial independence and thus buy into the myth that good students go further in life.


These parents and teachers measure analytical intelligence only, not the creative intelligence that’s responsible for sparking innovations, societal advancements, and crafting solutions in niche markets.

They fail to realize that most millionaires wear blue jeans, overalls, or work shirts, not a suit and tie. They eat at McDonald’s and Burger King. They live in ordinary, well-established neighborhoods. Most own their own businesses.

Statistically, you’d be more likely to predict a future millionaire if you were to choose a self-sufficient student in shop class who pays for their own car, gets decent (but not spectacular) grades, has a job, and enjoys what they do, rather than selecting someone from the honor roll.

Find a Complementary Spouse

Your efforts toward a better, financially independent life are going to feel like struggling in quicksand, no matter how successful you are, unless your spouse is equally disciplined, frugal, and investment-oriented. The emotional, financial, and social toll that marrying the wrong person can take on your life will overwhelm almost any progress you can make in your career or pocketbook.

A tremendous amount of success is based on proper temperament and psychology. How can you focus on your work and creating the life you always dreamed of if you’re worried about the situation at home? You need the kind of support that allows you to take risks because you know, no matter what happens, that there will always be someone waiting for you at home who loves you and shares your overarching financial goals.

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Invest in (Not So Glamorous) Niche Markets

Billionaire investor Charlie Munger has remarked that entrepreneurs can thrive if they specialize in an overlooked economic niche, much like animals in nature. Often, these niches are extremely lucrative but not likely to win you friends at cocktail parties.

Conjure up images of a multi-millionaire. What do you see? High-tech 20-somethings on a yacht? Molecular biologists? Although there are a few, most of the big money is in industries such as waste management, pizza, clothing stores, trailer parks, and shipping.

Consider the case of Sam Walton. He built a tiny dime store in a corner of Arkansas into the biggest retailer in the world, amassing a family fortune of more than $191 billion.

There’s nothing particularly exciting about selling 50-cent flip-flops and bottles of cheap cologne in small towns, but Walton was on a mission to bring affordable goods to everyday Americans. He was a man possessed with vision. He built his company one store at a time—one might even say one checkout at a time—with no fanfare or red carpet walks.

Business owners represent a disproportionately large segment of the millionaire population. There’s a good chance that the biggest hardware store owner or plumber in your town has a net worth many times that of the highest-paid doctor. Part of the reason is a concept we’ve discussed called “capitalized earnings.” Another reason is one that Dr. Stanley mentioned in his book.

Doctors (but not plumbers) are pressured to buy status symbols to convince their patients that they’re successful. Over decades, the result is millions in additional wealth for the guy who unclogged toilets instead of arteries. That’s not something you learn about in school.

Support Your Productive Relatives

It is almost always a mistake to provide gifts of cash and support to those relatives who are unable to generate high incomes on their own, or who are constantly in financial trouble.

Consider the incentive system you set up. One son becomes a physician, and one daughter an attorney, and you say they don’t “need” your money. At the same time, you provide free rent, board, and bailouts for their sibling, who sits at home in credit card debt but refuses to look for work. You’ve managed to effectively turn that child into a financial and credit junkie. It’s unlikely they’ll ever get over their addiction.

The child might tell you that they only need one more loan, but the fundamental, underlying problem is their inability to manage money. The support you give to your relatives should help them become financially independent themselves, not create a dependence on you, which is one way to ensure that you’ll never have financial freedom.