Attaining financial independence doesn’t just happen.
It is a detailed process, which demands a high commitment to a plan. It requires you to stick to a Financial Independence, Retire Early (FIRE) program, allowing you to quit your formal employment far sooner than expected when following traditional budgets and retirement plans.
Did you know that by dedicating about 70% of your annual income to savings, you could eventually live off your portfolio’s returns for decades before the age of 65? Indeed, the FIRE movement encourages members to save and invest 50-75% of their income to be able to retire between ages 30 and 40.
You don’t have to begin by committing as high as half of your earnings to savings or investments. But you must start either way.
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This article covers 10 tips to easily incorporate into your routine to achieve financial independence.
Table of Content
- What is financial independence?
- How can I be financially independent?
- 1. Commit to your FI goal
- 2. Create sub-goals
- 3. Control your spending
- 4. Increase your income & diversify the sources
- 5. Develop a saving culture
- 6. Set up a safety net
- 7. Invest surplus funds & diversify your portfolio
- 8. Manage your income taxes
- 9. Manage your debts
- 10. Monitor & review your goals regularly
What is financial independence?
Financial independence (FI) is defined as the state of holding enough income to settle your living expenses throughout your life without relying on formal employment.
Your income sources may include investments, real estate, and passive income – the goal of financial independence is to maximize your savings rate by lowering your spending and/or raising your income.
Financial independence comprises three levels – budget financial independence, baseline financial independence, and blockbuster financial independence.
Each of these levels drives to either of the following two goals:
- You will not need to work for a living because your investment or passive income caters for all your living expenses indefinitely.
- Your net worth is equal to or above your living expenses times the number of years left to live. For instance, $1.75 million with 35 years left to live would grant you financial independence in early retirement if your living expenses are within $50,000 per annum.
How can I be financially independent?
There are many ways you can become financially free and retire early. Let’s go through the top 10 ways to get there.
1. Commit to your FI goal
Many people fail to achieve financial independence because they are afraid of making changes that will enable them to get there.
You can start by setting small, attainable goals and increasing them over time. For instance, you can start by saving $50 per month as you build your confidence in gaining long-term success.
To improve your drive, you should understand what FI means to you, get a clear picture of your current financial state, and identify things or habits to give up to get there.
You should also assess the barriers likely to affect your mission and work on a set of goals to help you become financially independent.
2. Create sub-goals
To achieve financial independence for early retirement, you should set various steps in your financial life. These can include:
- Maximizing your income
- Keeping your spending in check
- Clearing your debts (credit card, student loans)
- Understanding your savings habits
- Establishing your investment objectives
- Developing your long-term financial goals
When creating the sub-goals, you should list down the corresponding goal against every sub-goal to ensure that all your activities are linked to the overall goal.
Also Read: How Can I Make Money Through NFT? – NFT Art
3. Control your spending
You need to understand how and on what you’re spending your money, daily, monthly, and annually. It would be best if you cut down on expenses that don’t make sense by distinguishing between your wants and needs.
Wants are things you desire to own or do, while needs are more essential and important commodities.
To gain financial independence, you should keep your spending on ‘wants’ low. You will save much more if you live beneath your means. Pay yourself with a smaller portion of your income and save and invest the rest.
This value of frugality is also built best by delaying your gratification. You should be willing to make sacrifices now to enjoy a better life in the future.
Some of the sacrifices to make to control your spending include taking advantage of discounts, using coupons, and reducing expenditures on new clothes and cars. This approach will enable you to have free cash to build your savings, clear your debt, and invest for the future.
4. Increase your income & diversify the sources
Besides keeping your spending in check, you can also achieve financial independence for early retirement by boosting your income.
There are many ways to achieve this sub-goal, such as keeping your business or career moving forward. When you keep your spending low and increase your income steadily, you will be on your way to attaining your financial goals much more quickly than anticipated.
You can enroll for courses to enhance your skills or improve your performance, enabling you to be an easy target for job promotion opportunities. If you own a business, you can improve your earnings by delivering more value to your clients. You can identify challenges your prospective clients are facing and suggest cost-effective solutions.
When you create more value for employers or clients, you gain a competitive advantage and the ability to bargain for better pay. These efforts are in line with long-term thinking and will drive you closer to attaining financial independence.
As you look to increase your income you should also enhance your financial independence by diversifying your methods of making money.
Jobs are not always secure – whether in full-time or temporary employment, ensure to create a side business. This side hustle can give you extra income for savings, investment, debt reduction, or become a fallback plan in the event you lose your job.
Business owners can also diversify their sources of income by investing in other related businesses or partnering (forming alliances) with like-minded business people.
