How to Become Financially Independent in 10 Steps

Summary:

To start achieving financial independence you’ll need to outline your financial goals, calculate how much money you’ll need, manage your finances wisely, and pay off credit card debt. Perseverance and a solid financial plan will help you gain financial independence, lower your stress, and give you the freedom to enjoy your time on your own terms.

If you, like most Americans, live primarily from paycheck to paycheck with little savings, the idea of being financially independent might seem like a lofty goal best left to those who earn a six-figure income or more. But that doesn’t have to be the case.

In this article, we’ll look at the steps you need to take to achieve financial independence, what holds you back from becoming financially independent, and the many benefits of living a life of financial freedom. But first, what does financial independence really mean?

What does it mean to achieve financial independence?

Financial independence means different things to do different people. Generally speaking, to be financially independent means having enough money saved and invested to afford the lifestyle you want. This doesn’t have to mean you’re rich or have a lavish lifestyle, just that you can live how you choose without having to worry about money.

Financial independence might also indicate that you have the means to retire early, switch to a less lucrative but more fulfilling career, or have money to pass on to future generations. It also implies that you are living with minimal debt, have a healthy bank account, and have enough cash leftover after living expenses to spend your time more freely.

In a nutshell, becoming financially independent is essentially a combination of careful planning, developing good spending habits, and living a more frugal lifestyle. Part of achieving this may involve making smart investments in the stock market and earning passive income from other investment vehicles.

10 steps to achieving financial independence

Becoming financially independent is a lengthy process, but it’s well worth your time and effort. It won’t happen overnight, but it can happen if you’re willing to do the work. Start taking these steps right now to start down the path to financial freedom.

1. Make a financial plan

Wanting to become financially independent and actually achieving financial independence are worlds apart, and you can’t get there without a solid financial plan. Basically, you need to figure out how you want to live your life, how much you need to save to maintain that lifestyle, and what your time horizon is to get there.

Let’s say you’re 40 years old, you want to retire at age 70, and assume you’ll live until you’re 90 years old. Plus, you figure that once you’re debt-free, you can comfortably live on $40,000 a year. In that scenario, you would need to save $1.2 million in order to retire.

Once you’ve defined your ultimate goal, it’s a good idea to set individual financial goals to hit along the way and give yourself a reasonable amount of time to achieve them. This is a marathon, not a race, and you will hit some bumps along the way. However, it’s important to keep your eye on the prize — financial independence.

Pro Tip

A consultation with a financial advisor can help you outline the best way to get where you want to be. It can be difficult to figure out how to become financially independent, how much money you need, and the steps you need to take to achieve this goal.

2. Create a monthly budget

Another critical part of your plan is to come up with a monthly budget and stick to it. You can start by figuring out your after-tax income (your take-home pay) and deducting your fixed monthly expenses. What’s left over is the amount of money you have to spend, save, or invest.

Creating a budget is also a great way to see where your cash is going every month to determine if you’re using your available funds in the most efficient way. For example, if you notice you’re spending a lot dining out, you may want to adjust your budget for a little more frugal spending in that area.

One way you can do this is with a money management tool. Most of these tools are available as mobile apps, meaning you can track your spending and ensure you stay on top of your budget.

3. Pay off debts

It can be next to impossible to reach financial freedom with a lot of debt hanging over your head. A lot of financial experts will advise you to “always pay your credit card bills in full,” but what if it’s too late for that? That’s why you need to come up with a debt strategy to pay off your existing debts as soon as possible for a brighter financial future.

This might mean paying more on your debts each month or rolling credit card balances onto cards with a 0% introductory rate. If you have multiple debts to pay off, you may want to consider taking out a personal loan for debt consolidation, such as those below.

Pro Tip

If you own your home, you can look into a home equity loan, home equity line of credit (HELOC), or a home equity investment and use those funds for debt consolidation. Whatever strategy you choose, it’s important to get out from under your debts in order to achieve financial stability.

4. Save money for an emergency fund

Any financial advisor will tell you that having at least three to six months’ worth of living expenses in an easily accessible savings account is critical to your financial health. Even better if you store your emergency funds in a high-yield savings account so you can earn a little interest while you save money for unexpected expenses.

It cannot be stressed enough how important it is to have an emergency fund as a safety net against a natural disaster, job loss, or a medical emergency, for example. To start building up your savings now, take a look at some of the interest-bearing savings accounts below.

5. Start investing now

Investing isn’t just for those who are already wealthy. In fact, one of the best ways to become financially independent is to build a diverse investment portfolio. You can start investing by contributing to tax-advantaged retirement accounts, like your company’s 401(k) plan.

If that’s not offered by your firm, open an individual retirement account (IRA). And don’t forget to take advantage if your employer offers matching contributions to your retirement fund. After all, that’s basically free money.

Other investment options include real estate investing, such as buying a rental property or investing in real estate investment trusts (REITs). You could also invest in other, less risky, income-generating assets, like bonds or CDs.

This is also a good time to open up a brokerage account. Many online accounts have no (or small) minimums to open, so you can get started right away. Investment firms also have a lot of tools and additional resources to help you learn how to invest and start building a manageable portfolio.

Pro Tip

Brokerage accounts are another safety net as well because you can earn interest while still having easy access to them if necessary. If at all possible, you want to avoid pulling cash out of your retirement fund because you’ll have to pay taxes on those funds in addition to penalties if you make withdrawals before retirement age.

