The secret to becoming financially independent is not just about making the right decisions when it comes to money. It’s also about living a life that has financial freedom built into it. And creating such a life, while requires hard work, is much easier than you think.
Financial freedom can best be explained as being free from the need to earn money. Instead of living from paycheck to paycheck, you have enough assets set aside that you could continue making payments on any obligations (mortgage, credit card debt) and still live comfortably without income for several months or even years.
What exactly is financial freedom? What do you have to do to achieve it? And how much money will I need to retire comfortably and what’s the best way to save for retirement? This article takes a look at all of these questions while providing answers and tips on how to get there.
But first, what is financial independence?
Being financially independent means that you have enough money to cover all of your living expenses, including food, clothing, transportation, housing, and medical needs. It’s when you’re able to live without relying on any type of job or someone else for your income.
It also means that you are able to purchase luxuries on a whim without having to worry about it affecting other aspects of your life. People who are financially independent can live in any way they want and do anything they want without the concern of money getting in the way. To be financially independent you should have a firm understanding of what your current income is, how much money you spend in a month, and the difference between those numbers. You should also consider any future plans that might affect your finances such as having children or planning to move out on your own.
This will help you determine whether or not you are currently financially independent. If you aren’t yet financially independent, it will give you a timetable for when to achieve that goal and allow you to make preparations in advance of any upcoming changes in your financial situation.
For many people, the idea of financial freedom is just a dream that can’t be achieved. In reality, however, it’s something you can work towards and achieve in your lifetime. Keep reading to learn 10 steps that will help you get started toward attaining financial freedom (and achieving your financial goals)!
#1: Get a handle on your finances
Before you can even think about achieving financial freedom, you’ve got to get a handle on your personal finances. This means getting an understanding of where all your money goes and how much is available for saving.
You could check out this in-depth guide to becoming financially aware. Or you could just check out Personal Capital’s financial health dashboard to get a quick overview of your entire financial situation.
#2: Create a budget
Once you have an understanding of where all your money is going, it’s time to create a budget. A good starting point is the 50/30/20 budget, which is based on the idea that you should spend 50% of your income on needs (personal expenses), 30% on wants (luxuries and discretionary spending), and 20% on savings and paying down debt. This budget focuses in particular on how much money you’ll need to be saving for retirement. However, not everyone wants to start saving for retirement in their 20s. If that’s the case, you can instead focus on stashing away 3 to 6 months of expenses in an emergency fund. You should also determine how much money you’ll need for non-retirement goals such as vacations or a new car.
#3: Build a debt reduction plan with remaining funds (student loans, credit cards)
Once you know how much you’re saving for retirement and for your other goals, it’s time to figure out what exactly you’re going to do with the rest of the money. To start, consider your student loans and other types of debt.
It’s important to get a handle on this before moving on to building up your retirement savings because there are specific strategies that can help make paying off debt payments more effective. For example, by paying off the highest interest rate first (i.e. credit cards), the amount of money you have leftover for savings will increase over time.
This is because as you pay off debts, the interest rates associated will decrease – which means that a lower percentage of your income will go towards covering the interest payments on that debt.
#4: Refinance any outstanding loans if interest rates are lower
This one might seem like a no-brainer, but it’s actually more complicated than it seems. Generally speaking, refinancing a loan on a lower interest rate means that you’ll be paying lower monthly payments for the duration of your loan. However, this isn’t always the case and is dependent on what type of loan (mortgage, student loans), credit score, and employment history you have. It’s always best to consult with a qualified financial advisor before taking this step so you don’t end up hurting yourself financially.
#5: Start saving
Once you have your debts paid off, it’s time to start stashing away money for the future. This is when you’ll need to start putting money away. And the earlier that you begin, the better. The longer your money is allowed to grow and compound over time, without being touched, the more time your investments have to make gains. For example, if you start saving $800 when you’re 25 years old, your money has 52 years to grow. On the other hand, if you don’t start saving until age 35 (and still save $800 per month), that’s only 30 years for your investments to grow and compound.
You’ll need to determine where you should invest your money, what type of investments you should choose and how much money to put aside from each paycheck. You’ll also need to decide how much of your current income should be put toward regular spending, luxuries, and savings.
