Reaching Financial Independence

Financially independent people enjoy monetary freedom and the ability to make choices based on preference rather than financial limits. They can pursue their passions without worrying about how they’ll cover basic living expenses, allowing them to enjoy more meaningful and fulfilling activities.

Financial independence also gives you the security of knowing that economic dips or unexpected events, such as a job loss or medical emergency, won’t significantly disrupt your standard of living.

If reaching financial independence sounds like an impossible dream, it’s only because you don’t have the roadmap yet! In this article, we’ll discuss strategies for becoming financially independent that you can start putting into practice today. 

What is financial independence? 

By definition, financial independence means having enough money to pay for your lifestyle without relying on a job or external financial support. It's the result of saving, investing, and spending wisely. 

The benefits of being financially independent include: 

• Lifestyle freedom 
• Time for passions 
• Peace of mind 
• Freedom from traditional work 

In short, financial independence is about confidently and happily living life on your own terms.

Steps to achieving financial independence 

Most of us won’t reach a state of financial independence until retirement. As with any goal, becoming financially independent happens by doing one thing, then another, and another until you arrive at your financial destination. 

That being said, there are things you can do to become more financially secure in the short-term.

Create a budget 

Understanding your financial situation is essential. You’ll need to assess your living expenses, bills, and pay to create a realistic budget. Here’s how: 

1. Determine your monthly income and categorize expenses as fixed or variable. 
2. Set financial goals and prioritize them. 
3. Use budgeting tools to allocate funds realistically, ensuring your expenses don't exceed your income. 
4. Track your spending to stay within budget. 
5. Prioritize saving by allocating a portion of income toward your financial goals. 
6. Reassess and adjust your budget every few months or as life changes occur. 

Budgeting keeps you informed about the money coming in and going out of your bank account, and it’s crucial for achieving financial independence. 

Set financial goals 

Financial goals are milestones that can help you reach financial independence. Using the SMART goal-setting technique allows you to create goals you’re more likely to hit. 

I’ll use saving for a down payment on a car to demonstrate how SMART goals work: 

• Specific: Clearly define your goal. For example, "Save $2,000 for a car down payment.” 
• Measurable: You need a way to track your goal to assess your progress. Dollar amounts and percentages are useful for measuring financial goals. “How close am I to saving $2,000?” 
• Achievable: Set goals that match your current financial situation and resources. “I can realistically afford to set aside $100/month in savings for my goal.” 
• Relevant: Align big goals with your financial objectives by breaking them down into milestones or "mini goals." For example, in addition to setting aside $100/month from my paycheck, I want to funnel any windfall, such as tax returns and monetary gifts, into my savings account. 
• Time-bound: Setting deadlines increases the likelihood of achieving your goal. For example, I may set a 12-month deadline for a $2,000 down payment, with smaller milestones at three, six, and nine months ($500, $1000, and $1500). 

You can apply the SMART goal technique for staying committed to goals for becoming financially independent. 

Create an emergency fund 

Financial experts stress the importance of building an emergency fund as the first step toward financial independence. This fund cushions against unexpected expenses like medical emergencies, car repairs, or job loss, preventing the need for high-interest debt or dipping into long-term savings. 

There are two types of emergency funds you’ll want to establish if your goal is to become financially secure: 

1. A $1,000 “small fund” savings account for unexpected expenses. 
2. A 3- to 6-month emergency fund for covering living expenses in the event of job loss. 

Start with the smaller fund and gradually build the larger one while focusing on other financial goals, like reducing your debt. 

While you can use traditional savings accounts for emergency funds, there are better options. If these funds are too easy to access, you may be tempted to use the money for other things. You also want your funds to continue growing after you’ve stopped contributing to them. 

Instead of your regular savings account, ask your bank about these options to see which is best for you: 

• High-yield savings account 
• Money market account 
• Certificates of deposit (CDs) 
• Liquid investments like stocks, bonds, and mutual funds 

Having your emergency funds in accounts like these protects you against potentially devastating financial setbacks and allows you to build wealth passively through interest. 

Become debt-free 

There’s no better feeling than making a final payment and becoming debt-free! Deciding to pay off debt is an important step in the journey to financial independence, and here’s how the process works. 

Step 1: List all your debts, balances, interest rates, and minimum monthly payments. 

Step 2: Pick a debt-payoff method. Common ones include: 

• Debt snowball. The debt snowball method involves paying off your smallest balance first while making minimum payments on other debts. Once paid, you roll that payment into the next smallest balance, then repeat until all debts are cleared. You get the psychological reward of seeing a balance go to zero, which can motivate you to keep at it! 

