Are you tired of working day in and day out for someone else? Do you want to take control of your own financial future? If so, then you need to start on the journey to achieve financial independence….. Ok ok… you’re right, this is starting to sound like some weird self help get rich scheme type of blog let’s dial that back a bit!
Obtaining financial independence may seem like a really daunting task at first, but if we take a birdseye view of what it involves it is actually quite simple. In this blog post, we will outline the steps that you need to take to get started.
What does it mean to be financially independent?
There is no one-size-fits-all answer to this question, as the definition of financial independence will vary from person to person. However, at its core, financial independence or financial freedom means having enough money saved up so that you no longer need to work for someone else in order to support yourself. By no means does this mean that you have to quit your job straight away! Financial independence means that you now have the freedom to do things you have always wanted to because you are not dependent on your normal 9 to 5 to pay the bills.
Is it hard to become financially independent?
It all depends on your financial situation, your income and expenses, and how much you are able or willing to change your spending habits. Excuse me if I’m way off but I’m going to go out on a limb here and say that because you are reading a post titled “How to Begin the Journey to Financial Independence” you aren’t sitting there with millions in your savings account.
How much money do you need to become financially independent?
Unfortunately, there is no one magic number that will work for everyone to achieve financial independence. It depends on your unique financial situation, and how much you want to change your spending habits both now and in retirement. However, if you are starting from scratch you can start by aiming to save at least 25 times your annual expenses.
That might seem like a daunting task, but it’s actually not as difficult as it seems. If you make a concerted effort to save and invest your money wisely, you can reach your goal in just a few years. And once you’re financially independent, you’ll be able to live comfortably on your own terms, without having to worry about money.
What is the fastest way to become financially independent?
Some people may suggest that you can achieve financial independence quickly by winning the lottery or investing in a high-risk cryptocurrency portfolio. And look.. they aren’t wrong, winning the lotto could definitely provide financial independence! But I don’t think suggesting you invest all your money in OzLotto or DogeCoin is financially prudent.
Side Note – If you have the numbers for Thursday Night’s 60 Million Dollar Powerball let me know and I will split it with you!
We need to focus on a more gradual and sustainable long term approach to becoming financially independent by paying ourselves first (savings) and investing in assets that provide growth and passive income in the long term.
What are the 8 key steps to becoming financially independent?
Set Financial Goals
Writing financial goals down is a powerful way to create the future you want. I find that the easiest way to set my financial goals is by writing them down and creating an action plan with steps that will help you reach your goal. To start, write out what you would like to achieve on a piece of paper, napkin or my favourite.. a coaster at the bar – just kidding! (or am I?)
These Goals should include :
– How much money you can afford to save / invest. I like to put this down as a percentage of my income. You might set yourself a goal to start saving 25% of your take home pay with the goal to increase this to 30 or 40% in 12 months time.
– The timeframe for this goal. For example, when do you want the money saved by? When do you hope to achieve financial independence?
– Why is this important to you? Be specific! What will reaching that goal mean to your life? To your family?
– Review your plan regularly and make adjustments as needed.
Create surplus funds to invest
Identify areas you can cut back on spending or increase income so that you have extra funds left at the end of the month that can be invested for financial independence. Compound interest will help turn those small investments into a larger sum of money over time if you continue to save and invest on a regular basis.
Create an emergency fund
An emergency fund is an account that contains cash for use in case of emergencies such as job loss, unexpected medical expenses, or home repairs. I would recommend starting with just a simple savings account. The key is to build up your emergency fund slowly, even if it’s $50 or $100 at a time until you have at least three to six months’ worth of living expenses saved up.
When you create your emergency fund, make sure it is in a place where you can easily access the money when you need it. You don’t want to have to dip into your long-term savings or investments if you can help it. I would recommend opening a separate account with your bank specifically for this purpose, if like me you use an online bank such as Ubank or ING then setting up a new account is instantaneous so there is no reason you can’t get that emergency fund started today! And one crucial thing to remember, this is money that you should only use in case of an emergency, not for every day.
Understand that income is not wealth
There is a common misconception that because you have a high-paying job, you are rich and must have lots of wealth. Actually, it may just be the opposite! You can have a high income and still not be wealthy because of your extravagant lifestyle or crippling debt levels. So many people are stuck in a cycle of working to pay off debt and never really getting anywhere. It’s like living paycheck to paycheck except on steroids.
Pay yourself First
Be sure to ‘Pay yourself First’, this means that as soon as you get your pay you put money into your savings before paying anything else. This ensures that you have the funds in your savings or investment account and not just sitting around as ‘left over’ money.
Get out of debt
One of the best investments you can make is to be debt free. Being in debt for assets that do not produce income (having a business loan that produces income) or appreciate (having a loan for real estate) is a downward spiral and the only way out of that cycle is by paying them off! And the best time to get rid of your debts was yesterday, while second-best time is today. The reason why debt reduction is so important is that things like credit card debt and their huge interest rates can keep compounding and may get to the point where you can only afford to pay off the minimum and never pay off the principal. If there is one key takeaway from this post.. pay off your credit card! It will save you heaps in the long run.
Educate yourself on Personal Finance Basics
Read lots of books and blogs, talk about it with friends and family (not too much though), ask lots of questions. That’s the best way to start your journey to financial independence.
There is so much information out there on personal finance and how to become financial independence. It can be overwhelming at first, but don’t give up! Read as much as you can, talk to people who have been successful in reaching their financial goals, and ask lots of questions. Click here to see some of my favourite Australian Financial Independence bloggers that are either well on their way to Financial Independence or have already achieved it. Be sure to check out our top 5 books that will get you motivated and on the path to Financial Independence.
Invest in Low Cost Index tracking ETFs no matter what the market does
I subscribe to the KISS principle of investing, keep it simple and keep investing no matter what the market does. Market goes up? buy index funds. Market goes down? buy more index funds. The point is that no matter what the market is doing just keep investing regularly, don’t try to time the market as you will only cause yourself more stress and in the long term will not perform any better.
I personally think the best way to go about this strategy is automating your investment through an online trading platform such as Pearler. That way you can set up your investment strategy and let the platform do all the hard work.
Summary
While the path to Financial Independence can seem daunting, if you take it step by step you will reach your goal. Just remember it is a marathon not a sprint and there is always room for improvement so try to enjoy every part of your journey!