5 steps to achieve financial independence

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financial independence

Do you ever dream of achieving financial independence? It’s a goal that many of us aspire to, but the path to get there can feel overwhelming. Especially today, when the cost of living seems to be skyrocketing while wages barely budge. 

If you’re feeling stuck and wondering how to gain financial freedom, you’re not alone. Let’s take a closer look at the challenges and explore some strategies for overcoming them.

What does financial independence mean?

Financial independence is often defined as having the financial means to sustain your lifestyle for the foreseeable future, without having to rely on the income from a job. However, the most popular definition chosen by survey respondents interprets the concept as “no longer needing to receive money from family and friends.”

Considering that the last of these two definitions is more realistic and attainable for most of us, we will focus on that goal. We will talk more about this later but keep in mind that saving and investing for the future are key components of achieving financial independence. 

What should I do to become financially independent?

At its core, financial independence is defined by three key components: sustainability, lifestyle, and future. This means that becoming financially independent is a goal that requires a strong commitment to plan for the future, saving a significant portion of your income, and training yourself to live below your means.

You can build a financially sustainable lifestyle for your future with financial tactics and tools like budgeting, saving, and investing. 

1. Make a budget

Budgeting is the first step to building wealth on purpose. A budget is the plan you make every month to know how you will be spending your money; it is a practical approach to managing your finances and making the most of your hard-earned money.

Regardless of how much you make, it’s important to maintain a budget to organize your spending on essentials, flexible “fun” spending, and investments in personal financial goals.

One budgeting plan option is the 50/30/20 budget strategy. According to the 50/30/30 strategy, you’ll divide your income like this:

  • 50% for needs: About half of your budget should go to absolute essentials (food, shelter, healthcare, etc.)

  • 30% for wants: Around 30% to flexible spending (hobbies, nights out, and other non-essential clothes, products, and activities)

  • 20% for financial goals: What is left of your income pie goes to your personal financial goals (saving, investing, and paying off debt)

While saving and investing may seem like a luxury for those who make a cushy income, it is an essential component of everyone’s budget.

Many financial gurus believe that developing the habit of saving and investing early can “help you develop tremendous wealth”. To do this, feel free to tweak the 50/30/20 strategy and throw a little more money into your financial goals. Once you gain confidence in tracking your money, your budget may look something like this: 

Balancing savings, investments, and debt payments is key to achieving financial independence.

2. Build an emergency fund

Once your budget is up and running, you need to make an emergency fund as a safe haven for your plans for achieving financial independence. 

You never know when you will have a broken pipe or a health emergency. An emergency fund should provide you with money to take care of unexpected bills that may arise if your appliances or car need repairs, if you lose your job, or if you have sudden medical expenses.

An emergency fund acts like an insurance policy that you negotiate with yourself to ensure that your essential needs will be covered until the storm passes.

Seemingly short-term crises can turn into long-term financial problems if we don’t plan well enough for them. Having an emergency fund is important because it can prevent you from falling into debt and breaking your monthly budget. 

3. Plan for the future

While talking about how you can plan for your future and become financially independent, it’s important to keep in mind that everyone has different needs, wants, and aspirations for retirement, so there isn’t a one-size-fits-all approach. 

To start planning for the future, create a complete list of all essentials (ex. rent, insurance, health spending, taxes, food, transportation fees, etc.), financial goals (ex. higher education, job training, home and vehicle purchase, retirement) and things that will keep you happy and on track (ex. hanging out with friends, taking exercise and enrichment classes, Spotify, chocolate). 

Ideally, you should figure out an amount that would cover all of these expenses. The good news is you don’t need an extremely high salary for this. For example, a study in the US determined that Americans would need to earn about $94,000 per year to achieve financial independence. 

4. Diversify your income

Insufficient income is a serious barrier that prevents many of us from achieving financial security. Even if your main gig lets you get by, it’s important to consider diversifying your income.

Over the past several decades, rent, higher education, gas, and other living-related expenditures have left wage increases in the dust.

To combat these issues, consider adding additional sources of income. Joining the freelance economy is a common strategy for workers of all ages to take on additional part or full-time gigs. Also, take a look at our 20 side hustle ideas to help complement your income and savings, pay off debt, or boost investment funds.

5. Invest your money

Now you have a couple of income sources, great. But what do you do with that extra cash once you have it? You put it to work for you! To do this, money experts like Warren Buffet, recommend buying assets that will earn you passive income and/or appreciate in value. This could be a rental property, investment funds, or dividend stocks. 

Nowadays, investing doesn’t have to be intimidating or require a lot of money. With just $5, you can invest in the best companies in the world using modern investment platforms. Take FlexInvest for example. There you can find hundreds of offerings from top world companies and the most relevant funds to invest in. Their fractional shares feature lets you buy into these assets with just $5 and enjoy all the benefits of being a shareholder. Make sure to give it a try.

Sure, investing $5 may not seem like much, but if you make it a habit to invest regularly, the power of compound interest can help you grow your investment portfolio before you know it.

The bottom line

After crunching the numbers and determining what your current and future needs are, it will be easier to determine how you can arrange your financial life in order to achieve financial independence.

Trimming budgets, adding additional sources of income, and prioritizing financial needs will go a long way in supporting your journey to financial independence.

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