6 Steps to Financial Independence
It is not a mysterious or lucky path that will get you to financial independence. You don’t have to be an investment guru. If you don’t come from a family of money, you can still get there. It’s definitely not about picking the next bitcoin or other investment fad. Rather, the easiest path to financial independence is straightforward and comes from your behavior. Here are six steps to put you on your way.
1. Develop a Saver’s Mindset. Make savings a priority and you’ll quickly develop the habits to become a great saver. When something is important to you, you stand a higher chance of getting it done. Soon, you’ll start questioning purchases in new ways. “Do I really want to work 15 hours just for a pair of shoes?” Or “Is a $500 per month car payment versus a $250 monthly payment really worth giving up 4 years of retirement?” You’ll find a way to spend money on things that are really important to you in life and stop needless spending on things that do not provide you with happiness in the long run. And be sure to celebrate when you hit savings goals.
2. Live below your means, not just within your means. Unless you have money over and above your cost of living, you cannot really save. It’s math. You need surplus dollars to save or else you’ll be going into debt. This may take some budgeting to figure out exactly where your money is going. Make sure your big expenses are in line with your income. If you’re spending too much on housing or your car you may find it extremely tough to find surplus dollars to save. Look at these big expenses first and be prepared to make changes. Hint, if you have debt where you can only afford the minimum payment or you’re not saving much at all, you’re probably living above your means.
3. Automate your finances. Pay all your bills automatically so you avoid needless late fees or penalties. Also, a 401(k) plan is a great way to automate. If you contribute to an IRA, try to do it on an automatic monthly basis. A great side benefit of investing monthly is dollar cost averaging. This means that when the prices are down, you buy more shares. And when prices are higher, you’ll be buying less shares. This helps lessen the timing risk of investing. Investing automation is the easiest way to ensure that you pay yourself first.
4. Avoid bad debt at all costs. Credit card debt and other consumer debt can diminish the amount you can save. Pay off your credit card balances each month. Not all debt is bad, especially if it is an investment in an asset (house) or yourself (education). I consider a car a necessary expense and not an investment, so try to pay it off sooner than scheduled. If you’ve racked up some credit card debt, focus on paying one card off at a time. If one card has a significantly higher interest rate, target that one first. If they all have similar rates, target the smallest one first. Pay the minimum payment on all the others and put as much as you can towards the target until it is gone. Then go after the next one. And rejoice when each is paid off!
5. Save enough. This is the biggest determinant of whether you’ll make it to financial independence. It will be almost impossible if you are just saving 3% of your pay. At a minimum, you’ll need to save 10% to 15% of your earnings. If you don’t start saving until you are in your 30’s or 40’s, then you’re looking at 15% to 20%. Try to save more over time. When you get a raise or pay off a debt, use that new cash flow to save more.
6. Develop an investment plan and stick to it. Make sure you have an appropriate asset allocation, stay diversified and stay away from trying to time market swings. Keep your investment costs low. Use index funds and ETFs as a low-cost base for your serious money. If you want individual stocks, try to have at least 10 to 15 stocks in your portfolio. Lastly, keep your investment costs low. Paying just an extra ½ percent in investment fees could cost you several hundred thousand over your lifetime. Always know what you are paying and look to less expensive alternatives that are just as effective.
As you can see above, most of the steps to financial independence are behavioral. They don’t require a finance degree. There will be times in your life when these steps might be tough to do. You may be out of a job and be forced to take on some debt for example. Or you have a big expense that you weren’t counting on. That’s just life . But if you’re reading this post, you’ll likely have a steady income most of the time and following these steps over many years will lead to some wealth accumulation. Hopefully, a lot of it.
Enjoy the journey!