Being financially independent doesn’t mean you’re rich and can start buying luxury cars and mansions; it means that you can retire early, travel, and be able to spend quality time with your friends and family. You must take many steps to become financially independent, including learning how to manage your money and build wealth without taking on too much work. Here’s how you can gain financial independence in 2022.
If you strive to be financially independent one day, you’ll need to be able to think long-term, especially about retirement. While it might be tempting to blow your paycheck on things you want when you’re young, it will only hurt your chances of being able to retire early when you’re older.
Luckily, making lifestyle changes can help you retire more comfortably. To do that, you’ll need to think about your future. To figure out when you might be able to retire, you need to know how much money you’ll need to live off once you’re no longer working. This number is different for everyone depending on lifestyle, where they live, and how they want to spend their retirement.
To give yourself the most accurate number, you should consult a financial planner to help you realize your goals. For a general figure of how much you’ll need when you retire, multiply your annual spending by 25 to figure out your retirement needs. For example, if you spend $30,000 each month, you’ll need at least $750,000 to retire. Having a defined number to set as a goal can help you easily track your savings to ensure you’ll have enough for retirement.
To start planning for retirement or life insurance right now, you’ll need to create a budget to reduce spending and maximize your income. Budgets can help you take control of your finances by giving yourself spending rules. Your budget should aim to:
If you want to save money, you need to spend less than you make every month. Anything deemed as non-essential should be cut from your budget, but of course, you can reward yourself every now and then. However, excess spending can put you into debt. Instead of overspending, try to look at your current budget as a guide to help you determine what you can afford and what you can’t.
One way to eliminate unnecessary expenses is to look at your monthly bank statements. From there, you can see how much food delivery, streaming services, sports betting, and mindless shopping are costing you and start eliminating things by canceling subscriptions and cooking at home.
Even after cutting the unnecessary expenses, many people find that they are still living paycheck to paycheck, which means they’re not making enough money for their current living situation. Increasing your income is a necessity if you want to save more money over time. There are many ways to increase your income, including investments, getting a second job, or picking up a side hustle. Whatever you choose to do, make sure you never spend your additional money on shopping sprees; instead, put that money directly into your savings account or save it for a rainy day.
Even after creating a budget and eliminating unnecessary expenses, you should still track your spending. Small businesses use professional tax software to track their spending and income, and individuals can use a budget app to do the same. While you may not be running a business, you can look at your finances the same way an entrepreneur would, helping you realize that overspending can hurt you.
No one wants to work multiple jobs and feel exhausted all the time, so you must find ways to build income without working. Building a passive income stream allows you to earn money without putting in additional hours at the office. Instead, you could look into investing in stocks, cryptocurrency, or real estate. These investments will keep money coming in month after month through retirement and beyond. If you choose to continue building passive income after you’ve retired, you won’t have to rely on a pitiful Social Security check every month.
While your main goal is to become financially independent, you should still set milestones throughout your life. These milestones will serve as smaller goals that you can realistically reach and use to measure your progress. So, once you know how much money you’ll need for retirement and have a budget, you can start setting these milestones to ensure you can reach financial independence. Here are a few milestones to get you started:
As we’ve discussed, investing is a great way to build wealth over time. Even in an employer-sponsored retirement plan, investing early can help you retire earlier with less stress. You should always make room in your budget for your retirement contributions to earn compounding interest over time.
Being in debt means you’re farther away from financial independence because before you can even think about saving, you need to start reducing your debt. Of course, you can’t eliminate all debt at once. For example, if you just bought a house, you’ll owe hundreds of thousands of dollars for the next few decades. However, you can start somewhere, including paying off student loans and credit card balances, to help increase your worth.
You should reduce any type of debt you have and avoid getting loans while you’re trying to reach financial independence. But, of course, some loans are necessary, such as home loans and student loans. Additionally, getting an education and buying a house are ways to increase your net worth, so it’s up to you to decide which debt can help you in the long run and which can only hurt you.
If you don’t already have one, get a savings account immediately. Not only can a savings account give you somewhere to park your money so that it’s not available to you when you’re shopping, but many of them also earn interest. While the interest rate on many savings accounts is low, it is a way to help you make more money over time.
You can also enroll in an employer-sponsored retirement plan and take advantage of any company match.
These tips won’t help you if you aren’t committed to your retirement. Even if you avoid debt and pay off all your bills, you might still need to increase your income to save for retirement. Anyone can achieve financial independence, but it takes proper financial planning and strict spending rules to retire comfortably.
Matt Casadona has a Bachelor of Science in Business Administration, with a concentration in Marketing and a minor in Psychology. Matt is passionate about marketing and business strategy and enjoys San Diego life, traveling, and music.