Financial independence is achievable, but you have to follow the steps to get there. These are the 6 steps to get you on track towards financial independence.
Financial independence isn’t the same thing as retirement.
Retirement means the end of your working life (although as people retire younger and live longer, the definition is changing). Financial independence means merely the end of mandatory work, semi-early retirement. Like Mr Money Mustache!
Financial independence means being able to do whatever you want in life without having to worry about money.
You get a new boss who is impossible to work with? Just quit.
Do you want to go back to school to become a teacher? Enroll!
Do you want to spend a year traveling the world? Pack your bags!
Do you want to start your own business? Start writing up a business plan!
You can’t get there overnight. Achieving financial freedom takes the right planning and the discipline to stick to the plan even if things are sometimes harsh. It also means a lot of sacrifices. Your friends are taking exotic vacations, buying brand new cars, buying big houses with swimming pools and outdoor kitchens.
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You’re staycationing. You drive a ten-year-old Toyota. You’re still living in the same apartment you’ve been living in since you moved out of your college apartment. You keep your annual spending low. You have a savings goal.
But all of the sacrificing is front loaded. When you get to the sixth and final step on this list, you will be free while all of those people you’ve spent years envying are chained in place by credit card debt, car loans, and a huge mortgage.
You in? Good, let’s start right now. Here are 6 steps towards financial independence that you can follow to reach the freedom you’ve always wanted.
Step 1 – Get Control of Your Money
Getting control of your money is simple; spend less than you earn.
What are your monthly expenses? Some of us bury our head in the sand when it comes to our spending. Facing it can be scary but you must.
Next, you can set up a budget. A good rule of thumb is the 50/30/20 method to allocate your money. This will work well for most people, but remember, we’re trying to achieve financial independence here!
The more money you can save, the better. This allocation doesn’t mean you have to spend the entire 50% on essentials. And if you have debt, swap the 30 and 20. Put 30% towards paying off debt (at least) and 20% for discretionary expenses.
Now set up your budget categories. It might take a few weeks or months of tracking to see your patterns, but it will be worth it.
Let’s talk about debt. Every month it costs you money. You can’t achieve financial independence if you’re being held back by debt. Credit card debt is the most serious since it usually has the highest interest rate. Attack it with the snowball or stacking method.
You must rid yourself of this debt as quickly as possible.
It’s important to see your whole financial picture and our favorite tool to od this is Personal Capital. It’s free and will help you budget, manage your investments, plan for retirement, and calculate your net worth.
Link your financial accounts, and Personal Capital will pull in all of the information. This not only lets you see how much you make and spend, it shows you on what and gives you a 1,000-foot overview of your finances.
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Step 2 – Trim The Fat
Having completed Step 1, we now understand where our money is going. Knowing is half the battle when you’re working towards financial independence. The other half is slicing out the fat. No one becomes wealthy by spending all their money.
Cutting the fat isn’t always easy but remember, we told you some sacrifices would be made. Once you trim your budget, you’ll see your money starting to pile up much faster, and you’ll see it was worth it.
If it seems overwhelming, choose one category a week and focus on pairing that down.
Food is always a good place to start because so many of us overspend on it. Bringing lunch to work is an excellent first step. It doesn’t have to be fancy at first, just make a PB & J.
Seeing how much you’re saving each week will be an incentive to keep going and get a bit more creative when it comes to cutting expenses. Let Trim and Billshark do some of the heavy lifting.
Trim will cancel recurring expenses for things like subscription boxes, gym memberships, and music services. When you’re striving for financial independence, these things are luxuries you can do without. I work out every day, and I don’t belong to a gym.
Billshark will negotiate lower prices for things like your cable and internet bills. Although you should really cut the cord, no one watches cable anymore!
Step 3 – Increase Your Income And Productivity
At some point, there isn’t any more fat to cut so if you want to reach financial independence, you’ll have to make extra money.
Start where you are, ask for a raise. Go in prepared. Know how much people in similar jobs in areas with a similar cost of living are making on Glassdoor. Know the number you want. Lay out all of the reasons you deserve a raise.
If you don’t get a deserved raise, start looking for another job. The average raise is a paltry 3% when you change jobs; the average increase is 15-20%.
