Have you dreamed of being independently wealthy?
If you have, maybe you’ve thought of sailing on a yacht or taking exotic vacations.
However, many independently wealthy people don’t appear that way. And the fact that they don’t look that way is exactly how they got wealthy. They were smart with their money.
According to a Charles Schwab survey, Americans think a net worth of $2.3 million makes a person wealthy. However, I don’t think you can put a number on wealth. It is more of a state of mind and how you live your life than a number in your bank account.
Below I’ll discuss what it means to be independently wealthy, signs that you are independently wealthy, and how to become independently wealthy.
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What Does It Mean to Be Independently Wealthy?
Independently wealthy means that you can live the rest of your life without relying on any external financial support or money from a job. It doesn’t necessarily mean you don’t have a job; it just means you don’t need a job.
Meeting the first qualification of not having to rely on any external financial support would be considered financially independent, but I’ll cover that in more detail below.
If you can cover all of your living expenses without the help of others or creating additional debt, without the need to work for money, you are independently wealthy.
Many people who meet those criteria still work, but not because they have to. It is just a part of their way of life, and it is part of the values that created their wealth.
What Is Considered Independently Wealthy?
There isn’t a specific income threshold or savings amount that makes you independently wealthy. It is dependent on your lifestyle.
If you choose to drive a new luxury car every few years, live in a mansion, and like to spend instead of save, it is harder to become independently wealthy. It is possible, but it is more difficult unless you’ve inherited a substantial amount of money or won the lottery.
However, if you buy used cars and keep them for several years, live in a reasonably sized house for your needs, and have good saving habits, you are more likely to be able to achieve independent wealth.
But regardless of your financial lifestyle, if you meet the criteria of not having to rely on external financial support or income from a job to live the life you desire, you are considered independently wealthy.
Here are some of the signs you are independently wealthy or on the path to becoming independently wealthy.
1. You Prioritize Saving over Spending
When you focus on saving your money and paying yourself first, chances are you are independently wealthy or are well on your way to becoming so.
You’ll never become independently wealthy if you spend more than you make and you don’t save any money. Creating a budget and sticking to it is an excellent first step toward putting you on the path to independent wealth.
Understanding the importance of saving money and making conscientious decisions about new purchases help create the right mindset for meeting your financial goals.
2. You Live Comfortably Within Your Means
If you don’t live within your means or you are always trying to keep up with the Joneses, you’ll never achieve independent wealth. Having FOMO (the fear of missing out) when it comes to your finances is detrimental to your money management.
Buying the latest car, buying more home than you can afford or need, and using credit cards like cash will ensure you’ll always be chasing financial freedom.
Before making significant purchases that require long-term financial obligations, think about your long-term financial goals and how that purchase fits into the picture.
How will you feel about that decision in five years? How will you feel when you reach the point where you could have achieved independent wealth, but didn’t because of the financial obligations you locked yourself into?
If you’ve made smart decisions about large purchases throughout your life and invested the money you’ve saved, you’re likely independently wealthy or will be in the future.
3. You Understand the Value of Time
When it comes to your money, time is its best friend. This is a difficult concept to understand for many, especially when you are young.
Not understanding the impact of spending money instead of saving it is harmful for your long-term financial success.
It is hard to think about how spending $10,000 when you are 25 years old can negatively impact your future. If you use that money to buy a more expensive car at that age instead of investing it, you could be missing out on around $45,000 when you’re 50, and around $150,000 when you’re 65.
That’s assuming no additional contributions and a 7% return.
If you are older and understood the power of compounding interest at a young age, and used it to your advantage, there is a good chance you are independently wealthy.
4. You Have a Substantial Liquid Net Worth
Having a substantial net worth sounds good, however, that doesn’t mean much if most of it is tied up in a home or your retirement savings (unless you are near retirement age).
Your liquid net worth is a better indicator of how close you are to being independently wealthy. It shows you how much cash you have access to that isn’t tied to your house or retirement savings.
If your liquid net worth is substantial enough to live off of until you can access your retirement money, you are independently wealthy.
By using a free tool like Personal Capital, you can track your net worth and see all of your accounts in one place.
5. You’ve Inherited a Fortune or Won the Lottery
If you’ve inherited a substantial amount of money or won the lottery, you should be independently wealthy.
However, I say “should” because there are several stories of famous people and lottery winners who blew through a ton of money.
Even though you have a large amount of money doesn’t mean you need to spend it all. You should still live reasonably within your means and save for the future.
Don’t get me wrong, you can still have a good time and enjoy life with your fortune. Just be smart about it so it doesn’t run out.
How Do You Become Independently Wealthy?
While some people are lucky and inherited their money, won the lottery, or the stars aligned for them, the rest of us have to make it on our own to become independently wealthy.
