Akash Jha
Financial independence, defined as having sufficient savings, investments, and cash on hand to support the desired lifestyle for oneself and one’s family, is an essential objective for many people. It also entails accumulating a nest egg that will enable you to retire or pursue any career of your choosing — without being compelled to earn a specific amount each year.
Sadly, too many individuals fall far short of financial independence. Even without sporadic financial emergencies, their escalating debt due to excessive spending is a constant hindrance that prevents them from achieving their objectives. When a significant crisis, such as a hurricane, an earthquake, or a pandemic, completely destabilizes all plans, additional holes in safety nets become apparent.
Almost everyone encounters difficulty, but these 12 behaviors can set you on the correct path.
KEY POINTS
- Create a plan for achieving your objectives, whether they be large or small, financial or lifestyle-related.
- Create and adhere to a budget to cover all of your financial obligations.
- Pay off your credit cards in full, carry as little debt as you can, and monitor your credit score.
- Establish an emergency fund and make contributions to your employer’s retirement plan to generate automatic savings.
- Take care of your possessions, as maintenance is less expensive than replacement, but prioritize your health.
Being Financially Independent
Being financially independent means having sufficient income, savings, or investments to live comfortably for life and meet all of one’s obligations without relying on a paycheck. That is the ultimate goal of a long-term financial plan.
1. Set Life Goals
What is financial freedom to you?
There is a widespread desire for it, but that’s too broad an objective. You must be specific regarding costs and due dates. The greater the specificity of one’s objectives, the greater the probability of achieving them.
Write down these three objectives:
- What your lifestyle requires
- How much you should have in your bank account to make that possible
- What age is the deadline to save that amount
Next, subtract your target age from your current age and establish financial benchmarks at regular intervals between the two dates. Put the goal document at the front of your financial binder and meticulously record all amounts and due dates.
2. Make a Monthly Budget
Making and sticking to a monthly household budget is the best method to ensure that all bills are paid and savings are on track. It is also a routine that reinforces your objectives and strengthens your resolve against the temptation to indulge.
3. Pay off Credit Cards in Full
Credit cards and other high-interest consumer loans are detrimental to the accumulation of capital. Make it a point to pay off the full balance each month. Student loans, mortgages, and other similar loans typically carry much lower interest rates; therefore, paying them off is not an urgent matter. However, timely repayment of these loans with reduced interest rates is still essential, as timely payments contribute to a solid credit rating.
4. Create Automatic Savings
Pay yourself initially. Participate in your employer’s retirement plan and maximize any reciprocal contribution benefits, which are essentially free money. In addition, it is prudent to set up an automatic withdrawal into an emergency fund that can be used for unforeseen expenses, as well as an automatic deposit into a brokerage account or similar account.
Ideally, the funds for the emergency fund and the retirement fund should be deducted from your account on the same day your paycheck is deposited, so they never enter your possession.
Keep in mind that the recommended quantity to save in an emergency fund will vary depending on your specific circumstances. Also, tax-advantaged retirement accounts come with restrictions that make it difficult to access your funds in an emergency, so you should not rely solely on this account as your emergency fund.
5. Start Investing Now
Bear markets can cause people to question the wisdom of investing, but historically there has been no better method to grow your wealth. Your money will grow exponentially due to the power of compound interest, but you will need a significant amount of time to accomplish meaningful growth.
However, keep in mind that, unless you are a professional investor, attempting the type of stock selection made famous by titans like Warren Buffett would be a mistake. Instead, open an online brokerage account that makes it simple to learn how to invest, build a manageable portfolio, and make automatic weekly or monthly contributions. To help you get begun, we have ranked the top online brokers for novices.
Achieving financial freedom can be very difficult in the face of growing debt, cash emergencies, medical issues, and overspending, but—with discipline and careful planning—it is possible. That is the ultimate goal of
6. Watch Your Credit Score
Your credit score is a crucial number that determines the interest rate you are offered when purchasing a new automobile or refinancing a property.It also affects the premiums you pay for auto insurance and life insurance, among other necessities.
