How to Become Independently Wealthy

Becoming independently wealthy is a challenge that requires detailed planning.

To be independently wealthy means to attain enough wealth and passive income that your livelihood is not dependent on others. Another way to think of being independently wealthy is that your money works hard enough for you so that you do not have to work for it. To achieve this level of wealth is absolutely possible, however it is challenging and requires a significant amount of motivation and patience. To become independently wealthy, each individual will travel a different path, however in the end, all will feel enormous satisfaction and peace of mind. Please consider that this topic is very vast and this article only begins to explore strategies to achieve this highly respected level of wealth.

Step 1

Before you determine the strategies that will be most effective for you and your family, you must determine what it takes for you to feel independently wealthy. I believe it is easiest to think of this from an income standpoint, as most of us live daily off of our different forms of income. So, while one family may need $40,000 per year in passive income to feel independently wealthy, another family may require $1,000,000 per year. There is no right or wrong answer, it is based on the type of lifestyle you desire and on what is most important to you. As you move towards being independently wealthy, you will find that you are able to spend more time doing the things in life that you love. So, first, write down on paper your definition of being independently wealthy.

Step 2

Now that you have written your statement, please take the time to figure in inflation. This sounds technical, but it is quite important. If your goal is to be independently wealthy in 20 years and you believe you need $50,000 in today's income, it is extremely important to know that 20 years from now it should be $100,000 to protect your purchasing power. In simple terms, what $50,000 will buy you today will cost $100,000 in 20 years. Generally speaking, it is fair to assume that the cost of daily living will double every 20 years. So, now the statement has been corrected to account for inflation.

Step 3

Your goal to be independently wealthy is now in place (please see my article on SMART goals) and it is time to build your plan. Much like a roadmap, it is much easier to get from Point A to Point B if you actually have a Point A (today) and Point B (goal day to be independently wealthy). Your plan should be based around generating significant amounts and sources of passive earnings. Moving forward, as an example, I am going to continue with the figure of $100,000 annual unearned income in 20 years. As a reminder, unearned income is money that you receive for the year even if you just sit inside and watch television all year long.

Step 4

As mentioned in the introduction, there are many ways to create passive income but for the sake of simplicity we will explore 3 examples. In exploring examples, my hope is that you will be able to brainstorm ideas that may be reasonable for you and your family given your current circumstances. Some ideas require significant upfront capital, others do not, just as some require much more time and energy than others.

Step 5

First, let's consider the idea of owning a piece of land. If we buy a piece of land, we may finance it over a period of time - the best case scenario would be to finance our land over our 20 year period. After buying the land, we should now turn it into a revenue source. We may rent the land to farmers, build a home on the land and rent it to another family, add a storage facility to the land, or plant Christmas trees for future sale on the land (examples). Through the first 20 years, my land may cost me $20,000 per year and I should be looking to generate current income of at least $20,000 from the land. Once the land is fully paid off (I truly own it) in 20 years, I have a passive income source providing $20,000 annually. Rental homes can work very much in the same fashion.

Step 6

Another source of passive income in the quest to be independently wealthy may be the ownership of a business. For example, many individuals writing on eHow are quite entrepreneurial. If I consider my writing a business, I may make it my goal to get to the point where my articles are generating $2,000 per month from various sources (eHow, blogs, etc.) in 20 years. Ultimately, you are looking to build revenue that is recurring and would continue even if you stopped the actual activity that created the initial income. In this example, 20 years from now I could completely stop writing and would still get my business passive income of $24,000 per year. Obviously there are a multitude of businesses that fit the mold.

Step 7

In this example, we now have an actionable plan in place that will be generating $44,000 of annual passive income in 20 years, leaving us $56,000 that must come from another source. A major source for passive income that requires less work than the previous two steps is to use investment securities to generate predictable future income. We can use stocks, long-term bonds, mutual funds, annuities and other alternative investments (please see my articles on building tax-free income and income from stocks). As one example - if we purchase an "income builder" mutual fund today and invest $50,000, that fund will produce around $2500 of income this year. We can reasonably expect that income to compound and double 3 times over the next 20 years. This means this initial $50,000 investment should produce $20,000 per year in 20 years. Again this requires much less effort than managing land or a business. You can also work with a qualified investment professional to find out how much you need to invest annually in this type of investment program to meet your goal of $56,000 passive income in 20 years.

Step 8

Staying with the example, our income is now at $64,000 passive income per year in 20 years. At this point, you can see how a plan is created. It is best to stick with what you know best when creating income sources and stick with where your passions lie. In doing so, creating wealth can be an exciting adventure rather than taxing and stressful. How would you go about creating the other $36,000 to grow towards being independently wealthy?

Tip

Please respect the fact that this is a very basic summary on the discussion of being independently wealthy. I welcome all comments from those who would like to further explore the subject. My key goal in composing this article is to introduce a concept and hopefully create excitement, passion, and motivation for building passive income.

Warning

Life throws funny turns at us all the time, make sure that your plan leaves room for adaptation!