5 Ways to Find Your Financial Independence This Year
Posted by: Joseph Kuo | July 2, 2021
Achieving financial independence is a goal that almost everyone has. It brings you the personal freedom to do what you want for you and your family. How can you accomplish this? Here are five actionable ways to start working towards more financial freedom this year.
Step #1: Work Out What Financial Independence Looks Like to You
As they were fighting for independence, the Founding Fathers had specific changes and goals in mind which helped inspire them when they were writing the Declaration of Independence. Similarly, it’s important to know what you specifically want for your own financial independence.
What are your goals? Often when asked, people think of financial success in numerical terms: “Make X million dollars” or “retire by 50”. But what do you actually want to do after you retire? How do you want to use that X million dollars? Is X million dollars enough for what you want to do? What will financial independence look like for you and your family from a day-to-day living standpoint? If you can answer questions at this level, it will be far easier to plan towards your goals.
Step #2: Pay off High-Interest Debt
Credit cards have high interest rates that can grow your debt every month and impede your cash flow if they aren’t paid off. If possible, it’s best to treat your credit card like a debit card, meaning you should avoid charging more than you can pay off that month.
If you’re able, pay off your credit card balances in full and on time each month to improve your credit rating. This method will have the added benefit of making you eligible for lower interest loans and credit cards in the future as your credit score improves. Once you have high-interest debt like this paid down, you can focus on low-interest debts like mortgages, auto loans and student debt.
Step #3: Develop a Spending Plan
If you want to be certain that your bills will be paid and savings goals are on track, then you need to set a monthly spending plan and follow it. The difference between a spending plan and a budget is that a spending plan is not necessarily a “diet”, but more of a means to track your spending.
If you’re used to spending and saving as you please, sticking to such a plan will feel hard at first. But over time, consistency in your spending habits will make following a budget easy and natural. Having a spending plan can help deter impulse buys, splurges and make your savings goals a bigger priority.
One of the most effective ways to save more money is to automate the process. Determine how much you’re able to contribute to your savings account each month and set up an automatic transfer with your bank. Soon, you’ll forget this is even happening.
Step #4: Take Advantage Of Opportunities to Increase Your Income
Increasing your income is easier said than done, but it’s not impossible. If you’ve been at your job for a while and have taken on added responsibilities, now may be an opportune time to speak to your boss about a pay adjustment. Or, searching for opportunities elsewhere could result in a bump in salary.
If you have a hobby you’re passionate about, look for opportunities to make some money with it. Put your art up for sale online, offer classes (cooking, dancing, gardening, etc.) through your local rec center or find odd jobs you can do on the weekend.
If you do find yourself able to increase your income, be sure to update your spending plan to account for how that additional money should be used or saved. If it’s just being spent frivolously, it’s not helping you work toward greater independence.
Step #5: Design An Investment Strategy that Aligns with Your Values
Once you have control over your debt, you’ll want to focus on building passive income – which can be done through investments. Start off simple by contributing to a retirement account, like a 401(k) or IRA. Even small contributions now can grow significantly toward retirement through the power of compound interest.
If your company offers a retirement savings plan like a 401(k), you may have the option to automatically defer funds from your paycheck to the account. Again, this is something that will happen without action from you, making it an easy and convenient way to build retirement savings.
If you’re looking to expand, consider working with an investment advisor. An investment advisor can provide complex investment strategies tailored specifically to your situation and level of acceptable risk.
As you involve yourself in investments further, you may find other opportunities to invest as well, such as real estate, collectibles or other alternative investment classes.
Achieving financial independence isn’t something that happens overnight. If you plan and save, however, it really can pay off for you in the long run. Not only does it help you to build savings, but it starts strong habits for the future. If you’re unsure where to start, an experienced financial professional can help address your concerns and develop tailored strategies going forward.