The reason credit scores carry so much weight is because irresponsible financial behavior is correlated with irresponsible behavior in other areas, such as failing to take care of one’s health, or even driving while intoxicated.
This is why it is essential to obtain a credit report at regular intervals to ensure that there are no erroneous black marks tarnishing your good name. To protect your information, it may be worthwhile to investigate a reputable credit monitoring service.
7. Negotiate for Goods and Services
Many Americans are hesitant to negotiate prices for products and services out of fear of appearing cheap. Conquer this phobia and you could save thousands of dollars annually. Particularly for small businesses, purchasing in quantity or positioning yourself as a repeat customer can open the door to substantial discounts.
8. Stay Educated on Financial Issues
Ensure that all adjustments and deductions are maximized each year by analyzing relevant changes in tax law. Keep abreast of financial news and stock market developments, and do not hesitate to adjust your portfolio accordingly. The greatest defense against fraudsters who prey on unsophisticated investors to make a quick buck is knowledge.
9. Maintain Your Property
Cars and lawnmowers, as well as shoes and clothing, will last longer if they are maintained properly. The cost of maintenance is a fraction of the cost of replacement, making it a worthwhile investment.
Understand the distinction between things you want and things you need.
10. Live Below Your Means
Mastering a frugal lifestyle requires cultivating a mindset centered on living well with less, which is easier than you might imagine. In fact, many wealthy people developed the habit of living below their means before achieving fortune.
It’s not difficult to embrace a minimalist lifestyle. It merely entails learning to differentiate between the things you need and the things you want, and then making minor adjustments that result in significant financial gains.
11. Get a Financial Advisor
Once you’ve amassed a substantial amount of liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash), hire a financial advisor to help you remain on the right track.
12. Take Care of Your Health
The principle of appropriate maintenance applies to the body as well, and taking excellent care of your physical health has a substantial positive effect on your financial health as well.
Investing in one’s health is simple. It entails scheduling regular doctor’s and dentist’s appointments and heeding medical advice regarding any health issues. Numerous medical issues can be alleviated or even prevented with simple lifestyle modifications, such as increased physical activity and a healthier diet.
However, poor health maintenance has both immediate and long-term negative effects on your financial objectives. Some corporations have a limited number of sick days, resulting in a loss of income once paid days have been exhausted. Obesity and other dietary ailments skyrocket insurance premiums, and poor health may force early retirement with a permanently reduced monthly income.
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What Is Financial Freedom?
Everyone defines financial independence according to their own objectives. For the majority of people, financial security means having the financial cushion (savings, investments, and cash) to afford a particular lifestyle, plus a nest egg for retirement or the freedom to pursue any career without the need to earn a specific salary.
What Is the 50/30/20 Budget Rule?
Senator Elizabeth Warren popularized the 50/30/20 budget rule to achieve financial stability by dividing after-tax income into three categories of spending: 50% for necessities, 30% for wants, and 20% for savings and debt repayment. We’ve created an easy-to-use budget calculator to assist you in categorizing and controlling your expenditures and savings, which is the essential first step towards financial independence.
Will a Bad Credit Score Make My Car Insurance Higher?
Despite the fact that some states, including California, Hawaii, Washington, Massachusetts, and Michigan, limit or prohibit the use of credit scores to determine auto insurance rates, many companies use a credit-based scoring system to determine whether to insure you and how much to charge.2
The Bottom Line
These 12 steps will not solve all your financial issues, but they will help you develop the positive habits that lead to financial independence. Simply creating a plan with specific target amounts and dates strengthens your resolve to achieve your objective and protects you from the temptation to overspend. Once you begin to make real progress, relief from the constant burden of escalating debt and the prospect of a nest egg for retirement become potent motivators, and financial independence becomes a realistic goal.
