The Six Steps to Financial Independence
Financial freedom is possible. Here are 6 steps to financial independence with hacks to get the most of every step.
The National Finance Educators Council reports that financial illiteracy cost Americans roughly $415 billion in 2020 alone. Now, this is not to say that they simply lack financial education. Instead, it means that there is no financial planning. Proper financial planning inevitably leads to achieving financial independence.
The absence of a financial plan precedes these conditions:
- Working during the stipulated retirement age (50+years, depending on the country)
- Struggling to pay off your mortgage
- And sitting on a massive pile of student debt and credit card payments
Now, I use the word “proper” in describing how you plan your finances towards financial freedom. One reason for this is that while people seek financial independence, there is relatively accurate information on how they can work towards this status.
Therefore, we will take a look at 6 PRACTICAL and proven steps towards financial independence.
But first, before we dive into that pool, we must grasp what financial independence really is. Is it a point in your life where you have all the money to last you for years? Or when you can afford anything you desire? Let’s find out.
Understanding Financial Independence
Get this, while there are various definitions of financial independence, the fact remains that it is unique to every individual. Yes, the widely accepted meaning is that to be financially independent is to have time on your side.
This means that you no longer have to set the alarm on repeat to wake you up every morning for work. You have the monetary stability to do whatever you please with your time without any care of your next meal, vacation, or those monthly subscriptions you signed up for!
This is the most basic definition of financial freedom.
Most importantly, it provides a framework for what I am going to talk about next.
Let’s take a step back to how this financial status is unique to every person. This is a concept you will rarely find people talking about.
However, having worked the path towards financial independence, I have understood that every individual has their own idea of financial freedom. A clear understanding of yours would add to your determinism to achieving financial independence.
So, here is a question that will help:
What do you see when you imagine a life when you don’t have to worry about your expenses? What does it look like to live as you please?
That’s a financially independent you!
With this out of the way, how do you make this imagination a reality? Here you go:
Steps to Financial Independence
We will go through this plan on how to become financially independent chronologically. This would help you get better results as each step slower takes you up the ladder.
Step #1: Re-strategize Your Concept of Money
First thing first, what is your opinion of money? Towards financial independence, you will need to re-strategize your concept of those dollar bills. The best way to do this is to evaluate your current perception of money and your relationship with it.
This means that first, understand that high income isn’t synonymous with wealth nor financial independence. It boils down to how you make use of your money.
So, the belief that financial freedom is only accessible to high-income earners is a myth.
Secondly, your new formula of money should be to spend less, save and invest — exactly in that order. It shouldn’t be a means to living a luxurious lifestyle. Or a means to acquire that $100,000 car you have been fantasizing about since college.
Money shouldn’t be something that you are constantly looking for ways to do as you please. It should be a means to be financially independent! Therefore, whatever you do with your income should be synchronized with your financial plan.
Hack: Master financial emotional intelligence to effectively re-strategize your concept of money. Financial EQ is understanding your feelings about your earnings and especially the “why” around it. With every financial decision you make, does it all revolve around your emotions or rational choices?
Your financial EQ is the dominant emotion that influences how you make use of your money. Dig deep and discover this emotion. Then find a way to refine it to help you make smart financial decisions towards your financial freedom!
Step #2: What’s Your Magic Number? — Find out!
Here is another critical step that accentuates the uniqueness of financial independence. How much do you think you need to have that would immediately give you the luxury of time? It differs for every individual and dependents on a couple of factors. These factors are:
- Current income
- Estimate monthly spending
- Current savings and investments
With these, you can quickly ascertain how long it will take to reach financial independence.
It would also help you clarify how much more you will need if you are considering achieving financial independence in a shorter time frame.
You can see how vital knowing your magic number is. Well, you could say as high as I can get or as much money I can make. However, you need to be realistic. Take, for instance, you are above 40, “as high as it can be” isn’t a plan or a number.
Your magic number would help you figure out how much you should spend, save, and invest with your current income.
Hack: Clarity, along with a short-term plan, should be your priority when determining your magic number. How much would be sufficient for you? How long?
You need the exact figure. Yes, down to every penny! Of course, you would regularly evaluate this figure given inflation and the direction of the financial market.
