7 Steps to Become Financially Independent
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- By Laura Woods
- July 1, 2014
With Independence Day just around the corner, now is the perfect time to finally set the goal of financial independence for yourself. Whether you’re trying to break free from your parents’ financial assistance, switch jobs or finally pay off that seemingly never-ending stream of debt, becoming financially independent is one of the most fulfilling goals you can set.
Although achieving financial independence is undeniably satisfying, it definitely takes a lot of time, effort and motivation to achieve. Use the following seven steps to work toward your dream of gaining complete financial freedom:
1. Cut Expenses
If you’re able to minimize your expenses, you’ll be able to save money much more efficiently. It’s important to know exactly how much money you have coming in and where you’re spending it. Make a budget listing all your sources of income on one side and all your expenses on the other. Review what you’re spending money on to see if there’s anything you can cut to add more money to your savings account each month.
2. Spend Less Money Than You Earn
For a budget to be effective, you have to stick to it. It might seem obvious, but for many Americans, spending within their means is a real problem. In fact, according to Debt.org, the average household with a credit card carries more than $15,000 in credit card debt. Make it a personal goal to never spend more money than you have in your bank account. It might be helpful to carry cash in your wallet instead of credit cards, as this makes it impossible to overspend.
3. Create an Emergency Fund
Unexpected money emergencies always seem to happen at the most inopportune times. If you don’t have the money to pay for expenses like car repairs, medical bills or the cost of living if you lose your job, you’ll probably end up putting them on a credit card. Rather than letting unplanned expenses put a dent in your finances, create an emergency fund to tide you over. Most experts recommend having at least six months’ wages saved up for this purpose.
4. Pay Off Debt
According to the U.S. Census Bureau, as of 2011, 69 percent of households had some form of debt. Whether your debt is in the form of credit cards, student loans, a mortgage or auto loans, it’s important to work hard to pay the balance off. At the very minimum, be sure to make your required monthly payments (your credit score will thank you) — but you should also do your best to pay extra on the balance each month.
5. Save Aggressively
Set aside as much money to put into savings as possible — always remember to “pay yourself first.” Try to save at least 20 percent of your gross income. If that isn’t possible right now, do the best you can — strive to deposit at least 10 percent into savings each month. If you get a raise or find a little extra room in your budget, use this to increase your contribution.
6. Initiate Automatic Deductions
Let’s face it — putting extra money into savings or toward paying off debt can be difficult. Even when you desperately want to gain financial independence, it can be hard to resist the temptation of spending the money on something frivolous. Combat this problem by setting up automatic withdrawals from your checking account to your savings and loan accounts. When the money is taken out automatically, you don’t even have the option of making irresponsible spending decisions.
7. Invest Wisely
Supplement your income by making sound investments. Consult a trusted adviser to help you create an investment plan designed to fit your needs. While it’s important to have a savings account, you’ll also need to invest funds in stocks, bonds and other financial assets.
Achieving financial independence takes a great deal of hard work — and, often, a long time, so try your best not to become discouraged. If at any point you find yourself veering off track, take the time to realign your strategy and pick up right where you left off.
Photo credit: Bondseye