Financial independence is the ability to live from the income of your own personal resources. – Jim Rohn
Everyone dreams of achieving financial independence in life. No doubt, it’s worth striving for.
Financially independent means you have enough income to cover your necessary expenses without being employed or dependent on others.
But let me tell you, it doesn’t necessarily mean that you have to leave your job. You can continue with your work, if you want to.Well, who doesn’t want that?
But only talking about achieving financial independence won’t work. You have to make a foolproof plan for it. So, we have listed some of the best possible ways for you to plan for achieving financial independence. Let’s dive in…
Financial Independence Plan in 7 Steps
1. Know Basic Financial Calculations
Buddy, you are just a few calculations away from taking the baby step to your financial independence (FI).
The FI formula has two parts. The first part you need to calculate is your FI number.
FI Number = your yearly expenses / safe withdrawal rate (the percent of your net worth you can safely withdraw without hurting your finances)
For the second part you need to figure out how many years you might need to achieve FI.
Years to Achieve FI = (FI number – amount you have already saved) / annual savings
Wait! It doesn’t end here!
You need to calculate how much money you will spend each month once you achieve financial independence.
The best way to do that is to find out how much you spend every month at present. You can multiply your monthly expenses by 12 and find out your estimated annual expenses after you become financially independent.
Let’s say, you have achieved financial independence. Now, you might be confused thinking about how much you can spend?
Well, for that, the 1998 Trinity study has suggested a 4% rule. Have you heard this before?
The study has suggested that the safe withdrawal rate is about 4% of your net worth every year. If you follow this rule, you won’t likely run out of money throughout the rest of your life.
2. Plan Your Budget
Are you struggling to track your dollars at the end of the month?
Well, it’s quite normal if you aren’t following a realistic budget. If you have already planned one but are unable to follow it, then my friend you need to plan a more realistic budget.
Well, you must have heard about the traditional budgeting. But I would suggest you go for 50-30-20 budgeting. But what is that?
Harvard bankruptcy expert, Elizabeth Warren, coined the “50/30/20 rule” for spending and saving with her daughter, Amelia Warren Tyagi.
As the name suggests, you need to divide your net income into three percentages, i.e., 50%, 30%, 20% for your needs, wants, and savings respectively.
Most of us tend to spend lavishly on our wants. But this budget plan can help you to cap your expenses on your wants to 30%. And most importantly, save the rest 20% for your retirement, emergency fund, etc. so that you don’t need to depend on loan(s) during any exigency.
You might face some hurdles while following your budget in the initial months. But trust me, once you get addicted to your budget, you are going to stop overspending. And eventually, start saving a substantial amount of dollars every month.
3. Avoid Lifestyle Inflation
Most of us tend to spend more when we have more. But it’s a trap to avoid.
Let’s say, you have got a raise in your paycheck. And you are planning to buy your dream car or home or going for a long-awaited vacation. But let me tell you, even with a handsome raise in your salary, you might end up living paycheck to paycheck.
Yes, you heard it right!
Always remember, the spending decisions you are making today are going to affect your financial situation tomorrow.
The best way to refrain from lifestyle inflation is by sticking to your budget, no matter what.
You may transfer the excess amount to a high-yield savings account to earn more interest than the brick-and-mortar banks.
4. Stay Away From Debts
Are you using a credit card?
If yes, you need to use your credit cards wisely. Firstly, you need to pay off your outstanding balance amount on time, preferably by the due date. Doing so, you don’t need to pay any interest on your payable amount.
What if you don’t pay off your outstanding balance amount within the due date? Then, the credit card company is going to levy high interest on your payable amount. So, you will have to pay a much higher amount than you owe.
Secondly, never make only the minimum payment. Never! If you continue making minimum payments on your credit cards, then it will take more time to pay off your debts. And your incurred interest on your outstanding balance amount will be huge.
So, put some extra effort to pay more than your minimum payable amount. It will help you to pay off your outstanding balance amount faster and save more on the interest payments.
However, if you are already overwhelmed with debts, you can get advice on dealing with debt from a genuine debt relief company. They will guide you to opt for a suitable debt relief option based on your debt amount and financial condition.
5. Pay Yourself First
Gone are those days when you used to save the remaining dollars (if any) at the end of the month.
But now, you have to change this habit. You have to keep aside some funds at the beginning of the month.
Save before you pay your utility bills, buy groceries and any other basic expenses. Living with what is left after paying yourself is a great way to achieve financial independence.
6. Create an Emergency Fund
We humans can’t predict our future. So, how will you handle if any mishap that occur?
Yes, there lies the importance of a rainy day fund. You may tend to take out a loan to cover any sudden expenses.
And during any exigency, fast cash options appeal because of their faster disbursement. But doing so, you might end up getting trapped in debt.
Yes, you heard it right. The high-interest rates along with stringent terms and conditions are enough. Make sure you don’t fall prey to this debt trap.
If you are financially prepared, you can handle any emergency in a better way. So, start saving a specific amount for the rainy days ASAP.
7. Invest for a Better Future
Hopefully, you have been saving dollars every month for becoming financially independent. But are you keeping your funds idle, earning no interest?
Then, buddy, you might take a long time to achieve financial independence. What you need to do is to make your money work for you. You can grow your savings by investing.
But figuring out what is good and what is bad is quite a tough task. Because nothing is guaranteed.
Decades ago, you could simply invest your money in Treasury bonds and earn a handsome interest as steady income with virtually no risk. But interest rates have dropped since the 1980s.
Still, when investing for the long term, time is on your side. You can ignore the ups and downs of the bear market. And you can focus on the quality of the portfolio and performance over a longer period.
Over the long term, investments with some risk, such as stocks can offer you the best overall returns.
If you aim to achieve financial independence, you may take a bit of short-term risk to maximize the chances of growing your nest egg.
So, don’t wait! Follow the above steps to achieve financial freedom and lead a stress-free life.
Congratulations in advance!
One again, this post comes from Valentina over at Best Debt Consolidation. I hope you enjoyed it and if so, please share the article or leave a comment below.