Raise your hand if you’d like to stop worrying about money! That sounds like a dream. Unfortunately, being human, it costs money to live and take up a space in a society. Many of us live pay check to pay check or barely make it through the month before school fees and bills are due again, starting the cycle from scratch. Not even to mention when something unexpected happens, like your car breaking down or a throbbing tooth putting you in the dentist's chair. This barely gives you a chance to put even the smallest amount of money aside and work on your savings. But how can we break this cycle, become financially independent, and stop worrying about money once and for all?
First things first, what does it mean to be financially independent?
Financial independence is the status of having enough income (from investments, passive businesses, real estate, etc.) to pay your reasonable living expenses for the rest of your life without having to rely on formal or full-time employment.
We’re sad to inform you that this doesn’t happen overnight. It’s more about the journey and each small step along the way that results in you being financially independent in the end.
Financial independence means different things to different people, so you’ll have to be very specific in defining it for yourself. Once you have that established, the next step is to create a plan to attain it all.
Ideally, the average person aims for financial independence by the time they hit retirement age, but nothing is stopping them from reaching financial independence earlier. So how do we do that?
Step 1: Visualise, then plan
As stated above, we have to have a clear definition of what financial independence means to us. Once you’ve set this definition in stone, start breaking that umbrella term into smaller, more specific, and easier-to-manage chunks. This will give you a set of goals to achieve on your way to independence. Prioritise these smaller goals and rank them so that you know what to tackle first.
Step 2: Budget
To make the necessary changes, you first have to know what you’re working with. So draw up a simple budget where you note your income, expenses, and savings. Now, take it a step further and rank the expenses from most important to least critical. The expenses at the bottom of this list can be eliminated or better put to use if you need to pay off some debt or add to your savings or investments.
Step 3: Balance the scales
Now that you know what you’re working with, you can start cutting back on the non-essentials. It might be obvious, but it's one of the most difficult financial behaviours to execute. Adhering to a lower standard of living and expenses will help you put more money into savings and investments sooner.
Step 4: Set up a safety net
An emergency fund is critical for helping you stay out of debt. Just think about it, what do we do when the fridge breaks or the car needs new tires? We reach for our credit cards. So building an emergency fund will keep you on the right side of your credit and possibly prevent you from splurging on an item, rather than buying within a budget.
Step 5: Bust those debts
Get rid of any debt you have as soon as possible. You can start by tackling the smaller ones first, such as your clothing account, credit card, or cell phone payments. Then you move on to bigger items, like your car and the house. You’ll be shocked to learn how much you can save if you pay off debts sooner than the specified interest terms.
Step 6: Have a look at your job
Financial independence doesn't mean you have to quit a career you love, but you really can't get to financial independence without a steady income to nudge your savings and investments in the right direction over time. If you need to ask for a raise or jump ship to help you reach your goal, we say, go for it!
Step 7: Scale down
You’re bound to reach your goals faster if you cut your overall living expenses. If this means selling your home and moving into a smaller one, why not? It’ll not only help your journey to financial independence, but also save you some back aches when it’s time for spring cleaning again. The same goes for vehicles. If each of you has a car and you can realistically get by with less, get rid of the extras.
Step 8: Invest, invest, invest
Talk to a financial adviser or the investment department at your bank and get started. If you’re already dabbling in a few, make a full evaluation of the fees you are paying on every investment account you have and any fees of licensed professionals who sell you financial products and revise. They can cut significantly into your principal investments.
Step 9: Add assets and sit back
An asset can be described as anything useful or valuable, in this case, something that will generate income for you. This can be in the form of stocks, real estate, collectibles, or cash investments. Just remember to do your homework and focus on investments bought at attractive prices that are likely to appreciate over time.
Step 10: Keep tabs
Like we said, financial independence doesn’t happen overnight and financial planning isn't about making one set of financial decisions and assuming you're set. Things change. It's important that your planning be flexible enough to withstand both positive and negative changes without derailing your hopes for financial independence. If you’re unsure about anything or not comfortable with all the aspects of financial planning or investments, it’s fine to rope in the experts. But don’t just sit back and forget about it. Watch what they do, and learn from them, so that you can have your money issues at your fingertips.
There you have it. Are you on the road to financial independence? Do you have any tips to share with us? Join our member’s group on Facebook and share your tips and tricks with us. We can’t wait to hear from you!
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