The Perks of Being Independently Wealthy: What It Means and How to Get There

Being independently wealthy sure sounds nice. But there are rampant misconceptions about what that term actually means—and what it takes to get there. To some, independent wealth sounds like an impossible feat achievable only by those who build massive corporate empires, or those who inherit their fortune. However, it’s a realistically achievable goal, especially if you start early, so long as you understand its full nature and implications.

The Reality of Independent Wealth

Different people and organizations have varying opinions on what being “independently wealthy” truly means, but in general, it refers to having enough wealth that you don’t have to depend on a job or support from other people to meet your living expenses.

To many, that sounds like it needs to be an unfathomably large sum of money. And at that level of wealth, you’d probably be able to flaunt it, buying custom gold grillz and top-shelf champagne for even the most casual get-togethers. But this reveals three major misconceptions about the nature of independent wealth:

1. “Independently wealthy” means insanely rich. You don’t need to be a billionaire to be independently wealthy. You don’t need $100 million, either. In fact, you might be able to get by with just $1-2 million, depending on your circumstances. Even that may sound like a lot, but it’s an achievable figure if you know how to plan for it. This is based on the concept of the 4 percent rule; so long as your principal is invested wisely in a diversified portfolio, you should be able to withdraw 4 percent of that amount every year, indefinitely, for the rest of your life, and never worry about outliving your savings. If you knock that down to 3 percent, you can be extra sure you’ll never outlive those savings. Since 3 percent of $2,000,000 leads to $60,000 a year, enough to cover your basic living expenses and then some (in most areas), that amount can be considered independent wealth.
2. Independent wealth leads to a luxurious lifestyle. That word “wealthy” tends to throw people off. Being independently wealthy doesn’t mean that you live life like a tech entrepreneur or a famous rapper. In fact, most independently wealthy people are used to living a frugal lifestyle, so they maintain it indefinitely once they hit the milestone of independence. Living modestly, cutting expenses, and avoiding too many indulgences can help you preserve (and grow) your principal even further.
3. Independent wealth means all your financial worries are over. Imagining hitting an important milestone—like $2 million—often leads to fantasies that all your financial worries would end overnight. But that’s not exactly the case. Staying independently wealthy requires you to pay close attention to your investment portfolio, make adjustments when necessary, and budget and monitor your expenses. It certainly eases the stress of your finances, but it’s not an end-all solution.

Becoming Independently Wealthy

So what do you have to do to become independently wealthy? There are many possible paths to consider, including creating and selling a business or establishing a career that ends with a massive payout, but this is a straightforward approach that almost anyone can follow:

1. Determine how much you need. First, determine how much you’ll need, personally, to consider yourself independently wealthy. The easiest way to do this is to take the annual amount of money you want and multiply it by 25; this will lead you to a principal that will generate your desired salary with a mere 4 percent annual withdrawal each year.
2. Start saving immediately. The sooner you start saving extra money, the better, and the more money you save, the better. Investing in your 20s or 30s can result in massive growth via compound interest—though people in their 40s and 50s still have time to get some of these benefits as well. Optimize your budget by cutting unnecessary expenses, and try to find avenues to increase your income (such as with a promotion, or a side gig).
3. Take advantage of tax-free growth. Make use of a Roth IRA, a special type of investment account that enables you to achieve tax-free growth. You won’t be able to touch the proceeds until you retire, but being able to grow your money tax-free is a huge advantage.
4. Invest. Whether you use a Roth IRA or a standard brokerage account, take your extra savings and invest them. A balance of stocks and bonds (tilted toward stocks when you’re younger) will help you achieve an annual growth rate of somewhere between 5 and 10 percent, which over time, can help you accumulate the amount you need.

Being independently wealthy shouldn’t be considered a mythical status. It’s a grounded and achievable one with the right mentality, and it’s one that can sustain you for the rest of your life—if you know how to manage it.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.