6. Keep an eye on your credit scores

Good credit scores are one of the cornerstones of financial health and are something that you should monitor on a regular basis. When you want to borrow money, for instance, a good credit report can mean the difference between a competitive interest rate and one that’s comparable to a credit card. A lower interest rate can save you thousands of dollars over the life of a loan — money that could be better used to achieve financial freedom.

Your credit scores can also affect other aspects of your life, such as what you pay for car insurance or life insurance. While that’s not always the case, some states may use your credit report to determine your premiums. This is because companies assume if your financial situation is in bad shape, you might be careless in other areas of your life too.

Everyone is entitled to a free copy of their credit reports each year at AnnualCreditReport.com. It’s a smart move to look them over regularly to make sure there are no mistakes you need to dispute. If there are, you can reach out to the credit bureaus yourself or hire a credit repair company to do it for you.

7. Lower your living expenses

If your goal is to become financially independent, you probably already realize that spending money on unnecessary expenses is a bad idea. But it’s also important to think about where your monthly income is really going and how you can lower your basic living expenses.

For example, you might shop for better rates on car insurance premiums or try reducing your phone bill. Take a closer look and you might be surprised where else you can save on your monthly bills.

8. Take care of your health

You may not think that routine health maintenance will help you to become financially independent, but it will. Getting routine check-ups with your doctor and dentist can head off any potential problems before they become serious medical issues. Often just making simple, basic lifestyle changes, like getting regular exercise and eating a healthier diet, can make a world of difference.

Poor health maintenance, on the other hand, can lead to serious health problems that could make your health insurance premiums skyrocket. You might also suffer a loss of income if you need to take time off but have limited sick days or have to raid your emergency fund to pay for costly medical bills that your health insurance doesn’t cover.

9. Stay educated

Knowledge is power, right? You certainly couldn’t expect to become a doctor without the proper training. Well, you also can’t expect to become financially independent without some degree of financial literacy, and that should be considered an ongoing process.

Education can be obtained in many forms. It can range from a formal education in an institute, such as a university or a college, to informal education, such as reading books, magazines, or online articles or attending seminars and workshops. All of these can serve as great tools to increase financial knowledge and boost financial literacy,” explains Trinity Owen, Founder and CFO at The Pay at Home Parent.

10. Don’t live above your means

Many people who have achieved financial health know how important it is to live below your means. This strategy allows you to save more, build wealth, and reach financial independence that much quicker. And, as you gradually earn more, don’t use that as an excuse to start spending excessively. This is known as “lifestyle creep,” which (unchecked) can become insidious.

“Avoid lifestyle creep. Lifestyle creep [is] the tendency to upgrade your lifestyle as you earn more money. It’s easy to fall into this trap, but it can be a significant obstacle to achieving financial independence,” says Alastair Hazell, financial specialist and founder of The Calculator Site. “Instead of constantly upgrading your lifestyle, keep your expenses low and save the rest.”

This doesn’t mean you can’t splurge now and again, but it does mean making smarter choices. For example, if you get a bonus at work, take at least half of that money and use it wisely. You can add it to your retirement account, or emergency fund, or use it to pay off high-interest debt, for instance. Anything to add to your financial cushion is a good idea.

Pro Tip

Sometimes working your day job won’t be enough to achieve your dream of financial independence and you’ll need to come up with additional income streams. This might mean getting a second job or side hustle, but it could also mean figuring out how to earn a passive income from real estate investments or dividend-paying stocks.

Benefits of financial independence

Aside from potentially retiring early, there are several benefits that come with financial independence.

  • More time. Achieving financial independence can actually free up your time to pursue the things that bring you joy. Whether it’s reading, sleeping, pursuing your passions, traveling the world, or having more time for family and hobbies, financial independence gives you the time to do those things.
  • Less stress. Struggling with money is a significant form of stress, and study after study has shown that stress is detrimental to both our mental and physical health. Sure, money can’t buy happiness, and it can’t cure diseases. However, financial freedom can remove a lot of the stress that comes from worrying about your financial situation.
  • Job freedom. Once you achieve financial independence, you’re no longer tied to a nine-to-five job that you might not even enjoy. You could make a career switch, reduce your hours, or even enjoy early retirement. The point is, financial freedom means you can work because you want to, not because you have to.
  • Better relationships. When you have more time, less stress, and freedom to work when and how you want, it naturally follows that you’ll have more time and energy to devote to the relationships in your life. This could be family, friends, or your four-legged best pal.

FAQ

What is the FIRE movement?

The FIRE movement — which stands for financial independence, retire early (FIRE) — is a movement of people whose goal is to save and invest so aggressively that they can retire extremely early, like in their 30s and 40s. Usually, this involves saving and investing anywhere between 50% to 75% of their annual income.

This strategy isn’t necessarily feasible for most people, but some of its basic concepts of economic discipline are worth adopting. Proponents of the FIRE movement prioritize sticking to a budget, living well below your means, lowering your living expenses, and getting a second job to become financially independent, in addition to aggressive saving and investing. We could all take a page out of that book.

Key Takeaways

  • In general, financial independence means having enough money saved and invested so you can enjoy the lifestyle you want, which may include early retirement.
  • Achieving financial independence starts with outlining your financial goals and coming up with a strict plan to reach those milestones.
  • Investing is one of the best ways to achieve financial freedom. This includes retirement planning through tax-advantaged retirement accounts like a 401(k) or IRA.
  • Having an emergency fund is an important part of your personal finance strategy since it can help handle unexpected expenses.
  • Carrying significant credit card debt or other high-interest debt is a major inhibitor to financial independence. This is because it eats into your monthly income and can take a long time to pay off.
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