11 Expert Tips on How to Become Financially Independent

In today’s world, everyone wants to know how to become financially independent. Nowadays, it’s a common dream to become financially independent. However, the meaning of “financial independence” can be different for people depending on an individual situation and needs.

Whether you want to retire early, start a new business, or simply enjoying a stress-free lifestyle, becoming financial independent is the most important factor.

In this practical guide, we will explore a proven framework that helps you to gain financial independence as well as create a path to achieve more in life.

First, we will understand what is financial independence?

What is Financial Independence?

Financial independence means your passive income exceeds your living expenses and you can make life decisions without thinking about the financial conditions. You can live your desired life without depending on your employment.

The term financial independence is often used for early retirement. In simple words, you can control your finances. You have peace. You don’t worry about your bank balance.

However, the meaning of financial freedom can be different for everyone. According to investopedia, for most people, it can be living a luxurious lifestyle or the freedom to live a life without the need of a job.

How to Become Financially Independent

As we said, “financial independence can mean different for people such as debt free, working for less hours, or simply living without stress. Whatever you think about financial independency, the following tips can help you achieve financial independence.

Here are the 11 expert tips on How to Become Financially Independent:

  1. Setting Clear Financial Goals
  2. Create a Budget and Track Expenses
  3. Pay Off Your Debt
  4. Increase Your Income & Build Multiple Income Sources
  5. Start Investing In Your Retirement Future
  6. Save for Emergencies
  7. Try to Live Below Your Means
  8. Watch Your Credit Score
  9. Take Care of Your Health
  10. Get Professional Financial Help
  11. Stay Updated on Financial Trends

1. Setting Clear Financial Goals

The first step to become financial independent is to build clear and realistic financial goals. Your goals can be paying off debt, saving for an emergency fund, or investing for the future. You have to be more clear about your goals. If your goals are more clearer, there will be higher chances of achieving them:

You must note down these three objectives:

1. What lifestyle do you want?

2. How much should be in your bank to achieve this?

3. At what age you want to save that amount?

Once you’ve set your goals, you can now start to figure out what you’ll require to achieve your goals. To achieve your goals, stop spending money on unnecessary things, increase your income, start saving, and investing for the future. These are the best ways to save on low income.

2. Create a Budget and Track Expenses

One of the most fundamental aspect of financial independence is creating a budget and tracking your expenses. Creating a monthly budget is the best way to make sure all bills are paid on time and savings are on track. Make it a regular routine and stick to it.

An effective way to start savings is “50/30/20 rule”, a traditional method for after-tax income. Here, is the breakdown of this rule:

50/30/20 rule

If you keep going with this formula, it becomes very easy for you to manage your finances. You also learn to balance your priorities. Create a list of your large monthly expenses, debt payments and other spending. Also, list your unnecessary withdrawals and start tracking your expenses to see where your money is going.

3. Pay Off Your Debt

If you have debt like credit cards, education loan or card, it’s time to pay off or reduce your debt. Because, if you are spending hundreds of dollars on debt payments every month, you will never gain financial freedom.

Paying off your debt is the best way to reduce your expenses such as credit card balances. The lower your balance is, the less monthly interest payments will be. Also, make sure to pay off your debt during the promotional period and check if you can transfer your balance to a card with a low or 0% interest rate.

If you want to become debt free fast, ask your provider how much money you can pay monthly or annually without penalty.

4. Increase Your Income & Build Multiple Income Sources

Always look for ways to increase your income. As you know there are two types of income – active income and passive income.

Active income requires your personal involvement to earn money while passive income doesn’t require much effort from you. For eg. passive income may include returns from investments or income from renting a house.

Try to make multiple income sources to overcome sudden financial crises. You can start side hustles, investments, find a high-paying job, or doing extra shifts at work to generate more income. Also, you can boost your income by asking for a raise in income.

Plus, you can rent your car or consider renting out your extra space in your house like basement or a property.

5. Start Investing In Your Retirement Future

Start Investing In Your Retirement Future

Investing is one of the most important task in the journey to become financial independence. To generate passive income, start investing early to generate more income in future. Keep in mind, don’t put

When it comes to investments that generate passive income, you don’t want to put all your eggs in one basket. By diversifying into many different investment types with various levels of risk, you’re more likely to achieve continued returns over the long term.

Start by taking advantage of tax-favored retirement options at your work like 401(k) or 403(b). According to a survey by the National Study of Millionaires, 8 out of 10 millionaires invested in their company’s 401(k) plan. This played a major role in their financial success.

Now, a question arises on how much should you invest? You should invest around 15% of your income toward retirement.

6. Save for Emergencies

If your main goal is financial freedom, you need a fully funded emergency fund that will put you on a path of financial independence.

