Financial Independence

Financial independence is a state of a person, when you don’t have to work (though, you can), and you live, not worrying that you will run out of money. Financial independence is sometimes referred as financial freedom or FIRE (Financial Independence Retire Early).

In my life, I have a goal to become financially independent. This includes some mindset change (like being frugal, etc.), and planning. Why this goal appeared? I saw a lot of examples of people spending their entire lives doing the job because they have to, and not because they like it. For instance, my parents are already retired, but still are working. I don’t want to do that. It’s not because I don’t like my job (I do!), but we have just one life, and I want to keep more time to myself.

There are some easy steps to reach financial freedom and this is the article, revealing the secret. Disclaimer: I am not a financial advisor and all your actions, based on this article are solely your responsibility. I am just sharing my experience and ideas.

Step 1: Define your goal

The final goal, when you can retire and become free depends on your expenses. For e.g. you are spending 1500€/month, then you need 450000€. Questions?

Why so much?

This number can be obtained in two ways:
1500 × 300 months = 450000
1500 ÷ 4% × 12 month = 450000
The logic here is that you will be withdrawing 4% yearly from your portfolio early to cover your expenses.

300 months is 25 years. If I retire at 40yo, at 65yo I will run out of the money!!

No, you won’t, unless you keep all the sum in the savings account.

I will never be able to save so much…

Saving probably not, but there are other ways of accumulating this amount. Please read the article further.

What about inflation and my future expenses?

You have to account that into the calculation, but 4% rule is taking care of that.

Step 2: Know your expenses and savings rate

You need to control your expenses and know, where you are spending. You can either be frugal or live your regular life, but you need to maintain your expenses at a low rate compared to the income.

The most important thing here is to figure out your savings rate. In other words, how much money per month you can contribute to your savings and building the portfolio. It’s calculated via this formula:

Savings rate = ( Income − Expenses ) ÷ Income

For e.g. you earn 2000€ and spend 1500€. Your savings rate is 25%.

My advice would be to pay everywhere with the card, and weekly or monthly go through the transactions report and try to categorize the expenses and the total spent amount. You can use the spreadsheet or some apps. For e.g. Revolut, Monese, N26, and other banks have quite simple apps, where they automatically show you the monthly graphs and diagrams.

Don’t listen to people, who suggest using the cash. As you will never be able to collect all the receipts, nor categorize them automatically. Some people advise to allocate weekly cash amount, but c’mon — it’s 202X already, everything can be done digitally.

Your average monthly expense is used in Step 1 to identify your future needs.

Step 3. Earn/gain/win more money

Getting more money will influence your savings rate (assuming that you don’t feel like spending more). That’s up to you to figure out, how you can earn more money every month.

Step 4. Have a safety pot

safety pot

It doesn’t need to be like the one on the picture, it can be a separate bank account or the same savings account, where you store money that would cover 6 months of your expenses.

6 months are necessary to have you protected from different unfortunate events, like losing your job, or other times, when you don’t have the income.

Even if you have collected some money already and invested them into your portfolio — don’t take them out from the portfolio, use the safety pot. As money in the investments can be lower priced than you’ve purchased them, so you’d lose some value.

Step 5: Invest

This is the most tricky part and an answer to the questions in Step 1 — How do you accumulate the wealth (aka portfolio). If you keep your savings in the regular account, over time your money will lose your purchasing power due to the inflation. So you need to put them somewhere, where they can grow and make more money.

It was mentioned earlier that when you retire you will have to get 4% from the portfolio yearly, and there is an inflation of let’s say 3% per year, which gives a total of 7% of value decrease. To compensate that your return in investments has to be higher than that. For e.g. Peer-to-peer lending or buying ETFs can increase your chances of getting around 10% yearly increase of the value.

Compound interest

A powerful role in reaching financial freedom is understanding the compound rate. Let’s say 10% is a yearly growth of the financial tools you are using, and this value is not taken out from the portfolio, but being added to invest in the portfolio. It means that the portfolio grows even faster. Here is a table to show the actual percentage, assuming no contributions are added since the initial investment:

211000€1100€21% (since the initial deposit)
312100€1210€33% (since the initial deposit)

So, it becomes more than just 10% of 10000€ per year. If you’d be contributing an additional 1000€ each month, the interest will be even bigger. So it’s important to keep the savings rate high, to be able to contribute to the portfolio more, so the return is bigger.

Out of 121000€ paid in 10 years, the total balance would be almost 210000€. By year 15 it’s actually possible to reach 450000€ mentioned in the initial goal.

Peer-to-peer lending (crowdfunding)

One of the ways of investing the money is lending them. In the same way, as banks lend money to people, you can lend money to other people and gain some interest. Interest will put more money into your portfolio. The average return that you can expect is 10%, which means that out of 10000€ invested you will get back extra 1000€/year.

To do that, you need to register on P2P (peer-to-peer) platforms, transfer the money, indicate to which target group you’d like to lend money, and wait until the money is returned after some time together with the interest.

An example platform would be Mintos — Europe’s largest platform, uniting other platforms, offering loans to people from different countries. When registering via this link you’ll get bonus money that will be added to your deposit that you will be able to lend to other people and get money out of that (for e.g. investing 500€ you’ll get 10€ bonus).

Is it a scam? no 🙂 Are my money safe? no… No one can guarantee you anything. And this is the risk that you are taking on your own. But keeping in mind that Mintos is the biggest platform in Europe and is in the market for many years, I wouldn’t worry too much.


Another safer and risky at the same time tool is to invest in ETFs. ETF is basically a fund with low commission fees that buys many shares from individual companies.

You can expect 8% (average) or 0-15% (in some years) return per year from shares ETFs (bond EFTs are much lower but less risky). Some EFTs grow in prices, others — grow in price and also give you dividends — money that can be taken out or invested again to buy more EFTs. They can be considered as interest.

EFTmatic is a Robo-advisor, it means that you just need to put money and the platform itself will allocate your funds based on the risk you choose. It charges 0.49% of the portfolio value per year, while trading is commission-free. This is a good option for beginners. However, the minimum investment amount has to be 1000€.

There are other platforms to trade EFTs, but in most of them, you need to research a lot, which EFTs to choose (as there are hundreds of them).

Other tools

There are many other tools and systems that you can use. Various brokers offer buying shares, bonds, options, warrants, etc. Those are more risky tools, where one day can bring you 20% and another day — minus 30%. This looks like gambling rather than investing, so they’re not considered as tools for financial independence.

Where I can get more info?

My advice — do your own research and read some books. For e.g. some of the simplest (yet powerful) books are in Robert’s Kiyosaki books: “Rich Dad, Poor Dad” or “Cashflow Quadrant”. You get there more inspiration than practical advice as they are targeted to the US more than to Europe. But in Europe, you can adopt some of the ideas.

In Europe — listen to Financial independence Europe podcast.

Leave a Comment

Your email address will not be published. Required fields are marked *