Despite the current economic situation of your finances as a result of Covid-19 or how your career has proceeded, financial independence is something that appeals to all of us. Who doesn’t want to choose when and where you work rather than being forced to work because of need? Retirement and financial independence can be a million miles away when you are in your 20s or 30s. However, achieving financial independence at a young age is possible when you actively work towards your goal. Let’s find out in this article what financial independence is and how you can start the journey.
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What is Financial Independence?
So, financial independence might mean many different things. Still, in this article, we will be discussing ways to save enough money that you no longer need to work, whether it is retirement or just your choice. Achieving financial independence means to benefit from freedom in your life without the need to stress or worry about money. Yet, your goal of achieving financial independence might be high or low.
How Can You Start Your Journey?
After defining financial independence, let’s discover the main steps you are going to take. Financial independence starts with a detailed plan and readiness to commit to it. We will talk about something that not just suddenly happens. It will be a long journey with hard work and sacrifices. But first, you have to talk to yourself honestly and be realistic.
1- Know the “Why”
You need to realize why you want to seek financial independence, to begin with. Do you want to leave a career you don’t like? Or you wish to travel the world? Or do you want to spend more time with your family? There isn’t a right or wrong excuse. Instead, you should consider your own motivation since it can have a significant impact along the road. To achieve your financial independence, it will require some sacrifices, and it’s much easier to make those sacrifices when you know why you’re doing it.
2- Thinking Long Term
Becoming financially independent is not an easy and fast process. Saving habits seem difficult for some people and impossible for the poor because for them to reach their financial goals tends to be far away. We all have a lot of temptations on the way to our financial goals, but if poor do not save, he will remain poor, and if reach spends more than he makes, he will become poor. If you think long term, you can accumulate financial independence irrespectively from your level of income.
3- Calculate Your Annual Spending
To know how much money you need to save to reach financial independence, you need to calculate how much you spend each year. In case you don’t know how much you spend, you can use your credit card and bank statements from the past years. We advise you to start tracking your expenses regularly to make sure you know how much you are spending.
4- Calculate your Financial Independence Number
You can start calculating your financial independence number once you know how much money you are spending. Take into account that you might not necessarily need to maintain the same lifestyle after retirement. So, one way to calculate your annual spending is called rule 25 to know how much you will need to save for your retirement portfolio. Yet, you should take into consideration the coming changes that could affect your spending. For example, if you are a newlywed couple and consider having kids in the future, you should expect that your expenses will increase. If you spend $40,000 a year now, then your true financial number is higher than $1 million ($40,000×25= $1,000,0000).
5- Cut Monthly Expenses
Many people think increasing net worth requires a high-paying job, but in reality, you need to spend less and save more. Take some time to calculate all of your recurring monthly expenses. Reducing these expenses will give you the chance to save every month, and the increasing impact of some tiny changes can be a significant increase in your savings rate. Some expenses like extra clothes, sugar, cable, memberships, and subscriptions can usually be reduced if you are considering some sacrifices. You can create your budget, stick to it, organize your shopping spree, plan out the exact days when you need to shop and prepare a list of items you absolutely need to buy.
And finally, the easiest way to cut your expenses is the ability to say NO. No more impulsive buying habits!
End luxury shopping, both online and in stores. Don’t buy stuff just because it’s a good deal; buy only what you need and use it. Getting a bad day isn’t a binge-shopping excuse. You can borrow books from the public library for less than they would cost to own. Hit thrift stores before buying anything new. Garage sales are great too for budget shopping. Organize the exchange of clothes with your friends, or at school for your children. Never buy new clothes for a single-use occasion, such as a wedding, a ski trip when living in a warm climate, or your child’s dress-up outfit. Instead, try borrowing from what you already have or making due with what you need.
7- Pay off your debt
It’s hard to be on the way to financial independence when you owe money to other people. For example, imagine that at age 25, you find yourself trying to plan for retirement but still with $10,000 in credit card debt. You have completed the budgeting, so you have $3,000 a year that you can apply for to pay off the loan or invest. If you add all of this to investments and earn 6 percent of investment earnings over time, you will end up with $17,000 five years later, which will continue to grow over time. But if you never make payments on your loans and have an interest rate of 15 percent, you ‘re going to owe $20,000 and have a net worth of -$3,000. Instead, if you pay off your debt, you’ll have a net worth of $0, which isn’t perfect but really is more than -$3,000.
8-Create Good Spending and Savings Habits
Finding ways to save might look hard, to begin with, but you’ll quickly figure out some good habits that make it easier moving forward. You can take a money-saving challenge for more fun, and to give you added motivation to save as much as you can. Once you get used to it regularly, you’ll find that saving money is easy, and it will be a part of your daily life.
9- Increase Your Income
Reducing expenses should be one of your essential goals, to increase your savings rate is to make more money. Many use a side hustle or second job perhaps as a way to make more money. The advantage of a side hustle is that you can still do it even after you retire from your traditional job. Many early retirees use this method as a way to earn some income and do something they enjoy. Of course, it is not the only choice for increasing your income. You might get a raise at your current job, a promotion, or taking a higher-paying job. Moreover, you can invest in growth funds to increase your savings rate. You don’t need to invest all that money you’re saving, it is essential to have an emergency cash reserve, it should be between three to six months of expenses. It will help you to have a safety net, and in case of an emergency, you will not be forced to disturb your long-term investments.
