Five steps to financial independence
Are you wondering what financial independence is? We’re breaking it down in this article and sharing five ways you can achieve financial independence.
Financial freedom means taking ownership of your finances, so that you aren’t worrying about paying your bills or any unexpected expenses. It is the ability to live comfortably on savings or investments, so you aren’t as dependable on your paycheck.
Some people might think this sounds easy, whilst others might consider it an impossible achievement. We believe that everyone can achieve financial independence with the right combination of planning, budgeting and determination
Step 1: Assess your current position
Before you can determine what financial independence looks like to you, you must first establish where you’re at, and to assess how much debt versus savings you have.
Confronting your debt can be unpleasant. We get it, but it’s necessary in determining your current financial position. Start by adding up all of your current outstanding debts, including your mortgage, credit cards, student loans, personal loans, and any money owing to family or friends.
Then, make a list of all your savings, such as savings accounts, investments, stocks, and superannuation. You can also include any income you receive on a regular basis, either from interest, salary or cashflow from a side-business but keep these numbers aside for now.
Once you have your starting point, you’re ready to set some goals.
Step 2: Goal setting
Everyone has a different end goal when it comes to their finances, so it’s time to evaluate what matters to you.
Start by setting three main objectives:
- What are your lifestyle needs?
- How much do you need to make that possible?
- What is the deadline for you to achieve this?
You should now have your start date, as well as an estimated end date for when you’d like to achieve financial independence.
Between these two dates, set yourself some smaller targets and milestones that will help you achieve your ultimate goal. Creating a monthly budget will help you in determining these milestones.
Step 3: Create a budget
Tracking your spending is a necessary step towards financial freedom. Not only will you better understand your regular expenditure, but you’ll be able to determine the areas in which spending can be reduced.
Make sure your budget accounts for all regular outgoing expenses, such as bills and debt repayments, as well as any big ticket items you foresee for the upcoming month. This can include big events, special occasions, or gifts for friends or family members.
Knowing what your finances need to cover month by month will better prepare you for when pay day rolls around.
Step 4: Manage your spending
Having a budget will help with this, but you will need to take some additional steps in managing your spending to ensure you don’t blow your budget or dip into your savings.
Firstly, don’t buy unnecessary things. This might seem obvious, but properly evaluating your wants versus your needs can help with managing your overall spending. Instead of putting your money into tangible items and material goods, invest in your experiences. Our happiest memories don’t often come from that thing we bought that one day when we were bored, but they do come from valued experiences shared with the people we love. This looks different to everyone but it’s exactly what living a Rich Life is all about.
Secondly, make sure you prioritise your debt repayments. If you have $20,000 saved, but owe $50,000 in accumulated debt, you’re technically still in the red. Pay off any high-interest debts, such as credit cards, as soon as you can, even if it’s at the expense of adding to your savings.
Step 5: Boost your regular income
Having additional income will only help when it comes to achieving financial independence. Whether you pick up an extra job on the side, or learn how to invest your funds, you will reap the rewards of having that extra bit of cash in your hand at the end of the day.
Everyone’s journey to financial independence looks different, but if you start by following these simple steps, you’ll find you’re well on your way to achieving your goals and improving your finances. The earlier you start, the more successful you will be, so what are you waiting for?