Related: How to Start a Successful Online Business in 8 Steps
5. Develop a saving culture
Make a decision to always save a portion of your earnings, irrespective of your income level or circumstances – small steps will count towards your financial independence in the long run.
To change your life, you must adjust your daily routine by making intentional, consistent efforts towards your goals.
If you lack adequate funds to save, then you should increase your income, reduce your expenses, or both.
Part of your savings goals should include developing a personal or business budget, reviewing the objectives periodically (daily, monthly, and annually), and discussing with your family or partners to determine areas of improvement.
6. Set up a safety net
A safety net can be in the form of an emergency fund. It is an effective way to insulate yourself in the short run. Since this cash is not meant for investment, you should hold it in a savings, fixed deposit, or money market account.
For a salaried employee, you should build your emergency fund to the point where you have about 3 to 6 months’ worth of living expenses. If you are self-employed or make a living from commissions, then this safety net should hold between 6 and 12 months’ worth of savings.
This cash can come in handy in case of emergencies, such as a layoff or an urgent medical treatment not covered by insurance.
When you have an emergency fund, you also have the flexibility to retire early from a 9-5 job.
7. Invest surplus funds & diversify your portfolio
If you want to attain financial independence to retire early, you have to invest part of your income.
You don’t have to start by investing a huge chunk of your earnings, but you can begin with 15%, then increase it to 30% thereafter. The goal is to develop a regular habit of investing monthly. Eventually, you gain more over time from accumulated interest – the larger your investment portfolio, the more money you make, and the closer you get to FI.
Focus on building your investment accounts – you can minimize the amount you’re investing in equities, especially during an economic crisis. However, you should always continue topping up the amount you put in a savings or fixed-income account.
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This approach will put you in good financial standing when the time to buy stocks is ripe.
Remember to always diversify your investments to protect yourself against risks. You can allocate a certain amount of your money in peer-to-peer lending, stocks, natural resources, real estate, and interest-earning accounts.
Understand the fees and other factors attached to each type of investment – learn more about smart investing.
Also read: 6 Tips for Better Money Management
8. Manage your income taxes
As you start to save for retirement, begin by setting aside 15% of your monthly gross income in tax-advantaged or tax-free retirement accounts. Such include the 401(k) and the IRA.
Your goal should be to match your employer’s contribution to pension funds. If you’re self-employed, you can establish your retirement plan, such as a solo 401(k).
These retirement plans will enable you to achieve financial independence because they generate substantial gains through unrealized capital gains, profits, and real estate appreciation. Retirement plans, depending on your country of residence, are great sources of tax relief, allowing you to shelter as much as 20% of your income in tax savings.
When you use legal strategies that yield lower income taxes, you end up with more disposable income to save and invest.
Related: Dividend Investing: Strategy & 10 High-Yield Stocks
9. Manage your debts
It will be really tough to gain financial independence and retire early if you owe money to banks and friends.
You can take charge of your debts by creating and sticking to a debt-repayment plan. You can also negotiate better repayment rates with creditors. For instance, you can contact your internet provider or cell phone carrier to request lower bills or rates.
If there are multiple service providers, consider shifting to a cheaper one, but weigh the costs versus benefits of signing a new contract with the competitor.
If you have a partner, it is important to discuss and understand your debt position and money philosophy. Hold a money date to review your standing on student, car loans, and other debt. Discuss each other’s views on making money, saving, investing, and borrowing.
It’s essential that you and your partner or spouse share the same financial goals. Having an honest conversation around this topic can help families realize their financial independence quickly and easily.
Have the resilience not to take on debt, especially high-interest loans and credit cards. An emergency fund can help you take credit responsibly, as well as minimize exposure to bad debts, which could hurt your credit score.
10. Monitor & review your goals regularly
Your path to financial independence demands more than making plans. You must commit to your sub-goals, assessing how they align with your overall goal and reviewing them monthly and annually.
You should ensure you’re still on track towards achieving your goals and remain focused on your mission and vision.
It’s possible to get comfortable with your achievements halfway and go back to your old spending habits. However, it would help if you made daily affirmations to stick to your plans, irrespective of the circumstances.
Realizing financial independence is not easy, both for high- and low-income earners, but you must keep working on your goals.
Financial independence enables you to live off savings and investment income. While it is desirable to not always wait for a paycheck, you have to make adjustments in your lifestyle and stick to your financial goals.
If you want to retire early, you need to take control of your spending, increase and diversify your sources of income, develop a saving culture, and invest wisely. You should also set up an emergency fund and manage your income taxes to take advantage of tax-free retirement plans. Remember to stay away from high-interest debts and to keep monitoring and reviewing your goals.
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