And while it may be nice or a dream to have it fall in your lap, I’d argue that you’ll appreciate it much more if you accomplish it with your own hard work and determination. You’re also less likely to waste it a way if you worked for it.
1. Have a Budget and Stick to It
Regardless of how much money you make, having a budget is essential to understand where your money is going. This can help you eliminate unnecessary expenses and devote more money to savings. A tool like Trim is excellent for finding subscriptions to cancel and negotiating lower bills.
And while having a budget is an excellent first step, if you don’t stick to it, it doesn’t do you any good.
Don’t forget to set aside some money for having fun though. While having lofty savings goals is good, don’t sacrifice enjoying life at the same time. Like everything else, just be smart about how you go about doing that.
2. Establish Financial Goals and Save
While a budget should address your short-term cash flow, it is vital to have financial goals if you want to achieve independent wealth.
Remember, you need to have enough money to live off of without any outside assistance or a job to truly be independently wealthy.
And while I think it is crucial to use retirement accounts to maximize your tax-advanataged savings, be aware that you won’t be able to use that money until you reach retirement age. Therefore, you’ll need to have non-retirement savings to get you to that point.
And while saving money is essential to achieve independent wealth, eliminating debt should be a priority. It is much easier to live without external financial assistance and without a job when you don’t owe others money.
And one more crucial move to help you achieve independent wealth – when you get a raise or bonus, don’t spend more – save more! Keeping your lifestyle at the same level and saving the money from raises will help you become independently wealthy much quicker.
3. Invest for the Long Term
To achieve independent wealth, long-term investing is vital to your strategy. The power of compound interest is your best tool for growing wealth.
Remember, maximizing liquid net worth is the goal when you want to have the ability to live without the need of a job or external resources.
And having Investments outside of retirement accounts is the best place to grow your money for these needs.
4. Start a Business
If you think about most of the wealthiest people in the world, you’ll find that most of them grew their wealth by running a business. While this may not be for everyone, it is truly the way to grow the greatest wealth. But again, wealth can be somewhat subjective.
Starting a business is difficult and it typically takes time before you start to see a profit. However, over the long term it can be fulfilling to see what you have built and it can be an asset you pass on to your children.
5. Create Other Income Streams
Another aspect common with independently wealthy people is that they typically have multiple streams of income. Not only is this a smart move to minimize the potential of financial hardships, it also helps to test different methods of making money to see which one is most profitable for you.
Alternate income streams can include things like doing side hustles, but it can also be achieved by creating passive income sources. Passive income sources can include things like creating online courses, digital products, or starting a blog. While starting a blog takes a lot of work, it can be monetized in many different ways and grow over time.
Creating other income streams can help you achieve independent wealth quicker, either by saving more money, being a source of ongoing income, or a combination of the two.
Other Questions You May Have About Being Independently Wealthy
Here are some frequently asked questions related to being independently wealthy.
Independently Wealthy vs. Financially Independent
Financial independence is just one-half of the equation for being independently wealthy.
Being financially independent means that you don’t rely on others for financial support – you don’t live in your parent’s house, you aren’t on their health or auto insurance, and they don’t provide any financial assistance to you.
Having a liquid net worth of zero or greater means you’ve achieved true financial independence. If your liquid net worth is zero, it means you have enough accessible cash to cover any debts you may have.
However, to be independently wealthy, you not only have to be able to cover any debts you may have, but you also need to be able to cover your ongoing living expenses for the rest of your life.
Rich vs. Wealthy: What’s the Difference?
The difference between rich and wealthy really comes down to how you handle your money.
While rich people have a lot of money, they tend to spend a lot of it as well. They spend freely and lavishly and don’t save much. Wealthy people accumulate their money and assets. And they don’t spend frivolously.
Being rich tends to lead to having a lot of stuff, and likely a good amount of debt. Being wealthy leads to financial freedom.
How Much Money Is Independently Wealthy?
There isn’t a set amount of money that defines someone as being independently wealthy.
Being independently wealthy depends on how you handle your money and the lifestyle you live.
A person living in a small home with an old beater as a car and few other belongings could be independently wealthy. While a person living in a mansion with a brand-new luxury car, a boat, and a private jet might be nowhere near being independently wealthy.
Related:
Best Investment Apps for Growing Wealth
Ways to Save Money From Your Salary
Conclusion on Independent Wealth
While independent wealth, financially independent, and financial freedom are all great sounding ideas, what is most important is that you are smart with your money.
No matter what you call it, if you live within your means, plan and save for the future, and invest wisely, you’ll achieve your financial goals and be better off than most people.
Becoming independently wealthy is so much more than having a large bank account. It is about being able to enjoy a fulfilling life without any financial stress.
I think its great to identify that, if you don’t spend a lot, it takes much less money to become independently wealthy! It’s a fun goal, to reduce one’s expenses as well as increasing savings, since the goal grows closer in two ways. Thanks for this thoughtful overview!