So many people are wondering how to reach financial independence. The financial independence movement has become more prevalent in recent years. Many have realized the importance of growing their savings and investments — but becoming financially independent isn’t just about having a bunch of money in the bank. It’s about having more control over how we spend our time and, consequently, our lives.
Financial independence is when you’ve saved enough money that you no longer need to work to afford your living expenses. Instead, you can spend your days however you choose, whether that’s with family, traveling, building a business, or working on a hobby.
Sounds pretty nice, right? Here are nine steps to financial independence you can start implementing today.
Get clear on your why
It’s helpful to clarify your motivations for wanting to achieve financial independence. Start by asking yourself questions such as:
- Why do you want to achieve financial independence?
- Why is financial independence important to you?
- What will your life be like once you are financially independent?
If you don’t reflect on your motivation for pursuing financial independence, it may become challenging to stick to your goal when times get tough. Understanding your “why” can sometimes mean the difference between giving up on a goal or seeing it through, which is why it’s crucial to do this early on in your financial independence journey.
Pay off any high-interest debt
Achieving financial independence is challenging if you are in debt. High-interest debts such as credit card balances are particularly detrimental. Credit cards carry an average interest rate of 16.13% — and that number shoots up to 25.80% for borrowers with bad credit. With rates like these, it’s no wonder why many people fall into a cycle of debt that’s hard to break out of.
Other debts, such as your mortgage or auto loans, are less likely to affect your ability to reach financial independence. However, it is still a good practice to minimize your debts as much as possible. The idea is that the less income that has to go towards repaying debts, the more money you have available to save towards your goal.
Identify your financial independence number
How will you know when you reach financial independence if you don’t know how much money you need to save to get there? That’s where your financial independence number comes in.
Your financial independence number is the amount needed to pay for your living expenses without having to work. The easiest way to determine your financial independence number is by using the following formula:
Annual expenses x 25 = Financial Independence Number
For example, if your annual expenses/what you want to spend each year in retirement is $40,000, you need to save $1 million to become financially independent ($40,000 x 25 = $1,000,000).
Create a budget
Reaching financial independence will be challenging without a budget. Contrary to popular belief, a budget isn’t meant to restrict you. Instead, it helps ensure you are using your money to accomplish the goals that are most important to you. A budget doesn’t have to be complicated. Start by taking a pen and paper, spreadsheet, or online budgeting tool and writing down your net income and expenses.
If your income exceeds your expenses, you’re likely in good financial shape. On the other hand, if your expenses are higher than your income, you will need to find ways to cut back or boost your earnings to achieve financial independence.
Keep “lifestyle creep” in check
Have you ever gotten a raise, and instead of increasing the amount you save or invest, you increased your spending instead? That’s lifestyle creep, and it’s something you want to avoid on your path to financial independence. Receiving a raise or bonus is a perfect opportunity to increase your savings and reach your goal faster.
Increase your savings rate
Though it may go without saying, it’s important to reiterate the importance of boosting your savings rate. Increasing the amount you save is perhaps the single most important step to take if you want to reach financial independence.
Many people with financial independence on their minds save a large portion of their income each month towards their goal. Saving 50-70% of one’s income is not uncommon for those pursuing financial independence.
Automate savings and investing
One of the best ways to increase your savings rate is to let automation do the work for you. For example, you can opt to have a certain amount taken directly from your paycheck and put into your savings account.
Alternatively, you can set up automatic transfers from your checking account into savings or investment accounts such as your 401k, IRA, or regular brokerage account. When you automate your saving and investing, it will make it easier not to overspend since the savings will be “out of sight, out of mind.”
Boost your income
Another step to help you reach financial independence is increasing your income. However, this only works if you use the increased earnings to save and invest more towards your goal. If you use the extra money to spend more, you won’t progress towards your goal. Some ways to boost your income include starting a side hustle, negotiating your salary, or getting a new job with higher pay.
Don’t forget to enjoy the present
When we have a big goal, it can be easy to let it consume our lives. It’s essential to strike a balance between planning for the future and enjoying the present. If you don’t balance the needs of tomorrow while enjoying today, you may get burnt out and give up on your goal too soon.
The bottom line
Though reaching financial independence is challenging, it is possible if you follow the steps outlined above. Sometimes starting is the hardest part — so begin with small changes such as increasing your savings by $50 or $100 a month and allowing automation to do most of the work for you. Small changes lead to success over time — the key is to get started and be consistent.
To learn more about my own journey to becoming financially independent, check out my blog post here.
Which of the steps mentioned above will you start implementing today? Leave a comment below!