Besides clarity, a long-term financial plan is a myth. Creating a short-term goal is way more realistic and would help maintain your focus. One good reason for this, besides the wavering nature of the economy, is our life cycle.
Marriage, kids, grandkids, all of these would influence our plan. Yes, financial independence is about YOU, but you would pay for your kid’s college, right? Doesn’t this impact your expenses?
Step #3: Learn all you can about budgeting and act on it!
The next step is creating a budget and keeping to it. Budgeting is a fundamental part of achieving financial independence because:
- It helps you save more.
- With saving comes investing.
- Through budgeting, you get to track your expenses, which would allow you to cut back on unnecessary spending. For instance, that cable subscription you pay for even though you are homeless than 5 days in a month.
Do you see?! Budgeting brings you closer to your magic number and could even help make that figure clearer. Draw up a budget today as you work your way towards financial freedom.
Hack: While most people would prefer to stick to a monthly budget, here is the thing: few are disciplined enough to keep to that budget. I recommend drafting both a monthly and daily budget.
Every day, you have a good idea of how much you are allowed to spend. Discipline is easier with this approach.
Step #4: Save, but only through the right accounts
Spending less and saving more is good but trimming your expenses and saving more through the right accounts is the ultimate. What do I mean by the right account?
Let’s face it, the interest rate in the typical savings accounts through local banks is not worth it. However, there are certain accounts that we could save through that come with higher interest rates. One of such is a High Yield Savings Account.
Now, you might be wondering why save your earnings when you could easily invest them for better returns. Here is the deal:
- Savings accounts are riskless and provide you a hedge against market crashes.
- More than this, it is an opportunity to tuck away your emergency funds.
Emergency funds are one of the building blocks to a financially independent you. Emergency funds protect you against unforeseen expenses that might tempt you into liquidating your investments — a not-so-good move.
Build a fund that covers at least 6 months’ expenses through a high yield savings account.
Maxing out retirement account such as 401k or Roth IRA (self-employed) is another avenue to save while earning good returns.
Hack: Automating your savings is an excellent way to keep up even without trying hard. Like creating both a monthly and daily budget, automating your savings ensures discipline. Give it a try!
Step #5: Invest
The next step is to invest your earnings. Towards financial independence, you have to find a way to make your money work for you. Don’t think you can save your way up to your magic number. While this is realistic, you would have spent years trying to meet up.
The best way to fast-track your progress to becoming financially independent at your desired age is by investing. Besides this, there are many benefits of investing, which would add some spice when you become financially free.
- One, you get to retire early.
- Two, you build generational wealth. Take a look at Warren Buffet. In this case, you are not only securing YOUR financial independence but that of the following generations.
Consider investing through the stock market, real estate (requires a relatively large capital), or the commodity market.
Hack: Diversify your investments. You might want to start with the stock market, but do not entirely ignore other financial markets due to market volatility. For instance, Gold thrives when the stock market is in shambles.
Now in a situation where you dump all your earnings into a TSLA stock, for example, and the market crashes, what do you think happens to your shares?
However, let’s say you own a couple of Gold-backed assets and TSLA stock or even a combination of stocks (ETFs or Index Funds). You will hardly feel the effects if TSLA suddenly goes bankrupt.
Step #6: Increase income
Investing and increasing your income are directed towards the same result: to fast-track your progress towards achieving financial independence. Figuring out ways to increase your earning provides you more funds to channel into both your saving and investment accounts.
You can rely on your 9–5 job to attain financial independence. But let’s face it. Despite living below your means or however high or low your magic number is, you need to figure out a way to increase your income because it offers you more to work towards your financial freedom. The most important of them all is paying off your debt.
With more money, you can quickly cross off your mortgage payments. You can’t claim to be financially independent when you have a massive debt to your name! Here are a couple of ways to increase your income:
- Start a side hustle if you have a 9–5 job. Start something on the side revolving around your interests or hobbies.
- Ask for a raise or work towards a raise.
- Work to get a promotion.
- If you’re self-employed, look for ways to maximize your services, i.e., go into consulting.
Hack: Learning a new skill every year or two is your best bet to increase your income. Learn, master, and then monetize the skill.
Here is the thing, financial independence is attainable for every person. The difference between one individual that eventually becomes financially independent and the other individual is commitment and the right planning. You have the plan now. How committed are you?