One could probably build a small library for the books written on the subject of financial independence. It’s a subject many of us like to fantasize about, but few of us will see materialize in our lifetimes. Why? Mostly because we allow competing priorities, egos and financial peer pressure dictate how we spend, and save, our money.

The good news is you don’t really need a book to learn about financial independence (though, if you do decide to read more on the subject, I highly recommend Your Money or Your Life). All you need to do is remember the seven secrets below.

Secrets to Financial Independence

1. Pay off debt. Yes, even the mortgage. I can hear the mathematicians screaming now – “PAY OFF YOUR MORTGAGE?” What about the tax deduction? What about all-time low interest rates. I don’t care about either one. To reach financial independence I’m all about reducing monthly expenses. A mortgage represents the highest monthly expense in most family budgets, and ours is no exception. Knock out credit card debt, car debt, student loans and the mortgage and you’ll owe a monthly payment to no one, which puts you on the fast-track to financial independence.

2. Quit buying crap. And while you’re at it, quit signing up for crap. The other day I sat down to try to tally our monthly expenses. Seems simple enough, doesn’t it? Problem is I kept forgetting little expenses we’ve signed up for. Oops, there’s the Netflix charge; then the gym membership fee. The other day the TiVo bill hit. I enjoy all three of these examples immensely, but altogether they represent about $50 a month. Talk about being nickel and dimed! Of course, there are other things I’m forgetting to list here. You can see how challenging it is to come up with a total monthly outgo figure these days!

3. Forget about trying to impress people. Do you have any idea how much money is wasted in a lifetime trying to impress other people? Just think of the things we buy, and the options we choose, for show rather than for practicality. Flashy cars, big houses and expensive jewelry matter little to those working towards financial independence, because we recognize you’ll be paying for that stuff long after we hang up the employee badge.

4. Make savings a top priority. If I had a financial do-over, I’d start saving half of my income from the very first day I started working. I can think of no faster way to accumulate wealth, build financial discipline, and expand your creatively frugal way of thinking to make things work on a meager income. Trouble is, very few of us ever thought to do this, so right out of the gate we needed more like 90% of our income just to pay for all the goodies we accumulated. To make it happen, talk to your payroll office and elect to have 50% of your paycheck deposited in an online savings account (I’ve reviewed a few of the best online banks in the past), separate from your primary checking account. Now, live on what’s left. Every year you pull this off you are essentially buying (saving) a year of freedom from earning an income.

5. Be aggressive early on. I’m a conservative person by nature. I don’t like to take big risks – with money, or life in general. But if I could talk to my 20 year-old self now I’d tell him to live a little. Invest a little money (10% of your portfolio or less) in that stock you just know in your gut will be a winner, because you know the quality of the people in management, or you believe in their product. Don’t be afraid to invest in that “aggressive” portfolio in your twenties, and early thirties. You’ve got time for ups and downs. You’ll win some, and you’ll lose some, but at least you won’t have any regrets.

6. Be conservative as you near financial independence. As passionate as I am about taking risks when you are still young, I am equally passionate about being conservative in the last few years leading up to reaching your “number.” That’s the time to start dumping the risky stuff, and start gearing down into low-risk investments. Some of your nest egg should be in cash, a little in bonds, or if you like simplicity, maybe something like a LifeStrategy Income Fund that takes the thinking (and emotions) out of investing your nest egg, or at least a portion of it. Be sure to check recent returns on such funds, as many billed as “conservative” lost their shirts in the recent downturn. At this point in your journey to financial independence you should be fairly immune to market swings, and more concerned with protecting the principal you’ve worked to accumulate.

7. Determine your own “number.” Speaking of your “number,” don’t let some financial egghead across a desk look down his nose and tell you that you need exactly $1.4 million to “maintain your style of living in retirement.” Garbage. Most of these guys immediately follow this with a sales pitch for an annuity, or a scare tactic about clients living to 90 years-old and running out of money. If you are dedicated to living frugal, paid off all your debts (see step 1), and built a comfortable nest egg based on your individual needs, you should be just fine.

