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Nearly everyone has their idea of financial independence, but it generally means the ability to live comfortably and afford whatever you need without worrying about debts.
While it can seem like a far-fetched dream for many people, you can turn that dream into reality if you follow the right steps.
Here are 7 steps to take to become financially independent:
- Set clear-cut, realistic lifestyle and financial goals.
- Spend less money than you make.
- Set up automatic savings and start investing right away.
- Draw up a personal budget and follow it.
- Create an automatic debt repayment plan.
- Take good care of your health and property.
- Hire a financial expert to help you plan well.
This article explains the steps above in easy-to-understand ways. Read on to learn everything you need to start your journey to financial independence as soon as possible.
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1. Set Clear-Cut, Realistic Lifestyle and Financial Goals
Do you have a strong desire or goal to be wealthy and not ever worry about money again? Well, guess what? Everyone has that same desire!
The problem with that goal is that it is too vague and lacks enough motivation to drive you. The first step to becoming financially independent is defining what the concept means to you.
Get your financial binder and write down concrete lifestyle and financial goals. The more specific you can make the goals, the higher the chance of smashing them.
Make sure to answer these questions when you define and set your goals:
- What lifestyle represents financial freedom to you?
- How much money must you have in your bank account to support that lifestyle?
- How old do you want to be when you smash this goal?
- What milestones must you reach every quarter or year to bring you closer to your overall goal?
It is okay to dream big, but be more realistic when setting your goals. You’ll be setting yourself up for failure if you give yourself goals that are too out of your current reality.
2. Spend Less Money Than You Make
The money you make doesn’t guarantee financial independence if you don’t have good money management skills. Think about this for a minute.
Are you any wealthier if you earn $1 million a month but end up squandering $1.5 million in the same period? That’s another way of saying a fat salary doesn’t automatically translate to financial independence.
Indeed, your income matters, but it is only a part of the overall picture. Understanding this fact can make the entire journey to financial independence less daunting.
Okay, what else does it take if earning a lot of money alone doesn’t guarantee that you’ll no longer have money worries? Spend less money than you make.
3. Setup Automatic Savings and Start Investing Right Away
The habit of spending less and tracking your income will limit unnecessary spending and put some excess cash in your pocket. Consistently doing this can significantly increase your net worth.
You can set up automatic savings where a portion of your income goes directly into a brokerage retirement savings account or a brokerage account, even before your paycheck gets to you.
Also, do your research and invest in well-curated investment vehicles. You won’t get wealthy overnight just because you opened an investment account.
But the power of compound interest can increase your money exponentially over the long term.
4. Draw Up a Personal Budget and Follow It
Preparing a budget may seem like a boring and tedious task. But it only takes a few simple steps, and it can help you stay on top of bills.
It is one thing to make a budget, but sticking to it is a different ball game altogether. Consider creating and reviewing your budget as often as possible (at least once a month).
This practice will help you stay on track with your goal of becoming financially independent.
5. Create an Automatic Debt Repayment Plan
You cannot successfully become financially independent if you struggle under the weight of debts. So, you must take steps to become debt-free.
It doesn’t matter what type of debt you owe, whether it is a car loan, a home mortgage, or credit card debt, the important thing is to make sure there’s a plan in place to gradually reduce your debt every month.
6. Take Good Care of Your Health and Property
You probably heard the saying, “health is wealth.” It is true in every sense of the adage. A 2019 study published in the American Journal of Public Health indicates that medical issues are an underlying factor in more than 66% of bankruptcies in America.
Bottom line: Take care of your physical, mental, and emotional health if you truly want to be financially independent. The same goes for your home, car, clothes, and other personal belongings.
It is easier and cheaper to maintain these things than to replace them. Not taking good care of your health and property puts a hole in your pocket.
7. Hire a Financial Expert to Help You Plan Well
It is easy to assume that writing down a set of goals in your budget binder is enough to motivate you. But that’s not always the case. Remember that there is no beeline to financial freedom, no matter how great your plans look on paper.
If you must create a solid financial plan, you need to build buffers to accommodate the ups and downs of life’s unpredictable situations. In other words, your financial plans must be flexible enough to resist big changes.
It is okay if you don’t know how to create solid plans, especially if financial planning is not your strong suit. That’s why there are financial advisors.
Consider hiring a qualified expert to advise and educate you. They will show you your current financial position, where you want to be, and the best way to reach there without running into too many hitches.
Acorns’ spare-change savings tool and its cash-back rewards program make investing easy. But the management fee on small accounts is steep.