Want Financial Independence? Keep Reading To Learn How To Be Financially Independent
So you want to be financially independent? We don’t blame you. The freedom and relief that comes from not depending on others to live your life well is priceless.
But the truth is many people are seriously struggling financially. Nearly 1/3 of American adults say they are absolutely struggling or “just getting by.”
If you do not want to struggle anymore and gain financial independence, you may not be sure exactly what steps to take.
That is why we have created this guide to becoming financially independent. We will give you a financial independence definition as well as steps to take for achieving financial independence.
Before you know it, you will start down the road of being financially independent.
What Is Financial Independence? A Financial Independence Definition
Before we discuss being financially independent, let’s talk about a financial independence definition. What exactly qualifies as becoming financially independent?
Financial Independence Definition
You will never find one magic number that tells you that you are now financially independent. That is because the cost of living changes all time from city to city and year-to-year.
On top of that, everyone has his or her own standard of what wealthy looks like. For example:
- Some may thing simply being able to pay their regular mortgage, car payment, and children’s college education without depending upon a job qualifies them as wealthy
- Others may think they would need a mansion, three exotic vacation homes, five cars, and a private jet to be wealthy
These reasons are why it can be hard to land on a clear financial independence definition.
The Business Dictionary defines financial independence like this: “Individual or family that can provide for, from its own resources, at least two of the three major expense categories: housing, food, and other living expenses.”
For this article, we will hold to that financial independence definition and add:
- Think about the lifestyle you want to be living and how much money/resources it will take to live that way without help from a family member or employer. That is your personal financial independence definition.
To help you figure out where you land, put your information into a financial independence calculator like this Early Retirement Calculator.
The Irony Of Becoming Financially Independent Through Others
Here is the hard truth: many people are have become financially independent because of others. This may seem counterintuitive since independence by definition means not relying on or depending upon somebody else. But it still happens, and it works like this:
Becoming financially independent sometimes does not start with independence. It can start with somebody else’s money.
But becoming financially independent ends with independence. They have wealth in their own name that they now control.
- Large lawsuits
Most people will not have the opportunity of being financially independent in this way. So let’s focus on how to be financially independent through other methods.
Ways To Become Financially Independent
So how does one go about achieving financial independence if they are not born to a wealthy family or gain a large inheritance?
Here are the most reliable tips for becoming financially independent this year.
- Make a future plan
- Get out of debt (and stay out of debt!)
- Spend less and budget
- Take advantage of compound interest
- Add extra streams of income
- Try passive income methods
Now we will go through each of these ways to become financially independent in more detail.
Make A Future Plan
You cannot get someplace if you do not know where you are going. Learning how to be financially independent must start with plans and goals.
Achieving Financial Independence
- First, decide what your version of financially independent looks like: perhaps you simply want to be able to live comfortably in your current home without working anymore. Or you might want to travel extensively and have 10 cars.
- Then see where you are now. Figure out exactly how much money you will need to make to turn your financial independence definition into a reality. You can easily do this through a financial independence calculator online.
- Next, make a specific plan that focuses on these goals. Typically, the best idea is to partner up with an experienced financial advisor who can guide you into financial independence
- Finally, stick to the plan and accept that you may have some “poorer” early years that will eventually lead into becoming financially independent
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Get Out Of Debt And Never Fall Into It Again
Nobody in any sort of debt can ever actually be financially independent. Living a wealthy life while having debt is just an illusion. At the end of the day, you are dependent to your creditors and lenders.
Becoming financially independent always starts by clearing off debt and making a plan to never be in debt again. Once the debt is gone, you can start building wealth and achieving financial independence.
Start by paying off your highest interest credit cards or loans first. Once they are paid off, that money can go into savings and investments that help you become financially independent.
Spend Less Than You Earn/Budget
The goal of financial independence often requires that you live as though you are poorer than you are at first, so you can live with freedom and wealth in your future. If you want to know how to be financially independent, first you must be financially responsible.
If you are constantly blowing your money, you will never have enough net worth to ever be considered financially independent.
