Financial independence is something everyone strives to achieve. You want to have a solid financial foundation so you are prepared for any emergency and can achieve your long-term goals. If you can eliminate money worries, you will have less stress, which can prolong your life. How to become financially independent is the real question. The answer can be summed up in one word: planning.
There are many definitions of the phrase “financial independence.” Perhaps the simplest definition is also the most meaningful—having the financial means to live your life without having to work because you can rely on your accumulated wealth for living expenses.
Achieving financial independence requires a few basic things, including:
- A reliable income: You have a stable source of income from dividends, interest payments, or some other source that you can count on to pay your bills.
- No debt: You don’t have any financial obligations, such as credit card debt or a mortgage.
- No money worries: Even with accumulated wealth, there are often concerns about further building your wealth or keeping what you have. If you feel you have enough and are free from worrying about maintaining your nest egg, then you are truly financially independent.
- A secure present and a bright future: With your current expenses paid, you are able to plan for a secure future without additional financial concerns. You have enough wealth to last for the rest of your life.
Develop Some Ground Rules
When you consider how to become financially independent, you need to start with some basic assumptions and establish personal ground rules to define success.
First, remember that income is not wealth. You may be earning more money than you ever dreamed of, but a paycheck still ties you to a job. To achieve financial independence, you can’t rely on the money you anticipate receiving. You can lose your job, or something could happen to your source of income if you don’t control it. You want to have the money secure and in the bank.
Second, think long term. You aren’t just planning to free yourself from money worries for the next year or the next 10 years. You want to develop a strategy that puts you on easy street for the rest of your life.
Third, simplify your lifestyle. You want to set your own terms for independence. Remember, if you can’t pay for something up front, then you are accumulating debt, so think twice about striving for that mansion on the beach. It’s easier to achieve financial independence if you don’t try to keep up with the Joneses.
How to Become Financially Independent
Once you understand your personal definition of financial independence, you have to create a strategy to get there. Unfortunately, get-rich-quick schemes seldom work, so the road to independence is really a matter of applying common sense and hard work. Consider these basic steps:
1. Start with a budget.
All financial planning has to start with a working budget, which helps you understand how much money you need. As you look at your current financial situation, you want to set aside as much money as you can to start accumulating wealth. Also, consider how your living expenses will change over time.
Because you are planning for the rest of your life, you should project your expenses using a timeline and adjusting for expected cost-of-living increases. Remember that your budget is changeable and should be regularly reviewed.
2. Cut your living expenses.
If you want to save more money faster, you have to start cutting expenses. Take a look at the line items in your budget and identify areas where you can save money or eliminate expenses altogether. That frees up more money for your savings.
3. Save as much as you can.
Your savings account is the launchpad for your strategy, so set savings milestones. Your immediate goal should be to set up an emergency fund that can cover 3-8 months’ living expenses so that you feel secure if you lose your job or another source of income.
Once you have your emergency fund in place, you can start saving additional money and investing it to accumulate more wealth. Above all, remember to pay yourself first so you can increase your savings.
4. Earn more money.
Your ultimate goal is to not have to work, but that doesn’t mean you won’t want to work. Retirement can be dull. Find a profession that you love and start earning extra cash that you can apply toward your goals.
5. Avoid debt.
Saving should be your priority, but as part of your budget, you also want to eliminate debt. If you have student loans, car payments, or credit card debt, allocate money to pay off that debt as soon as you can. Also, avoid taking on additional debt.
6. Invest to build wealth.
Work with a financial advisor to invest your money wisely so you can build your monetary foundation. You will want to consider retirement savings strategies, such as contributing to an individual retirement account (IRA), but you will also want to invest in stocks, bonds, and mutual funds to help your money grow faster. Be sure your financial advisor understands your goals and helps you choose investments with the appropriate level of risk.
7. Plan for expenses.
There are going to be expenses along the way that you need to consider as part of your plan. Taxes, for example, can take a big chunk out of your funds, especially when you divest investments, cash out an IRA, or tap into other sources of income. You should also plan for expenses you may need to pay to secure your future, such as long-term care insurance.
Financial Independence Is Within Reach
Once you have the basics in place, review and adjust your financial independence plan periodically to stay on track. You want to start with the basic tools you will need to manage your money, such as a savings account, retirement accounts, and investment accounts. You can also use digital banking to monitor and manage your money.
Your credit union is a good place to launch your financial independence plan. Why not start with our Financial Survival Guide, which offers advice on how to start taking charge of your money and planning for the future? iQ Credit Union has all the tools you need to start accumulating wealth, and we are always ready to assist our members to help them reach their financial goals.