Emergency funds act like a backup for unexpected situations in life like broken items, car repair, and health emergencies. To tackle these situations, try to do savings for next 3–6 months to cover unwanted expenses.

Make sure to invest in the right accout for your emergency fund. You’ll need a bank account that pays high interest rate on your savings and allows you to withdraw your amount without penalty.

7. Try to Live Below Your Means

Yes, you heard it right. Try to live below your means.

Living beneath your means is an another way of saving money and spend less than you earn. No matter how much you earn, you will never financial independence if you are spending your money unnesessary.

To achieve financial independence, you need to be self-discipline and need to say no to some things in your life that you can’t afford to buy right now.

Be honest with needs and wants. Think clearly about what you need and what you don’t. Do you really need card or you are buying to impress others. Look for cheaper alternatives for true needs.

8. Watch Your Credit Score

A credit score is a very important number (generally between 300 and 850) that indicates your creditworthiness to financial institutions and lenders. Credit score plays a major role in determining the interest rate offered when apply for a loan. This also affects the amount of loan you borrowed.

A good credit score can help you to borrow amount with low interest rate or renting an apartment. A high credit score shows that you’re a responsible borrower, means you can pay bills and charges on time and you are not carrying debt.

Try to pay all your payments on time and don’t skip payments because longer credit history will work in your favor. Try to build credit as early as possible.

9. Take Care of Your Health

Make your health a priority as we all know a health diet and regular excercise are good for your health. If you have a poor health, it could damage your financial statbility. Health problems mean more doctor visits and more medical bills.

If you take care of your health physically and mentally, you’re also taking care of your financial health. However, it is not difficult to maintain a good health, do regular visits to doctors and dentists and follow health advice.

Taking care of your mental and physical health will definitely put a positive impact on your financial health.

10. Get Advice From Financial Advisors

Get Advice From Financial Advisors

There is a lot of information, tools, and calculators available online which are helpful, but a little advice from a financial advisor will make finance better. As every financial situation is different and it’s not easy to find the right solution.

Once you earn a decent amount of money either in the form of cash or assests, get a financial advisor to manage and stay in the right path. A professional financial advisor can help you to develop diversified portfolio and guide you in asset collection that matches your risks and investment.

If you consult with a professional financial advisor, they may help you identify various ways to improve your income, overcome debts and skills. You can choose a right financial professional by checking which type of specialist you need. Look for individuals who have that designations, try to choose a professional who offer independent advice on finance.

11. Stay Updated on Financial Trends

Stay updated with the latest trends and updates related to finance and investments. Check relevant changes in tax laws to make sure that all your adjustments are maximized each year. Also, keep up to date with financial news and changes in the stock markets. Try to adjust your investment portfolio according to changes.

Understanding 50/30/20 Budget Rule

The 50/30/20 Budget Rule is a simple and effective strategy to managing your finances. This rule was popularized by Senator Elizabeth Warren. It is a simple yet effective guideline for achieving financial stability by dividing 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings. It can be stated as below:

  • 50% for Needs: This category involves the most important expenses that you must pay to survive like rent, food, utilities, transportation, healthcare, loan payments, etc.
  • 30% for Needs: The category covers expenses on the thinds you desire or want but don’t necessarily need like dining out, entertainment, clothing, travel, and subscriptions.
  • 20% for savings: This category involves saving money for future goals and paying debt. For example, emergency savings, retirement savings etc.

At What Age Should a Person be Financially Independent

This is a very impirtant question to ask. At what age would you like to achieve financial independence? In general, many people aim for the retirement age somewhere in the 60s. But this can vary from person-to-person. Some people could choose a retirement age before 60. It all depends on you, how you define financial independence. But, it would be better if you become financially indenpendent before the age of 40.

Conclusion on How to Become Financially Independent

Financial independence can be achieved in many ways, the process of gaining financial independence involves budgeting, less spending, investment, savings, paying debt, increasing sources of income, and planning for emergencies, etc.

However, these 11 strategies won’t solve all your money problem, but will help you develop good habits that will lead you on the path of financial freedom. Simply make a plan with targeted intention to reach your goals.

FAQs

What is 50/30/20 rule?

It is a simple yet effective rule for achieving financial stability by dividing 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings.

What exactly is the Financially Independent?

Financial independence means your passive income exceeds your living expenses and you can make life decisions without thinking about the financial conditions. You can live your desired life without depending on your employment.

At What Age Should a Person be Financially Independent?

In general, many prefer to be financially independent before the age of 40.

How much should I save?

Accirding to 50/30/20 rule, you should save at least 20% of your salary.

Is it good to get advice from professionals?

If you consult with a professional financial advisor, they may help you identify various ways to improve your income, overcome debts and skills. You can choose a right financial professional by checking which type of specialist you need.

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