Financial Independence: What it is, how to calculate it, and how to achieve it
Can you imagine how your life would change if money were no longer a concern? Perhaps you would have more time to devote to the things you love, such as going on the trip of your dreams or buying a house. This is what financial independence is all about.
It’s not just about amassing a million euros or retiring at 30. It’s about having the freedom to decide how you manage your time, make your decisions and plan your future. And the best part? You can get started today, even if you can only save small amounts or adopt a few simple habits.
What does financial independence mean?
Financial independence isn’t about having millions in the bank; it’s about having the power of choice. It’s about deciding where to live, how to use your time, and adopting the lifestyle you dream of – all without depending on a monthly salary. Put simply, you have achieved financial independence when your passive income covers your expenses, giving you peace of mind even if you lose your job.
Active income comes from your work, whereas passive income is generated without direct effort, for example from rents, interest and dividends. Building these sources of income takes time and planning. So, financial independence means living off passive income, freeing you to dedicate yourself to what you want without worrying about money.
What is the FIRE movement?
The FIRE movement (Financial Independence, Retire Early), which originated in the USA in the 1990s with the publication of the book "Your Money or Your Life”, has gained popularity online. The idea is straightforward: harness the power of your income and compound interest to save and invest aggressively from an early age in order to achieve financial independence by the time you are 30 to 50 years old.
The movement involves reducing expenses by more than 50% of income and investing the difference consistently, while living on less. In the long term, passive income can cover expenses, meaning that work becomes a choice rather than an obligation. This concept has inspired many people to achieve financial independence and retire early.
For example, if you invest €100 a month at an average annual return of 6% (0.5% a month), after 40 years you will have amassed around €199,000. Although your investment is only €48,000, the remaining €151,000 is the result of compound interest generated over 40 years at €100 per month.
The formula for calculating the future value of periodic contributions is as follows:
FV=P×((1+r)^N-1)/N
Where:
• FV is the future value;
• P is the amount invested in each period (e.g. €100 per month);
• r is the interest rate per period (e.g. 0.005–0.5% per month);
• N represents the total number of periods (e.g. 480 months for a period of 40 years).
How do you calculate your "FIRE figure”?
Use the 4% rule to determine the amount you need for financial independence: multiply your annual expenditure by 25. For example, if your annual spending is €20,000, you would need a net worth of €500,000 to live off your income without working (€20,000 x 25).
To accumulate €500,000 over 15 years with an average annual return of 6% (0.5% per month), you can use the inverse compound interest formula with monthly contributions to calculate your monthly savings target. To reach €500,000, you would need to invest around €1,712 per month at an average rate of 6% per year.
How to save and achieve financial independence
To achieve financial independence, you need discipline, planning and willpower. Follow these steps to help you on your journey:
1. Analyse your financial situation
Knowing exactly how much you earn and spend enables you to make informed financial decisions and make your money work for you. Don't let your emotional decisions dictate financial decisions and maintain strict oversight of your money.
2. Start saving
Before paying any expenses, set aside at least 12.5% of your salary (the equivalent of one hour's work per day) for savings. This habit is essential for building your assets and defining your financial profile.
3. Keep track of your monthly budget
Keep track of all your income and expenditure by organising them into simple categories. Understanding where your money goes is the first step to avoiding waste and creating a realistic plan for saving and investing.
4. Control debts and interest
Assess your debts, prioritise paying off those with the highest interest rates, and negotiate better terms wherever possible.
5. Make regular investments
Once you have built up a solid emergency fund, consider investing to make your money grow. If you want to achieve your goals more quickly and guarantee a financially stable future, this step is essential.
6. Improve your financial literacy
Read books on essential concepts, read expert articles, listen to podcasts and follow financial Youtube channels. To receive more structured follow-up support, explore webinars on financial independence, such as those offered by the Banco Carregosa Academy.
7. Set goals and deadlines
Set yourself realistic goals, such as buying a car, travelling or buying a house, and set clear deadlines for each stage. This helps you to stay focused and motivated.
8.Adopt an aggressive approach to saving
Many followers of the FIRE movement save between 50% and 75% of their income. In order to achieve this, they cut out unnecessary expenses and adopt a more efficient lifestyle.
9. Look for additional income
One way to speed up the process is to think about what you could do to make some extra money. You could look into freelancing, investments, running a side business or getting into passive income.
Which investments will help you achieve financial independence?
If you’re looking for smart ways to invest your money, take a look at these practical options:
Term deposits
A term deposit is a straightforward and secure way to lend money to the bank for a fixed period in exchange for interest. The terms and conditions, including the interest rate, are agreed in advance. Ultimately, you will get back the capital you invested, plus interest.
Treasury Certificates
They are ideal for medium- and long term investment, offering guaranteed fixed rates and increasing term premiums. The minimum investment required is €1,000, with terms of up to ten years available. From the second year onwards, you will receive an additional premium of 0.5%, which will increase to 1% between the sixth and tenth years. There will also be extra bonuses in the fourth and fifth years, which are linked to GDP growth. They are exclusive to individuals and cannot be transferred, except in the event of death.
Savings Certificates
These are more flexible and require a minimum investment of €100. The interest rate is variable and adjusts according to market conditions. Interest is also capitalised. You can access the capital from the third month onwards, which is ideal for those who are looking for a secure investment with some liquidity.
Property Investment
Although it is less accessible, investing in property in the form of REITs can provide a steady income and long-term growth. This is an attractive option for those who have the initial capital.
Shares
When you invest in shares, you acquire a stake in a company and benefit from its growth through share appreciation or dividends. Although it has greater potential for return, it also involves greater volatility and risk. You should invest and diversify according to your time horizon and risk profile.
Investment Funds
Investment funds offer a practical way to invest your money in a variety of shares, bonds and other assets, all managed by professionals. Participating in a fund enables you to pool your capital with that of other investors, allowing you to benefit from diversification and specialised management even with small amounts.
ETFs (Exchange Traded Funds)
ETFs replicate market indices such as the PSI20, S&P 500 and Nasdaq. They offer straightforward diversification and low costs, as well as the flexibility to buy and sell in real time during stock market hours.
Cryptocurrencies
Although cryptocurrencies such as Bitcoin and Ethereum are volatile assets, they have aroused interest due to their disruptive potential and rapid appreciation. Invest with caution and never risk more than you can afford to lose. Stay informed about this dynamic market.
Own business
Setting up a business can provide a source of passive income, helping you to achieve financial independence. Choose a robust business model and assemble a dependable team to oversee operations, enabling you to minimise your direct involvement.
Invest with the GoBulling Investor platform
If you’re looking to achieve financial independence, the GoBulling Investor platform from Banco Carregosa is the perfect solution. Simple, intuitive and secure, it allows you to manage your investments independently, whether you are a beginner or a seasoned investor. You can diversify your portfolio in a way that aligns with your goals by accessing a wide range of financial instruments, such as shares, ETFs, investment funds and other assets.
Start building your financial independence today
Although achieving financial freedom may seem like a distant goal, it begins with taking simple, consistent steps. The key to success is to plan and act with discipline and strategy, no matter how much you invest.
With the right tools, knowledge and support from Banco Carregosa’s NextGen programme, you can create a future where money works for you, providing greater security and autonomy so you can live life on your terms. Take the first step towards financial independence today – now is the best time.