Financial independence doesn’t have to be a mythical place we only visit in our day dreams. There are enough people out there living it, writing about it, and experiencing the joys of being free from the requirement to earn an income to survive. Learn from them. Model your behaviors after them. But be careful who you follow.

As author Thomas Stanley proved in his book, The Millionaire Next Door, most self-made millionaires look a lot different than the Paris Hiltons of the world. They probably drive a two year-old car (or older), shop where you shop, and live in a modest home. They don’t wear flashy jewelry, have a string of letters after their name earned from a decade of schooling in the Ivy League, and their idea of a fun family vacation probably looks like a week-long trip Disney World, not Paris or the Mediterranean.

The real secret to financial independence is to start living your life with that goal at the forefront of all your financial decisions. The longer you put it off, the worse your chances of ever succeeding will be. But for those who start early, and stay passionate about their dream, the payoff at the end is one of the more freeing experiences we can ever enjoy.

Most would agree that diversification plays a big role in the success of one’s personal finances. Spreading out risk is helpful in any environment, but is especially important when times are tough. It is just as important to diversify income as it is investments, because until we achieve financial independence it is income that covers basic life-sustaining expenses such as food and shelter. That brings us to the idea of creating passive income.

I’ve always been a big proponent of developing a side hustle – an additional income-producing endeavor you cultivate along with your full-time job. A side hustle might be related to your full-time job, or it could be something completely separate. In my case, I do very little writing at my full-time gig, and nothing related to personal finances. But past experiences, an interest in writing, and a passion for frugal living came together to form this blog and my side hustle.

What if we took this active-active income model to the next level? What if we used this side hustle to invest and create a third, passive income stream? This would be the ultimate in income diversification, and provide maximum coverage in an income emergency, such as  a job layoff or a huge stock market tumble.

I first read about the three-way income model at Money Hacker and thought it was a great concept. I immediately thought about how I could apply it in my own financial life. Keep in mind the difference in active and passive income for these purposes is active income requires me to work actively to generate an income. Passive income continues to grow whether I continue to do work or not. Here are my three current layers of income:

• Active Income #1. My first, and primary, source of income is my full-time job. Until two years ago this was my only source of income. My wife and I recognized that to meet our financial goals of becoming debt free and building a sizable savings fund, we would need to increase our income. After I struck out trying to find part-time employment, and spent a summer mowing lawns in 100-degree temperatures, I came to the conclusion it was time to try something else. Enter the side hustle.

• Active Income #2. In addition to my full-time job, I spend about 20 hours a week working on my blog, and related freelancing opportunities. This makes for some long days, but the per-hour earnings rate is much higher than traditional forms of part time work, such as retail or manual labor. Of course, this wasn’t true in the beginning. I made about $3 per hour the first few months of blogging when time invested yielded very little return.

• Passive Income #1. Creating a passive income stream is the area of this three-way income plan that I need to work on the most. As it is now, we have very little in the way of passive income, save the little bit of interest that accumulates in our online savings account, and the minimal stock dividends that accumulate on the couple stocks and mutual funds we own. Once completely debt free, we’ll be able to afford diverting more of our income to investments, and boost passive income.

Specifically, we plan to use the majority of active income #2 (side hustles) to build a portfolio of income-producing investments. Why? Because I recognize that earnings from active income pursuits are never a sure thing. In my personal example, I could be laid off from my full-time job tomorrow. Advertisers could decide to slash budgets, or some regulatory change could seriously affect my online earnings. I could get sick, or injured, and no longer be able to continue working at a 60-hour per week pace.

For these reasons it makes sense to develop a passive income stream over time to further diversify our sources of income. Early on, the passive income portfolio won’t pay for an extra value meal at McDonalds, but over time our goal will be to grow passive income to the point where it covers all of our required expenses each month.

