how to become financially independent

 

How to Reach Financial Freedom: 12 Steps0 to Get You There

• Financial independence means having enough income or wealth to pay for your own expenses without additional assistance.
• Steps to becoming financially independent include setting goals and a budget, creating a safety net, diversifying your income and more.
• Additional resources, such as speaking with a financial advisor and looking into financial education, can help you make informed decisions.

For many people, reaching a point of financial independence is a major milestone that can be hugely exciting and open many possibilities. Financial independence is a financial situation in which you have enough money, either via income or accumulated wealth, to pay your expenses for the rest of your life without dependence on others.

Financial freedom inevitably looks different for everyone, and the steps for achieving financial independence may change as a result.

Still, even though steps for how to become financially independent may differ among financial situations, there are a number of common boxes that people should check to become financially independent. Understanding these steps, their importance and how they can be achieved can set you on the road to know how to be financially independent.

1. Identify clear, achievable goals

Financial independence may be easier to accomplish for an individual who has a clear idea of what they’d like to achieve and when they’d like to achieve it. A savvy way to approach establishing your financial goals is through the SMART (specific, measurable, achievable, realistic and time-bound) framework.

Goals are different for each person and can vary in scope considerably. These goals may include anything from paying down a set amount of debt per month to purchasing a new home. Regardless of your specific situation, it’s helpful to set both short-term (setting aside a solid rainy day fund, paying for a minor home improvement) and long-term financial goals (early retirement, buying a house).

2. Set up a budget

A thorough budget will likely make it simpler to ensure your money is being used wisely and that you are on the path to reaching your goals.

Knowing how to make a budget is the first step. A strong monthly budget should include:

• Monthly income
• Household maintenance
• Clothing and personal care
• Groceries and prescriptions
• Rent or mortgage payments
• Entertainment and travel expenses
• Monthly subscriptions, memberships and dues
• Recurring expenses (bills, credit card debt, bank fees, etc.)

You can add additional categories, depending on your specific financial situation. For instance, you may need to add a pet care category if you have pets or may not need to include a monthly subscriptions, memberships and dues category if you do not have these costs.

No matter your situation, your budget should be comprehensive and identify exactly where your money is going, while making it simpler to identify areas for financial improvement.

3. Create a safety net

An urgent step to take is establishing a solid financial safety net as quickly as possible. Having a cushion is a major factor in becoming financially independent. Create an emergency fund alongside your typical savings account and funnel money into that fund whenever you can. You should save enough to cover at least three to six months’ worth of living expenses, so you don’t have to depend on any outside help in the event of unforeseen circumstances.

4. Save automatically

Using automated features can help you save money. 

For instance, direct deposit can direct money to several different accounts at once, enabling you to grow your savings while sending money into your checking account, too. You should consider using an income percentage, rather than a hard number, when setting up direct deposit distribution. This allows contributions to increase automatically with pay increases.

Another approach to consider is automated transfers. Some financial institutions also offer the ability to schedule recurring transfers from checking to savings accounts to make sure you are always contributing to your nest egg.

5. Establish or build your credit

Good credit can make achieving certain long-term goals easier. A solid credit score can help you:

• Get a leg up as a renter in competitive markets
• Secure lower interest rates on financing, such as car loans or mortgages
• Be approved for higher credit limits and loan amounts (including business loans, as business lenders use both business credit scores and personal credit scores to vet borrowers)

These perks can positively affect reaching independence-related goals, such as moving into a more appealing apartment, growing a cushion for retirement or securing a loan to start your own business.

There are several ways to build credit, but the easiest first steps include using a secured or beginner-friendly credit card or being added as an authorized user on a responsible cardholder’s account. As you establish your credit, you will have more options to keep building it.

6. Diversify your income

Another way to ensure long-term financial stability is to have several income streams. Consider ways you can make extra cash, in addition to whatever your primary job provides. Extra streams of income can take many forms, from freelancing or establishing a “side hustle” (such as graphic design or writing) to walking dogs. Passive income streams from investments also can be a good way to supplement your primary source of income.

7. Get professional financial advice

Professional guidance can help you map your plan for how to be financially independent. A financial advisor can be a good resource to help you understand your money and gain important financial education concerning saving, retirement planning and more.

8. Start Investing Now

Bad stock markets—known as bear markets—can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compound interest alone will grow your money exponentially, but you do need a lot of time to achieve meaningful growth.

However, remember that—for everyone except professional investors—it would be a mistake to attempt the kind of stock picking made famous by billionaires like Warren Buffett. Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.

9. Negotiate for Goods and Services

Many Americans are hesitant to negotiate for goods and services, because they're afraid that it makes them seem cheap. Conquer this fear and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, so buying in bulk or positioning yourself as a repeat customer can open the door to good discounts.

10. Stay Educated on Financial Issues

Review relevant changes in tax law to ensure that all adjustments and deductions are maximized each year. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against fraudsters who prey on unsophisticated investors to turn a quick buck.

11. Maintain Your Property

Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. The cost of maintenance is a fraction of the cost of replacement, so it’s an investment not to be missed.

12. Invest in your health.

Did you know that taking care of your physical health can have a positive impact on your financial health? Unfortunately, the opposite is also true—poor health maintenance can negatively affect your financial goals.³

If your company has limited sick days, for example, you may lose income if you use up paid time off and still need to miss work. Also, certain health problems can make your insurance premiums skyrocket. And poor health may force you to retire before you're ready, leaving you with a lower monthly income than you were expecting.³

On the positive side, by making regular visits to doctors, dentists, and other healthcare providers—and following advice about any issues that arise—you can make an essential investment in your physical and financial health. Many medical issues can be prevented or managed with basic lifestyle changes, including regular exercise and a healthy diet.³