Job hopping, long frowned upon is going to be a big part of your path towards financial independence. Those who don’t change jobs requently make less money than their less than loyal colleagues. How much less?
“The worst kept secret is that employees are making less on average every year. There are millions of reasons for this, but we’re going to focus on one that we can control. Staying employed at the same company for over two years on average is going to make you earn less over your lifetime by about 50% or more.”
Americans watch an average of five hours of television a day, 35 hours a week which is nearly another full-time job! A criminal waste of time. Take some of those hours and use them to do something that will aid in your journey to financial independence.
Step 4- Multiply Your Savings Rate
At some point, you have no more time left that can be used to make more money. You’re working a regular job and have at least one additional income stream. We have to find ways to make money that don’t require our time.
That’s called passive income, and one of the best forms of passive income is investing. When you invest your money, it makes money for you. You don’t need a lot of money to start investing, but you will never have a lot of money if you fail to invest.
There are many ways to invest and build your nest egg – opening retirement accounts like a Roth IRA or 401k, investing in the stock market, mutual funds, index funds, rental properties – the list goes on.
Since we already have many great posts on investing we’re not going to go in depth here. Instead, we will leave you with links to our best beginner investment posts.
Everything in here is low risk and low effort. We want you to have the peace of mind knowing that your money is safe and growing while you focus on other important things like your family, Xbox, etc.…
Step 5- Use The Right Tools
There are plenty of tools that you can utilize to help you smooth your path to financial independence.
The right tool for the right job will make things easier and allow you to monitor your progress.
These tools can budget for you, help regulate your investments automatically, find you savings when you do spend or even challenge you to increase your savings by rewarding you with cash for doing so!
These are our tried and tested personal finance tools.
Betterment is the ideal investing tool for beginners. You don’t have to know anything about investing to get started, there is no minimum required to invest, and the fees are low.
Betterment is hands-off, there are no humans making investing decisions which might sound scary but 79% of human money managers don’t beat the market.
AS we mentioned above, Personal Capital’s software can help develop your long-term financial strategy – calculate your net worth, set a budget, manage investment accounts, and plan for retirement.
Be sure to check out Personal Capital’s Fee Analyzer. You can use a huge percentage of your retirement money to fees over time. Personal Capital can help you find and eliminate unreasonable investing fees.
Did you know that investors with 20% allocated to real estate outperform those who only invest in stocks and bonds? You’d love to do that, but you don’t have hundreds of thousands of dollars to invest in real estate.
You are going to love Fundrise! Fundrise lets “the rest of us” get in on real estate investing too. You can invest for as little as $500. Fundrise has an impressive track record boasting an annual return of 12-14%.
If you’re worried about liquidity, don’t. Fundrise allows investors to liquidate any amount of their holdings quarterly.
For the full list of resources we use to manage our finances, click here.
Step 6 – Advanced Investing Techniques
For people that are ready for a more hands-on approach (and a bit more growth potential), this section is for you!
It will take a bit more work than a “set it and forget it” strategy, but you don’t need to be a rocket scientist to make gains here. Just remember, take the risks seriously.
When you are ready to further diversify your investments and take on a little risk, take a look at our list of the best Vanguard funds.
A retirement account is a tax-advantaged account. If you have retirement accounts (you should!), you can further maximize them. Gather up any 401ks from previous jobs and roll them over into an IRA. This allows you to consolidate retirement accounts, gives you more choice, and usually much lower fees.
And check out these super advanced (and super advantaged!) Roth strategies. Part of achieving financial independence will depend on how good you are at (legally) avoiding taxes. These strategies will help you do that.
It Was All Worth It
If you want to live like most people can’t, you have to be willing to do what most people won’t. There will be times along the way when you want to give up. You want to do all of the things everyone else gets to do.
When you feel that way, just imagine what life will be like once you’ve become financially independent. You can do what you want to do when you want to do it.
No Monday morning dread, no depressed feeling when you realize your once a year vacation is almost over and you have to go back to “real life” soon. No going to a job you hate surrounded by people you can’t stand. You have no debt keeping you up at night.
If you can stay the course and retire early, I’m sure you’ll agree that once you reach financial freedom, it was all worth it.