How do I Become Financially Independent by 40?

How to Become Financially Independent

What are the Steps to Become Financially Independent Early in Life?

  • Spend less than you make
  • Invest money you don’t spend
  • Diversify your savings

Decide on a Life Style

If you are serious about becoming financially independent, your first step is to decide on a life style and create a vision for success.

You probably lived through your student years without spending much money – because there wasn’t much to spend, was there?

Start by maintaining a life style that matches what you had as a student. Which means living on very little money and keeping a shoestring budget.

It is not the same thing as sacrificing all the good things in life, it’s just being aware of where your money goes and deciding if things are worth the cost or not.

Let’s call it conscious spending.



Track Your Expenses

Track your expenses

Unless you already live on tight budget and spend a lot less than you make, it’s time to track your expenses.

Look at your big expenses first. Your rent or housing cost probably swallow a large part of your income. Right?

Sure, it’s nice to live in the city. Perhaps even on the top floor. But can you cut back? Can you live cheaper and still enjoy life? Saving 20% or more on your rent or housing cost can make a huge difference later on.

Since you are still young, you probably spend more money than average on socializing with friends and on entertainment. Hanging out on the local pub or bar after work or every weekend is perhaps not very economical. Long vacation trips are also something most of us enjoy, but are they worth the cost?

Download a software than can help you track expenses. It is also a good idea to set goals with a budget.

It’s time to reverse the habit of wasting money unnecessarily.

Spend Less Than You Make

Spend Less Than You Make

To be able to save, you must spend less than your income. If you are able to save 15%, it will take you 40+ years to reach financial independence.

If you can cut down your expenses to half of your income, you have taking the first step to becoming financially independent. The key is trying to save more than you spend.

Let’s say your income is 5,000. Then, your expenses shouldn’t exceed 2,500 and you should be able to save 2,500.



Invest Money You Don’t Spend

Decide on an investment strategy – but don’t be afraid to change it later on. The earlier you start, the better off you’ll be.

Just be sure you understand the risks with your investments. You don’t want to start by losing everything you save.

If you have any debts, your first investment goal is to pay off all debts as quickly as you can. Consumer loans and bank loans can be very costly and exceed any interest rate or yield you get on your savings.

Depending on options in your country, take a closer look at savings that gives you a tax relief or pension funds that come with a company match. Maximize these savings.

The Key Word for Investing is Diversify!

Some possible investments early in life:

stock market

Don’t put all your eggs in one basket. Spread your investments, but don’t make it too complicated. You want to keep control without having to worry about your investments on a daily basis.

Investing in stocks can be absorbing and you gain invaluable experience as the stock market goes through its cycles. As interest rates are bound to go up, stocks in sectors such as banking could also rise. But other stocks may fall. A skilled investor with a long-term approach could be buying while others are selling. It requires some work and knowledge to understand when to buy and what to buy.

Important though, skilled stock investors don’t make major decisions based on tips they read on message boards or websites. They don’t just look at possible gains over time, but also on a company’s history and the dividends. Skilled investors show patience and persistence and try to understand a company’s underlying business.

Funds or ETFs can be a good choice if you don’t want to keep a tab on the stock market. Pick the ones with a good performance record and stick to them. Your success over time is based on psychology, the market will go up and down, but you should stay in long term.

High-interest savings accounts are usually safe investments – if you can find them. Make sure they are backed by a deposit insurance.

P2P Lending

Investing in P2P consumer loans is a fast-growing industry, which we are trying to follow on this website. It basically comes with the same risks as the stock market but can give immediate returns of 6 – 12 percent. PeerBerry is a good portal for your first investments. They work with solid and proftable loan originators. Mintos is for the more experienced investor who is willing to put in some more work. Not all loan originators on thw Mintos platform have a solid track reckord.

Investing your money in real estate or start-up companies can also be lucrative. But be aware, such investments may come with a high risk.



Investments When You Get Older

Diversity is important when you start investing. So is risk-taking. As you get older and closer to your financial independence, you want to do two things:

  • Trust your competence of investing
  • Cut down on risks

Remember, financial independence means that you should now live off your investments. You want to lower your risk profile and use the investing competence you gained over the years.

Safe havens with lower risks:

  • Investing in real estate or your home
  • Bonds

Is a home a good investment, or should we have learned a hard lesson from 10 years ago?

In general, real estate is a great investment opportunity. When purchasing a property for investment purposes, you need to consider the cost of taxes, utilities, upkeep, and repairs. But more importantly, look at the location, location, and location.

If you plan to sell at a later date, you need to research prices and trends of similar properties in the area.

Bonds are a common choice when you have low-risk tolerance or a focus only on generating income. Government-backed bonds (treasury bonds) pay a steady rate of interest throughout the bond term and come with very low risk.


Read more: What Does Financial Independence Mean?

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