Which Financial Independence pathway is right for you?

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Which Financial Independence pathway is right for you?

So you have a goal of achieving Financial Independence. Fantastic. Financial Independence provides the potential for enormous freedom in life. But how to get from where you are today, to your chosen nirvana? Of course you need clarity on your goals, and a robust cash flow plan to maximise your savings. But with those two foundational elements ticked off, which pathway should you chose to reach your Financial Independence goal?

I’ve worked with 100’s of people over the past 20 years on achieving financial independence, and through that I’ve identified 3 different pathways that most successful people apply. In fact my observation is that the most common solution involves using 2 of these pathways, and there are plenty of people who utilise all three. These financial independence pathways are:

  1. Investing in Stocks
  2. Investing in Property
  3. Business Ownership

In this post we’ll take a look at each.

I explore these pathways in greater detail in my book Financial Autonomy – the money book that gives you choice. You can download the first chapter for free to take a look.


What is financial independence?


Just before we dive into your pathway options it’s worthwhile defining what we mean by financial independence. Achieving financial independence means accumulating wealth/assets which generate sufficient income to meet your living costs without you needing to work. Someone who has achieved financial independence could, if they wished, not get out of bed all day, and know that their needs are covered.

Financial independence is therefore often associated with retirement. Here we accumulate savings so that later in life we can enjoy a period of retirement before our time on this planet comes to an end.

Some people (perhaps you?) aim to achieve financial independence far earlier than a normal mid 60’s retirement – the FIRE community is the most popular advocate of this. Early retirement is often associated with achieving low living costs so that the wealth required to generate sufficient income to cover your needs is more achievable in a shorter period of time.

Regular readers of this blog will know that we advocate a slight variation from financial independence, which I have termed financial autonomy. Financial autonomy is a lower hurdle to jump over than financial independence. We define financial autonomy as gaining choice. It could be achieved whilst still working, either as an employee or being self-employed, provided you’re working not because you have to, but because you choose to. It recognises that most people actually like to do meaningful work for the challenges and connectedness that it brings.

Whilst the precise game plan may differ depending on whether you’re shooting for financial independence or financial autonomy the three pathways apply to both goals.

How do you get financial independence?


Financial independence requires that your assets throw off sufficient income to meet your needs. So how might that apply to the three pathways?

Stocks pay dividends typically 6 monthly, so this is your primary income source from these assets. It may also be possible to sell down some of your stocks as their value rises, as a key component of a stocks return is its capital growth.

Properties generate rental income, and it is through receipt of this income that the property pathway can provide you with financial independence.

The third pathway is business ownership, something that rarely gets spoken about in financial independence discussions, but is in practice a common way for people to achieve financial independence. Most often this occurs through someone building a business, selling it, and then living off the proceeds.

As already mentioned, a combination of these pathways is the main way I see people get to financial independence. So the business owner ploughs some of the profits into a share portfolio or perhaps some properties. Or a salary earner buys a rental property, paying off the loan using surplus income, and has their retirement savings entirely in stocks to diversify.


Pathway 1 – Stocks


Investing in stocks, or shares if you prefer, is a great way to work towards achieving financial independence. You can start with perhaps $1,000, maybe even less, and build gradually as your financial circumstances permit. Trading costs are minimal, and if your circumstances change, shares can be sold quickly, with the cash in your bank account typically 3 days later.

Most stocks pay regular dividends. Whilst you’re in accumulation mode, these dividends can be used to build on your portfolio. When you reach financial independence, the dividends can provide an income stream for you to live off.

Because stocks are traded on an open market every weekday, their prices move around as new information comes through. Some find this price volatility disconcerting though it shouldn’t be. It’s simply saying if you wanted to sell right now, here’s what you can get. If you have no need or intention of selling right now, then the current price is an irrelevance.

To learn more about investing in stocks, take a read of this piece.


Pathway 2 – Property


Property investment is another popular way to achieve financial independence, especially in Australia. Property’s great attraction is the ease with which you can borrow to enter this space. Borrowing, sometimes referred to as gearing or leveraging, magnifies your outcome. It certainly doesn’t guarantee a positive outcome, but when done sensibly, and over a suitable time frame, usually 10 years plus, it can be a powerful pathway towards financial independence.

Properties produce rental income, and this income can be used to pay down debt, or produce regular passive income.

The challenges with property investment concern the high transaction costs, especially government stamp duties, and the ongoing maintenance costs. Eventually the kitchen needs to be refreshed, the walls painted, or the carpets replaced. Also, a large portion of your wealth is usually linked to a single tenant. If they fall on hard times and can’t pay the rent, or choose to damage your property, you’re in for a world of headaches.


Pathway 3 – Business Ownership


As with the previous two pathways to financial independence, pursing self-employment and business ownership entails risk. For one you typically need to quit your existing job and regular pay cheque. Next, often there is a capital investment required to get set-up.

But actually, in most cases pursuing self-employment is less risky than people think. If it doesn’t work out, you’ll likely be able to get another job. As an employer I’ve found employees who were once self-employed to be fantastic additions to the team because they appreciate that money is a scarce resource, and making a business succeed is tough.

As for capital investment, many businesses are now in the knowledge space, meaning all you need is a laptop, some insurance, and a quiet space in which to work. Even where more expensive fit outs or equipment is needed, it’s almost certainly a lesser outlay than buying an investment property.

In most cases financial independence is reached via self-employment through building up a business which is then sold. This means you need to create something that can continue to run without you in it. A single person consultancy type business for instance has no saleable value (though it may be great for achieving Financial Autonomy).  Ensure then that you are creating repeatable systems and thinking about how you could make yourself redundant.

Alternatively, it could be that you use the surplus cash-flow generated from your business to acquire investments – stocks or property, the same as a salary earner. The benefit a self-employed person has is that they have more control over how much money they earn, because they can be flexible with the number of hours they put into income earning. They can also focus in on the areas where they are strongest and get rewarded most highly.


So in summary, the 3 pathways to Financial Independence are:

  1. Invest in Stocks
  2. Invest in property
  3. Business Ownership

To learn which pathway is most likely to suit you right now, download our free Self-Assessment tool.


Here’s some other resources that you might find helpful:

My book Financial Autonomy – the money book that gives you choice

18 ways to build Passive Income that work in Australia

How could You become Self-Employed?

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