Financial Independence means living a fulfilling life - whether that means traveling the globe or purchasing your dream home. Financial independence also gives you peace of mind knowing you can continue doing what makes you happy after retiring from the workforce.
An effective way to achieve financial independence is to carefully consider all your monthly income and expenditures, starting by creating a budget with monthly take-home pay, debt payments and expenses included in it.
1. Invest in Your Future
Step one in reaching financial independence is saving and investing a substantial portion of your income. Although saving can be daunting, if you make saving and investing the foundation of your plan and stay committed, financial independence could come sooner.
Establish your "Financial Independence Number," which can be defined as the amount of passive income necessary to cover living expenses and your desired lifestyle. This number can be calculated using your net worth which equals assets (such as savings or investments) minus debts.
Eliminating debt is key to reaching financial independence, as interest payments on mortgages, credit cards and student loans eat away at your savings and limit your ability to invest and build wealth. One effective strategy for eliminating debt is using the snowball method of repaying it - see above.
2. Create a Budget
If you're serious about changing your financial habits, creating a budget should be one of your first steps. A budget provides a roadmap that shows where your money is going and how you can use it to reach your goals.
Start by calculating your total available income or take-home pay (after tax deductions). Add up all of your monthly expenses, such as rent/mortgage payments, utilities costs, transportation expenses, food costs, debt repayment costs and food. Finally, include savings or any discretionary spending you want to track.
Once you understand where your money is going, create a system to monitor it on an ongoing basis. This could involve keeping track of it all with pen and paper or using an app like Mint to track budgetary trends on your smartphone. Review this data every month and make adjustments as needed.
3. Get Out of Debt
Un essential step toward financial independence is clearing away debt. By freeing up funds to invest, this frees up funds that can then be allocated towards future savings goals or any other financial plans you may have.
Reducing debt means setting aside more of your paycheck towards paying off existing debt and cutting spending on things such as shopping splurges or specialty coffee beverages. Selling your car may even help, or finding ways to generate additional income via side hustles can all be helpful tools for financial freedom.
Build up an emergency savings account to cover unexpected expenses like car repairs or medical bills. Experts advise having at least 3-6 months worth of expenses saved up. This helps avoid using credit cards further into debt.
4. Create a Savings Account
Once you've identified your goals and created a budget, the next step should be saving. A savings account is an ideal place to begin; however, additional types of bank accounts such as money market or certificate of deposit accounts could also prove valuable in saving.
Savings accounts are protected by both the National Credit Union Administration and Federal Deposit Insurance Corporation and can be opened with any bank, credit union or online platform.
The best savings accounts are those with minimal fees and high interest rates, such as an automatic transfer from your checking to savings. This will keep you on track with your savings goals while showing your progress along the way.
5. Create a Retirement Plan
An effective retirement plan can help you reach your post-retirement goals, such as traveling or starting new hobbies. To stay on track, include retirement savings in your budget plan and set aside sufficient savings.
How much savings you need depends on your lifestyle. For example, if you plan on living out your retirement years at home with family and being frugal, a smaller nest egg should do.
Utilize your employer-offered 401(k), IRA and/or SEP IRA accounts (for self-employed individuals). Starting early is key as compound interest works in your favor; also consider increasing automatic retirement contributions after receiving a raise to help speed up reaching your retirement plan goals faster.