Emergency fund cash should be held in saving account, deposit, or money market fund.
10- Make an Investment Plan
The only way to create an investment plan is to have money to invest. We hope you have read all pieces of advice carefully and now ready to take advantage of investments.
Creating an investment plan does not mean investing randomly in a few stocks or establishing a savings account in a bank.
Nowadays, investors have a choice either they can get advice from professional financial advisors offered from different financial institutions or online through automatized solutions in case of preference do not interact with people. And, of course, any person can try to make their own. But first, what does it mean investment plan?
An investment plan means selecting a financial instrument tailored to the investor’s needs, goals, risk appetite, specific interests, and time horizon. Moreover, it plays a key part in portfolio management, asset allocation strategies, a process that involves an in-depth analysis of investor’s goals, interests, market strengths, weaknesses, opportunities, and threats. For an investor to choose the right investment strategies means to choose the most suitable investment product in the market. Always remember it is important to set your financial objectives before making any plan.
Why is Financial Independence Important?
Financial independence is freedom from having to work a job that you don’t love. If you quit today and didn’t have a paycheck for a couple of months, that would be all right. It could be money that you saved, and it can last months to years. It may also be passive income sources that you have, which can be paired with savings for some time to cover living expenses. But not only this. You should not depend on anyone but yourself. Life is full of ups and downs, and many changes happen, but how can you be prepared for these uncertain times? You might think you have your family, kids, or friends to support you in difficult times, but you are the only person you have to rely on in reality.
What are 4 things One Can Learn from the Financial Independence Retire Early Movement (FIRE)?
First, let’s define the FIRE movement, which is a movement whose goal is financial independence and retiring early. It became popular among millennials in 2010, gaining grip through online communities. Those looking to achieve FIRE actively optimize their savings rate by finding ways to raise revenues or reduce expenses. The aim is to accumulate assets in perpetuity until the resulting passive income provides sufficient money for living expenses. But there are a lot of delusions about what you have to do to be part of the FIRE movement — and things you can learn even if early retirement is the last thing you’ve ever thought about. The FIRE movement has 5 lessons to take away:
Lesson 1: Personal Finance Can Be Appealing
We love the F.I.R.E. movement because it makes personal finance exciting! It’s a game like hitting retirement by 45. It is a major motivating force. People are no longer just excited to think about how they’d spend a million dollars but are eager to think about how they’re going to get a million dollars. That is a major mindset shift. As a society, we are not waiting to win the lottery and spend money, but we are finding new ways of actively earning and growing money instead. Here at Wealthface, we call it a big win!
Lesson 2: An Open and Flexible Money Attitude
We all grow up listening to a number of financial messages. All of the stuff like, “money isn’t dirty,” “it is better that we are poor than rich,” “money isn’t bloomed on trees,” and so much more. That means that all of us have heard them in the better part of our lives from friends, relatives, the media, etc. Such money messages subconsciously hold us trapped in a loop of predetermined ideas about acquiring, maintaining, expending, and saving money.
But these views are questioned by the FIRE movement. It forces people to open up their minds about money. Find new ways of earning, growing, and even celebrating it. It’s tearing down years and years of generational financial insecurities and partialities. This same transparent and versatile money attitude enables FIRE-ee to cope with financial storms better. Yes, maybe by 45, they wanted to retire, but they also recognize that happiness and freedom were their ultimate purpose. The main factor for resilience is flexibility. Those who already have a flexible money mentality are better placed to deal with financial crises. Yes, over your short-term withdrawal goal, there can be a mourning period of 45. However, they may have tremendous gratitude for how much they are better prepared for the impending recession. Gratitude and a positive attitude have historically been associated with improving financial positions.
Lesson 3: Your Happiness is Worth More Than Money
Whereas our society says that to have a fulfilling life, you need a career, well, this is not always the case. It’s miserable and degrading for some to work. The FIRE movement has taught many valuable things: the desire for happiness should be at the root of all economic decisions. The entire object of accumulating wealth is to create a feeling of goodwill while getting plenty of money at the bank is beneficial. If work takes that away from you, then it isn’t really valuable. Of course, your job is needed to provide a roof over your head. But there is no minimum amount you must save to be happy for those looking for FIRE. Recall, financial independence means living your own way. The FIRE movement would say go for it if you can live off $15,000 annually without any problems. Don’t spend time on a job, which makes you miserable.
Lesson 4: Perhaps the Fascinating Thing About FIRE is the Element of Control
You can’t control everything in your financial life: the markets, interest rates, and to a lesser degree (even if you change jobs and give priority to new skills, this will be an option), your income. FIRE focuses on those things that you can control. The amount that you’re spending. The sum you’ll be saving. Proponents make big changes to tighten the reins — like moving to a less expensive area or downsizing way before they have to — but they are their choices. And doing so gives free time to spend that other highly prized commodity, as they choose.
Finally, Remember, this is a long-term journey that requires commitment and sacrifice to sum your control over your life instead of being controlled by work and money. Moreover, financial independence is something that practically anyone can achieve, like for many, they can finally use their time for things that they want instead of being forever on the treadmill of paying bills. It provides people with an exciting new lifestyle and shows them what’s possible.