Passive Income Portfolio Possibilities

What types of investments might make up our passive income portfolio? There are a couple requirements. To be truly passive, the investment has to be a “set it and forget it” type of investment. The simplest form of passive income investment may be a simple savings account. You deposit money, forget about it, and it earns a little bit (very little bit) of interest each month.

As you have higher sums of money to invest you can typically move up in rate of return over a simple savings account. Sticking with deposit accounts for a moment, higher investments in products like money market accounts and CDs will yield higher returns and build our passive income more quickly. A diversified mix of bonds, treasuries and dividend-growth stocks have even higher rates of return (traditionally), but must be spread across a variety of sectors for ultimate diversification.

In addition to financial investments, there are other ways to build a passive income portfolio. Authors of books often earn royalties on copies sold, though the argument could be made that books don’t promote themselves, so the marketing effort required might eliminate the “passive” feature of this investment. In this case, the work is done up front and the residual income that follows could be included in a passive income portfolio.

Over time, we may also use active income to invest in paid-for real estate, and consider rental income and real estate appreciation as passive income. Again, unclogging a toilet at 3:00 in the morning is far from passive, so if you want a totally hands-off real estate investment you will probably need to hire a property manager.

For me, the main benefit of building a passive income from active earnings #2 is that it extends the life of those earnings. If I simply spent them each month on a bigger mortgage, or a car payment, they would be forever gone. Eventually, when my side hustle dwindled away I would have nothing to show for the years of work. This way, passive income will continue to flow long after I quit working for money, guaranteeing financial independence in the years to come.

On this day marking the celebration of our nation’s independence, I thought it fitting that thoughts of our own financial independence were near the front of my mind. I just wrapped up my second book in as many weeks, Work Less, Live More: The Way to Semi-Retirement. It was a great read, and I particularly enjoyed it because the author shared many actionable steps, portfolio recommendations and real-world techniques to move towards financial independence. Other works often come up short on providing anything beyond theory and “pie-in-the-sky” projections.

The most important lesson I learned (or had reinforced) from the book is the idea that I just need to get started. Many of us are paralyzed by the investment choices so we sit around and do nothing. Suddenly, we’re fifty-five years old with barely anything in savings, and twenty years left on our mortgage. That puts you about as far away from financial independence as you could get!

Here I sit at almost 32 years-old, and not a lot of savings to show. But, we’ve had some big wins in the last several months. We’ve knocked out a lot of debt, paid off our car, and rebuilt our emergency fund after a family emergency took its toll. In the next year we’ll be debt free, except the mortgage, and can then really begin to focus on our dream of a semi-retirement before traditional retirement age.

Maybe I’ll continue writing in semi-retirement; maybe I’ll find some other side hustle I enjoy. Regardless, in 15-20 years I’d like to find myself doing more meaningful with my days than working in an office. I’d like to teach, mentor, and coach young people. I’d like to do more volunteer work. I’d like to do many of the things I’ve had to forgo to this point just to keep the family checkbook in the black. When we reach financial independence we will have the freedom to use our life energy for something more worthwhile to use than earning a paycheck.

In the coming weeks and months I’ll begin to share more about my strategy for achieving financial independence. Some big decisions will have to be made regarding our future plans. Will we invest in taxable accounts, or tax-advantaged retirement accounts (or both)? Will we go with mutual funds, high-dividend stocks, bonds, cash, or some combination?  How will real estate play into our plans? What will we do for health insurance? How does our kids attending college affect our plans?

Lots to sort out, but fortunately we have plenty of time. Our number one priority is becoming debt free. In the mean time we continue to save in retirement accounts, but soon we may add other investments to the mix. Of course, I’ll be seeking your input along the way as well. From the comments, I know many of you are now enjoying a semi-retired lifestyle and I deeply appreciate your input, as do other readers.

While this post was about “financial independence,” it’s worth mentioning on Independence Day that many men and women around the globe are putting their lives on the line for our independence. Many others have come before them and paid the ultimate sacrifice. Take a moment today to remember those who serve their country, and their families. Without their sacrifices the idea of financial independence would be merely a dream.