Congratulations for clicking to this page. Most people want to become financially independent, but not so many people actually make a plan to achieve this goal.

Firstly, we need to define Financial Independence. StreetSMART defines financial independence as
“having enough money to do what you want to do, when you want to do it, without going to work unless you choose to”.

We are talking about more than just paying the bills on a day to day basis. We are talking about creating a source of passive income so that you can live your life as you choose on an ongoing day to day basis.

There are ten steps to achieving Financial Independence: 

1. Visualise your desired life
2. Determine how much passive income you need 
3. Determine how much capital you need 
4. Determine your time frame 
5. Determine your strategy to achieve this 
6. Do the numbers to check that the strategy is SMART 
7. Confirm your commitment 
8. Begin implementation 
9. Review and fine tune 
10. Never give up!

Step 1
Visualise your desired life

For many people the concept of visualisation is a bit too “out there”. But all successful people have used visualisation to help them succeed, from Olympic athletes to the bride planning her wedding.

The clearer picture you have of your desired life the more commitment you will create to achieving it. Successful people achieve their goals, not because it was easy, but because they were determine to.

It can be helpful to go some where quiet with a pen and paper (or your laptop) and write out what your perfect day would look like. Describe your home, your family, the things you did that day in as much detail as possible to help it become real for you.

For some of us this visualisation will focus more on material things or a lifestyle that costs more money (such as travel adventures etc). While for others it will focus more on having the time to enjoy simple every day pleasures or hobbies and/or family life. The important thing is that you know what type of life you want to live.

Step 2
Determine how much passive income you need to live the life you dream of

Most of us tend not to know how much this figure is and so we need to work it out. We usually recommend that when you do this exercise you assume that you have no personal debt (no home mortgage or credit card debt etc) and possibly that you no longer have dependent children.

Go to the StreetSMART Personal / Family Expenditure Planning Tool (click here) and complete this exercise assuming you are already financially independent and living the life you dream of – with no personal debt and possibly no dependent children (this will depend on your personal goals and time frame). You may at some stage have grandchildren that you wish to assist with their education and so on, in which case include this in the detailed expenditure planning. The total expenditure is how much passive income you need (after tax) to live that life. We ignore inflation when doing this exercise as the strategy will generally involve investment in inflation proof assets.

Step 3
Determine how much capital you need

Next you need to determine how much capital you will require to generate that income. We prefer to be conservative in this calculation and use a medium to long term figure of 15-20 times the amount of income required. This is the equivalent of a 5 - 6.67% annual return after tax.

For example, if you wanted a net after tax passive income of say $100,000 then the capital required to generate that would be in the range of $1.5 - $2 million.

While that capital sum may seem unduly high, please remember that passive income must carry less risk, otherwise you will need to stay involved in the generation of that income and it ceases to be passive. You would then no longer be free to do what you wish to do when you wish to do it.

In addition to income generating capital you will also wish to have lifestyle assets to enjoy, such as a nice home, perhaps a second (or third?) home, and “toys” such as a boat, cars, perhaps even an airplane or helicopter! Total up the value in today’s dollars of the lifestyle assets you desire and then deduct your existing equity that you have in your current lifestyle assets. Add this amount to your capital required to generate passive income. This is your total capital goal.

Step 4 - Determine your time frame – how long before you want to be financially independent?

Most people say “yesterday”, but obviously that is not an option unless you are already there. Consider your circumstances and how hungry you are to achieve financial independence.

If you currently enjoy your work and lifestyle then you may be quite happy to have a longer time frame than if you are unhappy in your working environment or passionately desire to live the life of freedom that you dream about. Take into account your family as well, especially if you have a partner and/or children.

Calculate how many years you have to become financially independent – say you want to be financially free by age of 50 and you are currently 35, then your time frame is 15 years.

Also realise that the shorter the time frame the more risk you must take and the harder you will have to push to get there.

Step 5
Determine your strategy to achieve this

This is perhaps one of the more difficult parts of the Financial Independence plan. Your strategy will take into account your personal risk profile, talents and skill set, time available to invest and so on.

