Achieving financial independence is enshrined as an important milestone for many of us. However, gaining financial independence today doesn’t quite have the same meaning or requirements as it did for Baby Boomers or Generation X. The cost of college tuition, housing, gasoline, and other goods have greatly outpaced wage increases.
So, if everything is more expensive, the job market is tough, and it’s hard to gain financial know-how, how can you become financially independent?
What does financial independence mean?
Financial independence is often defined as having the financial means to sustain your lifestyle for the foreseeable future, although others define it as already having the means to sustain oneself for the rest of one’s life.
Considering that the former of these two definitions is more realistic for most of us, we will focus on that goal while keeping in mind that saving and investing for the future are key components of achieving financial independence.
What should I do to become financially independent?
The key components of our definition of financial independence, “having the financial means to sustain your lifestyle for the foreseeable future,” are sustainability, lifestyle and future.
You can build a financially sustainable lifestyle for yourself with financial tactics and tools like budgeting, saving, investing, getting a side hustle and planning financial goals.
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, about half of your budget should go to absolute essentials (food, shelter, and healthcare), around 30% to flexible spending (hobbies, nights out, and other non-essential clothes, products, and activities), and 20% to your personal financial goals (saving, investing, and paying off debts).
2. Prioritize your financial goals
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 saving and investing is one of the best ways to save money and say that developing this habit early on can “help you develop tremendous wealth”. They recommend setting up an automatic monthly transfer of up to 10-20% of your income and funneling it into your savings account or investment fund.
Balancing savings, investment and debt payments is key to achieving financial independence.
3. 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.
4. Plan for the future
Planning for the future is another vital component of becoming financially independent.
To start planning for the future, create a complete list of all essentials (ex. rent, insurances, health spending, taxes, food, transportation fees, etc.), 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).
Don’t forget to calculate an emergency fund into your plans for achieving financial independence. Ideally, 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.
Having an emergency fund is important because it can prevent you from falling into debt; seemingly short-term crises can turn into long-term financial problems if we don’t plan well enough for them. 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.
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 like creating an emergency fund will go a long way in supporting your journey to financial independence.
Continue consulting the Academy resource library to learn more tactics to help you in this journey!