Financial independence is an attractive goal, whether that means being able to pay your way at the end of your career, or being able to choose when and how you work and spend your time earlier in life. Getting to a state of financial independence, however, requires making wise decisions – and the earlier you make them, the better.
Whether you're 30 or 70, few people would argue that financial independence is a good thing. At some point in your life you're almost certainly going to reach the point where you can't or don't want to have to work any more. Whether or not you can afford to do that will depend on the decisions you made in the years and decades leading up to that moment.
DeFi and crypto are critical new asset classes that can help you reach your goals. The better informed you are, the better decisions you're able to make.
How Much Do You Need To Be Financially Independent?
The amount of money you'll need to be financially independent will depend on your personal circumstances. In the US, average household income is roughly USD $70,000, so that's a reasonable starting point when calculating the pot of money you'll need.
Of course, that can vary a lot. If you don't have kids, or they've left home, and you've paid off your mortgage, you'll have fewer financial obligations and might be looking at something more like $50,000.
As an aside, one thing it's almost always worth doing when seeking financial independence is paying down your debts, simply because the interest rates on debt (especially expensive debt like credit card debt) is more than the return you'll get on most investments.
Whatever your financial needs, you'll need a portfolio of investments to produce that sum every year. And the million-dollar question is: How big should that pot of money be?
How Much Do You Need To Be Financially Independent?As a very broad principle, it's reasonable to withdraw up to 4% of your total portfolio each year without running the risk of decreasing its value over the long term. That's because average returns over the course of decades will keep topping your portfolio back up to where you began, and ideally beyond.
The Four Percent Rule
As a very broad principle, it's reasonable to withdraw up to 4% of your total portfolio each year without running the risk of decreasing its value over the long term. That's because average returns over the course of decades will keep topping your portfolio back up to where you began, and ideally beyond.
The Four Percent Rule isn't perfect, but it's a good starting point. In practice, it may be possible to improve on your income without eroding your overall portfolio – more on that below.
Creating a Long-Term Portfolio Focused on Financial Independence
As discussed in a previous article, diversification is critical in building a long-term portfolio geared towards sustained growth.
Using the four percent rule and taking a (low) figure of $50,000 as your income produces a target portfolio value of $1.25 million. For many people, building a portfolio of over a million dollars worth of assets will be the work of decades over their entire careers.
For others, it will be clear that meeting that target is unrealistic unless you can find a way of turbocharging your returns. That's where crypto comes into the picture.
The Role of Crypto in Your Portfolio
There are at least two reasons why you should consider an allocation of bitcoin or other cryptocurrencies in your portfolio.
- Crypto may be volatile, but it has strongly outperformed the market over a course of just a few years
- It's an insurance policy against high inflation or financial collapse
Buying virtual currencies and using them to earn more crypto is arguably the best option for that high-yield strategy that provides the outperforming element of your portfolio, pulling up the overall returns.
Typically, growth-focused investment portfolios might return 8-10% per year, in line with the stock market. That's before you factor in inflation, which eats away at the value of your portfolio in real terms, even if the headline number is going up. Crypto can appreciate 10 to 20 times per year, or 1,000-2,000%. Of course the bad years can be very bad, but overall the average return for bitcoin has been over 200% per year.
A New Zealand pension fund called KiwiSaver was recently in the news after allocating 5% of its funds to bitcoin, not to mention many other hedge funds and big corporations, including Tesla and Microstrategy. Crypto isn't a fringe asset any more. While the big players use the new institutional solutions coming onto the market, regular investors can buy virtual currency like bitcoin on crypto exchanges such as Coinchange.
Moving from Growth to Income
Throughout the years of growing your portfolio, but particularly when you want to start living off the funds you have built, you're going to want income opportunities – not just growth. Stability, not volatility, becomes critical at this point.
This is where another sector of crypto, DeFi, really comes into its own. DeFi (Decentralized Finance) provides opportunities to put your capital to work in generating an income with maximum efficiency, bypassing the delays, costs and middlemen of the traditional financial sector. As a result, the yields are generally much higher – often as much as 20% per year. And, because these yields are available for stablecoin holdings, you won't have to worry about the risk of your funds dropping in value, like bitcoin might.
While figures vary according to market conditions, taking this yield of 20%, you would need a total fund of $250,000 to reach that $50,000 per year target.
To achieve that, you'd likely need to monitor the market closely to find the best opportunities. You'd also need to manage your own crypto wallet and funds, which is the purest form of financial self-sovereignty – not only being your own bank but being your own investment fund and hedge fund. But all of this requires time, expertise, and critically, the confidence and knowledge to ensure your funds remain secure.
An alternative is to use a service like Coinchange, which makes it easy to deposit funds, lock them in DeFi opportunities, and have them automatically generate a return from the safest and best opportunities on the market.