- Live below your means
- Create a detailed budget that leaves room for investing
- Save money now, so you can enjoy financial freedom tomorrow
Once you have used a financial independence calculator to see where you need to be to meet your goals, you will have a better idea of just how much you need to budget over the next few years.
It is quite feasible that some people who simply downsize their lives can achieve financial independence without gaining more money.
There is such a thing as being “house poor.” This means your extremely high mortgage payment, utility payments, and upkeep costs drain all the money that could be used living a comfortable, stress-free, financially independent life.
If you downsize, you not only save money on your mortgage, but you also save money by:
- Heating/cooling a smaller area
- Selling furniture that will no longer fit in your home
- Paying less property tax
All of this extra money can be used for becoming financially independent with the two steps below: taking advantage of compound interest and investing.
Take Advantage of Compound Interest
Up until this point, we have been focusing on ways to eliminate date and save money to start your journey to being financially independent.
Now let’s focus on making more money as a step toward financial independence.
We will start with compounding interest. Here is how it helps you:
- Say you invest $1000 in something that earns 5% interest monthly. You will earn $50 that first month for a total of $1050
- If you allow your interest earnings to stay with the principal, you keep earning more each month. The next month you could earn $52.50 in interest. And the next month you could earn $55.12 in interest and so on.
Compound interest continues to build your money larger and larger. When you have multiple sources of this compound interest, achieving financial independence becomes possible.
So search for compound interest account options, or ask your financial advisor to set you up as you aim for becoming financially independent.
Add Extra Streams Of Income
Another way to gain financial independence is by adding extra streams of income. Most likely, you still have a full-time job if you are not yet financially independent. But that one job may not provide enough money for achieving financial independence.
How to be Financially Independent
Here are some ideals to have multiple streams of income coming in, an important step in becoming financially independent:
- Get a part-time job in the evenings or weekends
- Start an online business/e-commerce store you can manage on your downtime
- Become a realtor or freelancer, jobs that give you full control and flexibility to work around your other job
- Sell your hobby (example: put your sewing creations up on Etsy, or teach neighborhood kids how to play the piano)
Since you already cover your needs through your first job, this extra money can either go entirely to wealth-building activities that lead toward financial independence.
Try Passive Income Methods
We have focused on the importance of having multiple streams of income in order to become financially independent. Now let’s focus on one of the best types of income to for financial independence: passive income.
Here is the difference between active income and passive income:
- When you are a plumber, a teacher, a lawyer, a nurse, etc. you get paid for the time you are actively putting into your job. This is the most common form of income and it is active.
- Passive income often takes a little initial work, but then the money comes in even when you are not actively spending time on the project.
Examples of passive income include:
- Selling an eBook or course online
- Setting up a website with affiliate marketing
- Starting a podcast
- Building an app and then selling it
- Renting out a vacation property
The reason passive income is so important to becoming financially independent is time. You only have a certain number of hours each week.
So if you can set up ways to earn money without taking up much of your time, you can have quite a few sources of income at one time. This leads to achieving financial independence.
Without a doubt, investing is one of the most important steps if you want to know how to be financial independent. You will only be able to make a certain amount of money.
Then you need that money to start building itself in order to be financially independent.
Options for investments that can aid financial independence include:
- Mutual funds: Investing in multiple companies all at once to limit risk
- ETFs: Like mutual funds, but they are single stocks that will be traded on the stock market
- Certificates of Deposit: Slow-growing interest accounts that are extremely safe
- Real estate: Buy property to rent out or to flip
- Companies: If there are new companies you believe in, you can give some startup investment for a share of future profits
The best option is to talk with a professional financial advisor and share your goals of becoming financially independent. He or she can help you decide which is the right choice for being financially independent.
Most likely, they will advise you to invest in multiple ways to prevent any major losses that may force you to lose your financial independence.
Conclusion – How To Be Financially Independent
Now you have a better idea of how to create your own financial independence definition, and you have methods to try to gain the financial independence you are craving.
Remember that being a person who is financially independent often takes plenty of time, hard work, and initial sacrifice.
But if being financially independent is your goal, these ways of becoming financially independent should eventually lead to you to the life you want to have.
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