#6: Increase your earnings
Once you have a budget in place, it’s important to start increasing your earnings. There are dozens of ways that you can increase your income from side jobs to freelance gigs and even starting a business. Once you’ve got a handle on increasing your income, you’ll have to determine how money should be re-allocated each month. This will help assure that the increase in income goes toward saving for retirement and other larger financial goals rather than regular spending or savings.
#7: Track your net worth
Net worth is how much you own (your assets) versus how much you owe (your debts). In other words, it’s the value of everything that you have minus what you owe.
You can track your net worth through a variety of different methods depending on what best suits your needs. One option is to track it on an application like Mint, which automates the process of tracking your net worth each month. Another option is to set up a spreadsheet and manually calculate it.
Get into the habit of making an entry for your net worth every week, every paycheck, or monthly – whatever works best for you as an individual. Either way, keeping tabs on your net worth will help keep you motivated in terms of saving for retirement while also watching how much you’re saving each month.
#8: Create an emergency fund of 3 to 6 months’ worth of expenses
Once you feel like you’ve started to get a handle on your finances, it’s best to start saving for emergencies. The easiest way to do this is by creating an emergency fund that will cover 3 to 6 months’ worth of living expenses.
What happens if you lose your job or have a medical issue? Without a proper amount of savings, it could be very difficult to make ends meet when the unexpected occurs. If you don’t have an emergency fund set up yet, give it a goal of saving $1,000. Then, begin putting aside small amounts on a weekly basis. This might mean that you stash away $10 or so per week from each paycheck until your funds reach the proper amount for your situation. The simplest way to accomplish this is by setting up an auto-transfer from your checking account to a savings account. This is an example of an effective way to make sure that money is set aside for emergencies without it being missed.
#9: Automate your finances
Once you have a good idea of how much money is coming in and going out, it’s time to start automating certain aspects of your finances.
When applying for any type of loan or credit card, be sure to ask about the specific options that are available with each account. For example, with many student loans, you have the option to set up an auto-repayment plan that takes a fixed amount of money out of each paycheck and sends it straight toward your student loan.
One of the great benefits of this type of account is that they are paid off in as little as 10 years whereas traditional accounts can take 20 or more years if you don’t pay the extra money each month.
Similar to student loan accounts, your mortgage can also be automated if it comes with an auto-pay option. This will ensure that you don’t forget about making payments on time.
This method of financing is even more effective when your employer offers direct deposit into a savings account. The reason this works so well is that you’ll know exactly how much cash is coming in each month. If you want, set the system up so that a little more than half of your income goes toward your mortgage and other fixed bills. Then, each month you can use the rest to build wealth through investments or savings.
#10: Be your own employer
Finally, if you want to truly become financially independent, it’s best to be your own boss. When you begin to reach the upper levels of wealth and financial independence, you have a lot of options. One option is to be your own employer. While it may seem daunting at first, there are a number of ways that this can be accomplished with very little upfront investment. For example, if you have an idea for a business – or even if you don’t, start by making a list of your potential strengths and weaknesses.
Once you identify those areas that you can improve on, develop a plan for how to improve them through continuous education or other means. Then, take the next step toward becoming self-employed by identifying ways that you could make money from your newly improved skills.
It’s important to make sure that you have enough money in your savings account so that you can pay the bills and cover living expenses while also working on building something new from scratch.
This doesn’t necessarily mean starting your own business right away, but it does mean planning ahead. If you’re in the middle of your career, consider planning for your next big move. For example, if you want to start a business, look into various opportunities and begin saving money each month so that when it comes time to make the leap you’ll have enough cash on hand.
Becoming financially independent is an admirable goal for anyone. One of the top reasons people never reach financial independence is because they make a number of common mistakes that prevent them from ever achieving it.
Whether you’re trying to become self-employed or your employer, there are ways to automate and be more efficient with your finances so that you can work on building wealth without having to worry about paying bills every month.
If all this sounds intimidating, don’t worry! It doesn’t mean that you have to make a complete career change or spend your entire life savings on starting a business, but it does mean planning ahead and investing in yourself so that you can build financial independence more quickly.
Don’t lose sight of your dreams and goals! Even if you’re just starting out or are about to make a big move, there’s no time like now to take charge of your finances and start building wealth. It’s up to you how much money you want to make and how quickly, but if you keep the above tips in mind that should get you well on your way. Remember, financial freedom takes time and it can be a fun way to challenge your skills. There is always a way to grow and achieve more than you ever could have imagined.