• Debt avalanche. Some people find that the debt avalanche method works better for them. This method prioritizes paying off the highest-interest debt first with above-minimum payments while maintaining minimum payments on other debts. After clearing the highest interest balance, the payment is allocated to the next highest interest debt, gradually working down to the lowest interest balance. 

• Debt consolidation. You can also explore debt consolidation options like personal loans or balance transfer credit cards that combine multiple accounts into one. 

Step 3: Find ways to put more money toward debt payments. For example, you can: 

• Increase your income with side hustles or getting a second job. 
• Live frugally and trim expenses by canceling online services, cutting entertainment spending, and avoiding unnecessary purchases.

Step 4: Stay committed and trust the process. 

• Keep your debt goals where you can see them to stay motivated when things feel challenging. 
• Celebrate milestones like paying off an account or reaching debt reduction percentage goals.

Invest for retirement 

Retirement investing involves saving and growing funds in accounts or financial products for future needs. It requires strategic decisions and long-term planning to ensure a comfortable retirement. 

Key concepts to understand about investing for retirement include: 

• Compound interest: Earning interest on both your initial investment and the accumulated interest over time. Reinvesting boosts growth, especially when you start early. 
• Diversification: Spreading investments across different assets, such as stocks, bonds, and real estate. 
• Asset allocation: Dividing investments among asset classes based on risk tolerance, goals, and timelines to create a diversified portfolio tailored to your age, income, and retirement timeline. 
• Tax-advantaged accounts: 401(k)s, IRAs, and Roth IRAs help grow retirement savings more efficiently with tax benefits. 
• Monitoring and rebalancing: Knowing the health of your finances and adjusting your investments is a normal part of your financial life. You’ll likely have to modify your retirement portfolio to maintain diversity and reflect changes in your risk tolerance, income, and financial goals. 

Understanding and applying these concepts helps you make informed decisions about retirement investments. Consider seeking the advice of a financial advisor to help you get started. 

Live below your means 

If you're tired of living paycheck to paycheck, it's time to live below your means by intentionally spending less than you earn. The benefits of living below your means include: 

• Reduced financial stress 
• Increased savings and investments 
• Reduced debt (or no debt at all) 
• Mindful spending 
• Value-based lifestyle 
• Contingency plan for unexpected events or economic downturns 

Here are some of my favorite frugal lifestyle tips: 

• Plan meals to reduce grocery costs 
• Limit streaming services and consider cheaper cable plans 
• Cut back on clothing purchases 
• Opt for home date nights and find free or low-cost entertainment 
• Use store-brand products and make items at home 
• Shop thrift stores or find free items online 
• Differentiate between needs and wants 

As you start living below your means, practice intentional gratitude. Every month I’m grateful for the security of having a roof over our heads, lights, running water, and a stocked pantry and refrigerator. It makes our financial sacrifices feel worthwhile! 

Increase your income 

After cutting expenses, you should focus on increasing income to achieve financial independence. Ways to boost earnings include: 

• Taking on a second job or starting a side hustle 
• Monetizing hobbies and talents 
• Negotiating higher salary or benefits 
• Pursuing career advancement or education 
• Enhancing productivity at work 
• Networking for job opportunities or partnerships 
• Explore ways to generate passive income 

Monitor your credit 

Your credit report and score are vital for accessing credit and favorable rates, enabling financial milestones like buying a car or home. Regularly monitoring your credit is essential to catch errors that can impact your life. 

These are some tips for improving your credit: 

• Pay bills on time 
• Reduce balances or increase credit limits 
• Keep balances low or pay them off monthly 
• Diversify credit types cautiously 
• Avoid opening multiple accounts rapidly 

Building good credit takes time and discipline but offers benefits like favorable loan terms. 

Consider working with a financial advisor 

When faced with complex financial situations or challenges, seeking professional advice is often the best action. Look for a qualified advisor skilled in your specific financial needs, such as investments, retirement, tax, insurance, or estate planning. 

Start your journey toward financial freedom 

Becoming financially independent doesn’t happen overnight. It’s the result of years of disciplined and intentional decisions. And no, financial independence doesn’t require a degree in finance, a six-figure income, or winning the lottery. Most of us can budget, set goals, improve our credit, and invest the money we do have. We just have to make these a priority. 

Now that you know how to be financially independent, you can start your journey to financial freedom and wellness today!