There are a number of options to consider here:

Choosing the right strategy for you is an important decision and you may require assistance from family and / or professional advisors. StreetSMART welcome the opportunity to go through the process with you.

Regardless of which strategy you decide on, you still need to manage and control your current personal expenditure in order to create surplus capital to invest (in yourself, your selected investments, or your business). Go to the Personal / Family Expenditure Planning tool in Smart Resources to make a start on that now (click here).

Step 6
Do the numbers to check that the strategy is SMART

You need to check that the strategy you have selected is achievable and realistic and will give you the end goal that you desire in the time frame you have set. Check that the preferred strategy is SMART:

• Specific
• Measurable 
• Achievable 
• Realistic 
• Time Bound

You may need the help of an advisor such as StreetSMART to review the strategy from a financial perspective and confirm the numbers and assumptions behind them are realistic.

Step 7
Confirm your commitment

Once you have identified your financial goal, set the time frame, chosen the strategy and checked that the strategy and timeframe seems realistic it is then time to pause and take stock.

Think about the planned strategy and consider the actions that need to be taken to implement it. What are the consequences of those actions? Are you prepared to make the commitment? Are you happy to pay the price?

The answer depends on how hard your financial goal is to achieve, how far you currently are away from that goal, how short your time frame is, your selected strategy, and how hungry you are to achieve the goal.

This is a good time to ensure you are really committed to achieving the stated goal. It’s your life and your future – make sure your financial independence goal is yours too. Don’t set your goal too high to impress someone else, but don’t set it too low simply because you don’t want to be a “tall poppy”. Take the time to mull this over in your own mind, and talk about it to your partner if you have one.

If you do lack commitment then go back and review the process to date. Once you are sure you are committed then go to step 8.

Step 8
Begin implementation of your strategy

It can seem daunting to actually start to implement your strategy, but in truth you have already began. Simply by working through steps 1 – 7 you have already started your journey to Financial Independence.

We suggest the easiest way to create an effective implementation plan is to set annual targets and then break them into 90 day sub-goals and appropriate action steps.

For example:

Write your goals and action steps out and review them regularly, preferably every day. Some people like to stick them on the fridge or in the bathroom so they can read them while brushing their teeth each morning and evening. If you have a suitable phone put them in your phone as well so you can review while stuck in traffic!

Step 9
Review and fine tune your strategy

Getting started is usually the hardest part and requires the most energy. However, once started, you have gained some momentum and it is easier to slightly change direction once you have already made a start towards your goal.

It is important that you set time aside to regularly review and fine tune your strategy implementation and results to date. This should be done at least annually, but preferably quarterly.

If you are setting 90 day goals then a quarterly review and fine tune is usually effective. Schedule time in your diary at the end of each quarter (we suggest 31 March, 30 June, 30 September and 31 December) to review your goals for the year, for the past 90 days and your results against those goals. Then set goals and appropriate action steps for the next 90 days. It’s simple, it works.

If you get stuck perhaps find yourself a goals buddy who also wants to get ahead financially. Scheduling time with your goals buddy each month or quarter should help you stay on track.

Step 10
Never give up!

We all know that things never seem to always go exactly according to plan. That’s life and it would be boring if the unexpected never occurred.

But its important that if things don’t work out as expected, then draw a line in the sand and think of it as a chance to begin again more intelligently.

It is easy to get discouraged, but remember that winners are the people who pick themselves up off the floor, dust themselves down and get stuck in AGAIN! Winners are the people who don’t give up and don’t settle.

However, we also know that too many failed attempts tend to reduce our confidence and wears us down over time. This is why it is important to have a financial coach on board… someone who can ensure that the plan was workable at the outset, that you are approaching things in the right way, and who will provide emotional and technical support when the going gets tough (and inevitably it will at some point). Think of the effort you would save by taking an intelligent approach at the outset!

At StreetSMART we understand the importance of working towards medium to long term goals and enjoy working with our clients in this way.

Congratulations on making it to the end of this FAQ – you are well on your journey towards Financial Independence!