7 Ways to Become Financially Independent
Everyone wants to be financially independent. With financial independence comes the freedom to do what you want, without worrying about missing important payments like rent or bills. It means being able to live a life you enjoy without dealing with intense financial stress. But even though everyone wants to become financially independent, many people fall short because they don't use the proper strategies. This article will review some critical points you need to keep in mind when trying to become financially independent. Some of these tips may seem simple, but many people, unfortunately, do not follow this advice, and it can doom them to financial worry. So if you want to start heading down the path to financial independence, pay attention to these points, and you'll be well on your way:
1. Set Concrete Goals
Before beginning the journey to financial independence, it's important to write down concrete, tangible goals that you hope to achieve. These might include both long-term and short-term goals. For example, do you want to have enough capital to retire by age 65 and not have to work after that? Do you want to save a certain amount of money for a college fund for your children? These examples are more long-term, but they can be helped by setting short-term goals as well, such as setting a percentage of income that you want to put into savings each month.
The important thing to keep in mind when setting financial goals is to write them down and make them tangible and concrete. Goals like, “I want to be rich when I'm older” don't help as much as, “I want to have $200,000 in savings in 10 years.” And studies have shown that writing down goals can help improve the odds of actually achieving them. Bottom line, write down your goals and keep them specific, and you're more likely to make them happen.
2. Form a Budget
This is some advice we've probably all heard before, and unfortunately, it's easier said than done. But making a budget and sticking to it is one of the best ways to gradually increase financial independence. Often, when people get a raise or start making more money, their spending habits increase as well, and they end up no closer to financial independence than they had been previously. If you find yourself making more money than you used to, that's great! But the wisest thing to do is to maintain the same lifestyle and put away any extra cash into savings. By writing up a budget, you'll know exactly how much you need to get by each month. And you can even include some money for frivolous spending in your budget. Just make sure not to go overboard! That way, if you do start seeing more income, it can contribute to your eventual financial independence, instead of getting spent right away.
3. Earn More than you Spend
Again, this seems like a no-brainer on paper, but it can be harder than you think. We've all had to dip into our savings at one time or another to pay for unexpected expenses like medical bills, car repairs, home improvements, or other similar costs. But by making a habit out of using your savings as a cushion, or regularly spending more than you earn, you are crippling your ability to achieve financial independence. Spending less than you earn is one of the early steps to building financial independence. The road to financial independence can feel like a slow one at times, and it can be tempting to spend big on a purchase that will make you feel good in the short term. To properly reach your goals and stick to your budget, it's important to make sure that your income is a net positive versus your spending.
4. Pay off Debts
Excluding home mortgages, the average American household now has around $38,000 in debt. That is a massive number, and even if your personal debts are less than that, debt can seriously drag down anyone's efforts to attain financial independence. Most debts incur interest, so they can end up costing far more in the long run, the longer they are kept around. That's why it's wise to pay off debts as soon as possible. It may feel like a financial crunch at the time, but overall it could save a lot of money. Debt acts as a drain on finances because you have to constantly pay back interest – usually monthly. The longer it takes to pay back debt, the more it ends up costing. So if you have a large chunk of debt and the means to pay it off, don't wait until later. Take care of debt as soon as possible, and you'll be one step closer to financial independence later.
5. Make Smart Investments
A good investment can lead to a financial windfall if you know what you're doing. But by the same token, a bad investment can be a huge waste of money. Investing can be a wise move, but only if done properly. If you have money available to invest, make sure to do careful research or consult an expert before making any big investments. It can be difficult to learn everything you need to know about a potential investment all on your own. You'll need to take into account industry market trends, any relevant competition, seasonal shifts, and a myriad of other factors. Even a relatively secure investment in a tried-and-true field like real estate comes with inherent risks. Unless you're confident in your expertise, it might be a good idea to get advice from an outside source who has a deeper understanding of the business landscape where you plan to invest.
6. Keep Track of your Money
One way to help achieve all of the points above is to keep careful track of your money. A big mistake that people with wealth often make is that they don't keep tabs on their financial situation. There are many obvious benefits to keeping a close eye on your funds. You'll be able to notice any suspicious charges or withdrawals, plus you'll have a better sense of what recurring costs are eating into your finances. Obviously, some recurring bills are impossible to avoid, like home costs, taxes, and other living expenses. But monitoring your money closely will help ensure you know exactly what your financial situation is, which can help you be more prepared for emergencies and other unexpected expenses that might otherwise jeopardize your financial security.
7. Be Realistic
On top of all this advice, it's a good idea to keep goals realistic. Again, everyone wants to be financially independent. It can be a very achievable goal, but it's important to set expectations at a realistic level. Saying you want to become a billionaire might sound like good motivation, but you're more likely than not to fail at that goal. It's much wiser to keep your target goals within range of actually achieving them. Not only is it a smart financial strategy, but it will also keep you from getting discouraged along the way.
The road to financial independence isn't always easy. It takes careful planning and a mature, realistic approach. But if by keeping your mindset in the right place and taking steps to improve financial standing over time, you can get to where you want to be. The truth is, there is no foolproof way to “get rich quick.” Successful business people and entrepreneurs understand this. No matter what your goals are, it will take a lot of hard work to achieve them. But by following the tips above, you'll be putting yourself on the right path. Stick to it, and you can achieve the financial independence you're looking for.