Ah, financial independence! Most people seek it, but not all of them know how to get there, or the amount of time it takes to get to that point. Being financially independent means that you’ve achieved that level of freedom that allows you to enjoy the good things in life. At this stage, you should also be able to handle any financial challenges.
Of course, it’s not an easy process, especially if you’ve not yet achieved enough responsibility with your money. If you want to be able to touch financial independence, you have to put in a lot of work, and not expect it to happen overnight.
Here are some ideas on how to start your journey towards financial independence.
Don’t Spend More than You Earn
Many people allow themselves to fall victims to temptations, especially if something they wanted to purchase is being sold for a lower price. But it’s these temptations that usually lead us to spend a lot of money, sometimes more than we should or can handle. Bad spending is a vicious circle that is difficult to break.
Luckily, difficult doesn’t mean impossible. You must make sure you spend less money than you earn. Each month, you have to make a visible effort to stop spending money on anything unless it’s absolutely necessary. Make sure to use the least amount of money for what you need and save the rest.
You can also make weekly savings of 10-15% of your gross income. If you have a spouse, you might try banking a certain amount of money from one salary. By doing all of these, you will successfully save money, and be one step closer to being financially independent.
It’s important to set goals regarding financial independence. You don’t have to set a huge, single dream – you can break it down in multiple goals to achieve along the way. This makes things more realistic and achieving a smaller goal will motivate you to go further.
Make sure to write them down, as it will be much easier to follow through.
Try the 48-Hour Method
Did you ever found yourself rushing in a store in the heat of the moment because you really wanted a specific product? It happened to the best of us, and it’s really one of the culprits making us waste so much money.
There is one thing you can do to stop this, although you must practice in order to master it. Whenever you find yourself in the store, eager to spend money on something, stop yourself and leave. Make sure you don’t enter the store again for 2 days. Usually, waiting for that long will kill all the excitement you had in the moment, and you’ll see things much clearer. Your brain will come up with a lot of questions such as: do you really need the product? Is it worth the money? What else you could do with the money? And so on.
Buy the product only if you still feel the same eagerness after the full 2 days have passed. That means you really want and need it and it wasn’t just something for the moment. During those days, you had enough time to think things through in a rational way, which is why this method is really useful.
Let’s face it, debt is one of the demons in anyone’s life, no matter how small or big it is. When you have to do regular payments, it feels like you never have enough money to enjoy the small things in life or save for more important things.
Before you are able to become financially independent, you need to take steps into eliminating all of your debt. Find ways to pay it off, and free your funds in order to save them.
A little over a decade ago, the world was experiencing a financial crisis. Whereas the debt levels have considerably decreased ever since, it seems that student loans, home loans and other types of debt have started accumulating again a few years ago. It’s best to pay your debt as soon as possible – before another financial crisis comes along.
Use the FIRE Method
Many people don’t seem to know about the FIRE method. Basically, it allows you to cut some of your costs while saving 50% or more of them. This will make it much easier for you to save and invest wisely.
In order to achieve this, you need to go through a series of steps. First of all, you need to monitor your expenses – in other words, you must see where your money goes. This way, you can realize that some things are not needed.
Once you see the reality, you have to work on your spending habits and cut some costs, especially when you have a bad habit of wasting money on stuff you could live without. It won’t be easy to get out of your habits, but make an effort and see how much you’re able to abstain for a month. If you see improvements next month, then you’re on the right path.
Next, you should calculate your financial independence number. Under the FIRE method, this is done by using this formula: 25 x your expenses. This is based on the withdrawal rule of 4%. Of course, this is only an average number. You can go higher than that, around 30 times your expenses for example, if you want to be sure. Keep in mind that you can get a very big number if you’re a hardcore spender.
During the next step, you must become tax-efficient, for both the present and the future. You can use a qualified account to save money as a FIRE member. Later on, you can turn your savings into a ROTH IRA, as long as you become financially independent.
Also, you must make sure you invest wisely. More often than not, people into FIRE have greater opportunities since they can invest in markets, and also recover from bad investments. The reason is that for the most part, FIRE people are young, which is why they are having a better time with this. If you want to invest efficiently, you can start investing in real estate, but you might also consider a diversified portfolio. It depends on your needs and expectations. A good idea would be to talk to a specialist to help you take the best decision.
Emergency funds are something worth considering if you’re looking for financial independence. However, a lot of people only see them as these magical accounts that you can use when you find yourself in an emergency situation. Although that’s the traditional definition, sometimes you need to think well about building safety nets, and how you can do it.
You should consider checking the car, home, and health insurance deductibles, so you can see if they can be added into an emergency fund. Don’t forget that being effective in handling a financial hardship means you can increase your savings and investments too.
Do Some of the Things Yourself
Do you pay someone else to provide you with services that you could do by yourself? Do you do realize that by doing that, you waste a lot of money? It might be nice to take the day off and have someone else wash your car, but constantly paying someone else when you are in enough power to do it is not beneficial to your funds. And besides, this kind of stuff adds up quickly.
Whenever possible, you should consider doing some chores by yourself. While you may not be eager to mow your lawn, you’ll be happy when you’ll see more money in your wallet.
Ignore what People Think
More often than not, people are worried about being in trend or buying the latest iPhone release. They think that if they don’t do this, other individuals will judge them. But honestly, why does it matter what they say? The world won’t stop spinning if you don’t spend money on whatever new version of iPhone they put out every year.
Even if you have people around you keep telling you to buy a new car or spend on anything new although you don’t need it, don’t listen to them. You would only end up spending unnecessary money.
Don’t worry about it. You might lack certain stuff that you desire right now, but later on, you’ll be the one living a good life and you’ll afford most trends.
Becoming financially independent takes time and dedication. Still, if you don’t get off your path, your wishes will become true. Make sure to cut expenses, pay off your debt, save cash, invest money wisely, and after some years, you’ll reach independence. Also, don’t give in to temptation. No matter what people tell you or what you see, have some self-control, and you won’t regret it. Hopefully, you found these tips helpful.