Achieving financial independence is a goal that almost everyone has as it brings you the personal freedom to do what you want. The start of a new year is a good time to update your financial strategy.
Defining Financial Independence
The first thing to do is define what “financial independence” means for you. This varies drastically from person to person. It is informed by who you are, where you are coming from, and what your experiences with money are. A person who has had serious financial troubles in their life might have different expectations than a person who has enjoyed relative financial stability.
Start by having a values-based conversation with the decision-makers in your household, meaning any tax-paying adult who contributes income and shares responsibility for the bills. This could be your spouse or a family member. Make sure that the non-essential things you are spending money on line up with your commitments to meeting your financial needs. This is a “ Am I spending money on the things that matter to me?” conversation not necessarily a “stop getting lattes” conversation. Defining and prioritizing these things is an important part of this step.
How, then, is “financial independence” defined? First, ask yourself what you need to feel secure, financially speaking. To start, consider taking these steps:
Prioritize Retirement Savings
Saving for retirement is something often put on the back burner until it is too late. The sooner you begin saving for retirement, the more time these savings will have to grow and the better return you will have on your investment. One of the most effective ways to save money is to automate the process and set up automatic transfer of regular contributions going into your retirement account. Make sure you take advantage of any matching contributions you might get from your employer and then determine how much you are able to invest in a brokerage savings account each month. Even small contributions can now grow significantly toward retirement through the power of compound interest.
Take Control of Your Debt
Debt can be one of the primary factors that can hold you back from financial success. In fact, the average adult has around $103,358 in debt.1 The good news is that there are strategies to pay down debt and work toward financial independence. This includes all types of consumer debt, such as credit cards, personal loans, student loans 2, mortgages and auto loans.
Is becoming totally debt-free an achievable goal? It can be, if you make it a priority. That said, being totally debt-free can be a difficult task for most households. For that reason, it may be better for you to focus on good versus bad debt and make debt freedom a target for a later date: for example, being debt-free by retirement.
Consider automating payments, especially for regular items, including student loans, credit cards, and other installment payments. Credit cards are some of the worst debt to carry with high-interest rates that can increase your debt every month they aren’t paid off. If you’re able, pay off your credit card balance in full each month. Additionally, pay them on time to help you build good credit.3 If possible, it’s best to treat your credit card like a debit card, meaning you don’t spend more than you have. Once you have high-interest debt like this paid down, you can focus on low-interest debts like mortgages, auto loans and student debt.
Make an Emergency Fund a Priority
Medical costs, major vehicle repairs, job layoffs, and house maintenance can quickly derail a budget. Make sure that you have a fund set up specifically to handle these unforeseen expenses so that you don’t have to alter your monthly budget to accommodate. A good rule of thumb for an emergency fund is to create an emergency fund reflecting at least 6 months of household expenses to establish a stable foundation going forward. If that seems too ambitious, build the fund a month at a time until you reach your goal.
Budget an amount each month for your emergency fund. If an emergency were to require the funds sometime during the year, you will need to re-establish your cash reserve.
Create a Long-Term Financial Plan
Make long-term financial goals. Draft a plan that includes saving, investing, and other ways to build the wealth you need to achieve these goals. If you are thinking in terms of buying a house or retiring,4 for instance, let that guide your overall financial strategy. Goals can be more difficult to set if you have difficulty envisioning the rewards that come with financial stability.
As you involve yourself in investments further, you may find other opportunities to invest smarter with an eye towards tax efficiency. If you’re looking to expand, consider working with an investment advisor who can provide tailored, complex investment strategies.
These are, of course, not hard and fast rules. As mentioned above, every individual has their own specific definition of financial independence. Some of these examples might feel like a long reach. Others, you might already be practicing. Achieving financial independence isn’t something that happens overnight. If you plan and save, however, it really can pay off for you in the long run. Not only does it help you to build savings, but it starts strong habits for the future. If you're unsure where to start, an experienced financial professional can help address your concerns and develop tailored strategies going forward.