How to become financially independent in 4 simple steps
Financial independence is a noble pursuit, but what does it mean to be financially independent? Well, it’s the ability to live without having to rely on things like employment, social security benefits, or your parents.
Most people have no idea how to become financially independent without working full time for 20+ years. But it doesn’t have to be this way. Here’s some steps to financial independence you can start with today.
1. Take stock of your finances
The first steps to financial independence involve taking a long hard look at your finances. You’ll need to know your income and your spending habits like the back of your hand if you want to improve your bottom line.
Once you’ve calculated what you spend on average per month the spring cleaning can begin.
You should usually start cutting things like luxury items. And, if you need, you can go all the way to canceling memberships or subscriptions to things you barely use.
As I mentioned in a previous article, something as basic as making coffee at home instead of buying one at a Starbucks can save you hundreds of dollars a year. There are many ways you can cut back, so make sure you shop around for things like cheaper car insurance. Every reduction will help you on your way.
2. Manage your debt efficiently
Unless you’ve found a way to live off the grid, you probably have a few outgoing expenses including some debt. Staying in debt is not how to become financially independent.
While it may seem impossible to be both in debt and financially independent, a little debt is no death sentence. A mortgage is a form of debt, but if you make a passive income on your property that covers your monthly repayments, then it’s a necessary expense.
Prioritizing debt over investments might be the right move for one person, but it might not make the most financial sense for you. If debt is a big issue for you, then focus on reducing it to a sustainable level. It may be worth consolidating your debt into one loan, so it’s easier to calculate.
3. Improve your financial literacy
If you don’t do your homework when it comes to investing, then you’re walking into a minefield with a blindfold on.
As an investor aspiring for financial independence, you need to understand the balance between risk and reward. It’s absolutely vital that when you look at an investment, you can assess how likely it is to be successful.
It’s not enough to just invest in high returns. Some great interest rates come with killer fees that can eat into your profits. Low-interest investments often give you the most reliable returns with the fewest fees.
If you’re relatively new to investing, it’s worth checking out the articles we’ve written detailing the differences between secured and unsecured loans, the difference between APR and APY, as well as all the articles we write concerning different investment opportunities. We try our best to teach you how to become financially independent.
4. Make your money work for you
So, you’ve taken stock of your finances, sorted out your debt, and gained some knowledge about finance. Now for the real meat and potatoes
The key to true financial independence is generating enough passive income through investments to completely cover your day-to-day living costs. It’s usually not something that will happen overnight, but it’s something that anyone can work towards. As you may imagine, how much you’ll need varies from state to state, but MIT worked out that it’ll be between $22,000 and $30,000.
So, how do we get there? Steadily and patiently. You need to choose investments that conform to your personal appetite for risk also provide adequate returns.
It’s also important to choose investments that will keep you ahead of inflation – meaning that you exceed the fed’s expected 2% annual rate with your returns. Otherwise, you technically are losing money. That means a savings account probably won’t cut it.
Finally, if you want more resources on how to become financially dependent, you live in the right time. There are tons of people who’ve managed to do it already and share their secrets with others in online forums. Just remember that if they’re trying to sell you a get rich quick guide, think twice. They probably still need money!
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