People can choose to define financial independence in their own way — after all, not everyone wants a private jet and a mansion. However reaching real financial independence — the ability to live comfortably off one’s savings and investments with no debt whatsoever — could be easier than you think.
It takes a plan. Many individuals — particularly those with a healthy self-discipline and solid financial guidance — can reach this goal. Here are 10 ideas to get started.
Visualize first, then plan. Anyone’s vision of financial independence can probably use a reality check. Start by considering what your vision actually looks like and then gather some qualified financial advice to set — or reset — your course. The path to financial independence may be considerably different at age 20 than it is at age 50; the more time you have to save and invest generally produces a better outcome. But whatever age you are, start by getting a realistic picture of what options you have.
Budget. Tracking your finances effectively starts with budgeting – the process of measuring income, subtracting expenses and deciding how to divert the difference to your goals. It’s the essential first task in achieving financial independence.
Spend less than you earn. Most of us have certainly heard this rule, but it remains one of the toughest financial behaviors to execute. One rule of thumb is to put between 10-15 percent of your gross income in savings or investments every week (which includes employer match if it’s available). Working couples might try to bank a substantial part of one salary if possible. In any case, adhering to a lower standard of living and expenses will help anyone put more money into savings and investments sooner.
Build smarter safety nets. Emergency funds and insurance are part of the financial planning picture, but they’re rarely discussed in combination. The traditional definition of an emergency fund is a separate account for cash that can be used instead of credit in a sudden emergency like an unexpected car or appliance repair. But it might be wise to evaluate current deductibles on home, car and health insurance to see if those amounts should be built into one’s emergency fund – many people keep deductibles fairly high to keep premiums low. Would you have cash on hand to cover deductibles if you had a sudden claim? If not, put that money in reserve. The more effective you are at dealing with financial emergencies, the faster your savings and investments can grow.
Eliminate debt. Though consumer debt levels have generally fallen since the 2008 financial crisis, the Federal Reserve Bank of New York reported in February that home, student loan, auto and credit card debt began creeping up again in 2014. Getting rid of revolving, non-housing debt is one of the most effective things you can do to free up money to save and invest.
Consider your career. Financial independence doesn’t require you to quit a career you love, but you really can’t get to financial independence without steady income to fuel savings and investments that will build over time. If you are behind on your financial goals, chances are you won’t be able to quit working, at least for a while. You might even consider expanding your sources of work-related income, such as consulting part time. Consider speaking with qualified financial and tax experts as you evaluate your current career income and benefits picture. Also keep in mind that over the age of 50, the Internal Revenue Service allows you to make catch-up contributions to both 401(k) and IRA accounts.
Downsize. Whether you are age 20 or 50, financial independence requires a personal evaluation of what money, property and items you will need to live happily and securely. It might also help to stop any “Keeping up with the Joneses” you’ve done in the past that’s unduly influenced your spending. Generally, you’ll get to your goal faster if you can cut your overall living expenses. For some, that means selling your home and moving to a smaller one or to an area with lower living costs and taxes. You can also sell or donate property you don’t need and use those proceeds to extinguish debt or add to savings or investments.
Invest frugally. Become a student of investment fees and commissions. When you’re able to add money to savings or investments, watch for fees, deadlines or penalty rules. Washington took aim earlier this year on fees on 401(k) accounts, but make a full evaluation of what fees you are paying on every investment account you have. And if you work with a qualified professional licensed to sell investment products, know how much you’re paying in investment and advisory fees for their services and discuss their performance.
Buy assets that generate income. No investment is foolproof – whether you invest in stocks, real estate, collectibles or cash investments, all have up and down markets. It is important to fully understand everything you invest in and focus on assets that will make money over the long haul. Reading widely on the subject of any class of investment you’re interested in will help you buy low so you can sell higher at a later date. Don’t forget to study the tax ramifications of any investment transaction you make.
Always know where you are financially. Financial planning isn’t about making one set of financial decisions and assuming you’re set. Lives and situations change and your financial planning must be flexible enough to withstand both positive and negative changes without derailing your hopes for financial independence. If your forte is not investing, financial planning or tax matters, by all means bring in qualified experts to help. But financially independent people generally have their money issues at their fingertips not only for their own use, but for estate purposes as well.
One last point. Being able to pay for a lifestyle you love without worrying about money is an enormous relief and reward. If you don’t feel you’re heading in that direction, consider putting some of these steps in motion today.