Financial independence is the state of having sufficient personal wealth to live, without having to work actively for basic necessities. Most of us dream of the day we can quit our day jobs and live life on our own terms, but few of us are setting ourselves up to attain that goal. Financial freedom seems like an overwhelmingly impossible task, and many people do not know where to begin.
In order to achieve financial freedom, it is best to break down the tasks into smaller steps:
1) Define your personal financial freedom goal
Our world is so diverse and so are our definitions of financial freedom. Some may feel they are financially free if eliminate debt. Others feel financially free when they have enough income to cover debt, living expenses, and leftover money to spend on family and fun. Many people dream of having enough money to travel the world, enjoy their favorite hobbies, or serve their communities. Only you can define your personal financial freedom goals. Once you determine your objectives you can figure out how to get there.
2) Create an emergency savings fund
Saving for emergencies should be a top priority for everyone. Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat and those who sink into debt. The general rule of thumb is to have 3 to 6 months’ of living expenses. Emergency savings allow you to easily meet unexpected financial challenges such as:
- Car repair
- Job loss
- Major home repairs
- Unexpected dental procedures
- Unplanned travel expenses
- An emergency room visit
- Replacement computers or tech devices
There is rarely money to spare at the end of each month, but there are creative ways to find funds to build your emergency account. Small but steady changes in your spending habits will help.
Here are some ideas:
- Set up an automatic payroll savings account. You will not miss the money since it never hits your checking account. You will be more motivated to save additional money as you notice your emergency savings balance increase.
- Deposit your tax refund.
- Ask family members contribute their loose change in a savings jar.
- Have semi-annual yard sales.
- Cancel cable and switch to video streaming via Netflix or Hulu.
- Get a second job.
- Cook on weekends and prepare lunches for the week to avoid eating out.
You will be pleasantly surprised with your results once these slight changes are implemented in your life.
3) Pay down credit card and other debt
Debt can be overwhelming and often snowballs out of control if credit card balances are not paid in full each month. This interesting article from Nerd Wallet breaks down the real cost of making minimum payments.
Making monthly minimum payments could take years to pay off. Credit card companies do not mind their borrowers paying the minimum about because they make more money by charging interest. That interest then gets added to your outstanding principalandexisting interest so that you are continuously paying interest on interest.
You can break the cycle by Increasing Your Monthly Payment on the credit card with the highest interest rate. Once that balance is paid, do the same with the card with the next highest interest rate until you pay off all your credit card balances. The money you were throwing away to pay interest can then be used to pay off other debt. Once you are debt free, you will be in a position to start purchasing items that you can really afford.
4) Pay yourself first
Begin by building your retirement fund. It is easy to get started with an employee sponsored 401(k), so find out from your human resources department if it is available. If not, you can always start a Roth IRA (if you are eligible) or a traditional IRA (if you’re not eligible for the Roth).
It is a good idea to start slow and gradually increase your savings to 15% of your income. Most people start by contributing a lower percentage and add one percent to their retirement fund each they get a salary increase. Since you never had the money before you will not miss it. Start saving for retirement early and steadily. The following chart shows how beneficial it is to begin the savings process early.
5) Create and maintain a workable budget
Make a monthly budget based on your income, not your expenses. Once you determine how much money you have to spend, trim down your expenses to live within that income. This is also known as living beneath your means. You will create a lifestyle you can afford and still have money left over. Spending less than you make is the gold standard of financial freedom. The secret for living below your means to buy only what you NEED and want what you have.
Huffington Post provides these great insights. You become a natural saver by living beneath your means. Many people are in debt because they never learned how to save money. Saving money is an underestimated survival skill.
You are now on the right track. The fact that you are reading this puts you ahead of many of your peers. We all dream of financial freedom and it is obtainable. Good Luck!
Want a little more help? Check out our eLearning module on BUILDING EMERGENCY SAVINGS or our BUDGETING TOOL.
About Financial Independence
Financial independence is a state where an individual has accumulated enough personal wealth to cover their basic living expenses without the need to actively work for income. Achieving financial freedom involves setting clear goals, creating an emergency savings fund, paying down debt, prioritizing personal savings, and maintaining a workable budget. It's a process that requires careful planning and discipline, but it's an attainable goal for those who are committed to it.
Concepts Related to Financial Independence
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Defining Personal Financial Freedom Goals: Financial freedom is a personal and diverse concept. It can range from eliminating debt to having enough income to cover living expenses and have leftover money for leisure activities or travel. Each individual needs to define their own financial freedom goals based on their unique circ*mstances and aspirations. Once these objectives are clear, a plan can be developed to achieve them.
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Creating an Emergency Savings Fund: Building an emergency savings fund is crucial for financial stability. It's recommended to have 3 to 6 months' worth of living expenses saved to cover unexpected financial challenges such as job loss, medical emergencies, or major repairs. This fund can be built through small but consistent changes in spending habits, such as setting up automatic savings, depositing tax refunds, or finding additional sources of income.
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Paying Down Credit Card and Other Debt: Debt management is an essential step towards financial independence. Paying off high-interest debts, such as credit card balances, is important to avoid accumulating interest and to free up funds for other financial goals. Strategies like increasing monthly payments on high-interest debts and gradually paying off all balances can lead to a debt-free financial position.
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Paying Yourself First: Prioritizing personal savings, especially for retirement, is a key aspect of achieving financial independence. Starting with retirement funds, such as a 401(k) or IRA, and gradually increasing savings contributions can lead to long-term financial security. The earlier one starts saving for retirement, the more beneficial it is due to the power of compounding.
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Creating and Maintaining a Workable Budget: Living within one's means and creating a budget based on income are fundamental for financial freedom. By spending less than what is earned, individuals can create a sustainable lifestyle and have funds left over for savings and investments. Learning to save money and live below one's means is crucial for long-term financial stability.
These concepts provide a comprehensive framework for individuals to work towards achieving financial independence and living life on their own terms.
I hope this information helps you understand the key concepts related to financial independence and empowers you to take steps towards your own financial freedom. If you have any further questions or need additional guidance, feel free to ask!
