News
9 steps to financial independence
Our writers and editors used an in-house team natural language generation platform to help with parts of this article, allowing them to focus on adding information that is uniquely useful. The article has been reviewed, verified and edited by our editorial team before publication.
If you’re like many people, you dream of getting to a point where you don’t have to worry about money and can ditch the 9 to 5 schedule. According to Bankrate’s recent report Financial Success Survey41% of Americans would consider themselves financially successful if they never worried about their finances.
Most Americans say they wouldn’t feel secure until they earn at least $233,000 a year, according to Bankrate’s Financial Freedom Survey. To feel wealthy and financially free, Americans said they would need to earn an average of $483,000 a year.
Fortunately, it is possible to achieve financial freedom. With careful planning, disciplined savings, and wise investments, you can achieve your goal. See how you can become financially independent.
What is financial freedom?
Financial freedom means different things to different people. Some define it as never having to work again, while others say being financially free means eliminating debts.
In Bankrate’s Financial Success Survey, 19% of Americans say having enough money to stop working represents financial success, while 41% say living debt-free fulfills that goal.
“Financial freedom describes having enough wealth to live without having to actively work to meet your needs,” says Dennis Shirshikov, chief growth officer at gosummer.com and a professor of finance at the City University of New York. “It means having the means to afford the lifestyle you want for yourself and your family.”
“Achieving financial freedom allows you to make decisions that are not based solely on financial constraints,” adds Shirshikov. “For example, you can choose to pursue passions, hobbies, or even career changes without worrying about the financial repercussions.”
What is the FOGO movement?
O Financial independence, retire early The (FIRE) movement is a lifestyle and financial strategy that aims to achieve financial independence and early retirement. The goal is to save and invest enough money to provide a sustainable income for the rest of one’s life, allowing one to retire at a much earlier age than the traditional retirement age.
FIRE gained attention after the publication of the book Your Money or Your Life by Vicki Robin and Joe Dominguez. The movement emphasizes the evaluation of each purchase by analyzing the working hours required to make the purchase.
The story continues
Followers of the FIRE movement typically aim to save between 50% and 70% of their annual income and plans to retire when your savings reach about 30 times your annual expenses, or about $1 million. Once retired, they make small annual withdrawals (usually around 3% to 4%) from their savings to cover living expenses.
“You would need to live significantly below your means and be aggressive when it comes to your asset allocations,” says Steven Charlton, certified financial fiduciary and founder of Wisdom Financial. “The FIRE movement it can be used to find financial freedom by increasing assets proportionately to be able to live off interest and dividends. That way, you won’t have to live off the income when you decide to retire.”
How to create financial freedom
Achieving financial freedom involves discipline and careful planning. The following steps can help you reach this milestone.
Create financial goals
Creating financial goals is necessary to achieve financial freedom. Start by setting specific, measurable, and time-bound goals. Goals (SMART). Instead of just trying to save money, set a goal to save $10,000 in one yearfor example.
Distinguish between short-term (within a year), medium-term (around five years) and long-term (more than five years) objectives. This helps you decide the type of savings and investment strategies to use for each goal. Maintaining a budget, saving for emergencies and retirement, and paying off debt should be part of your plan.
“One of the biggest mistakes when trying to achieve financial freedom is not planning,” says attorney and certified public accountant, Mark Pierce, founder of Wyoming Trust and LLC Attorney. “Planning for the future is essential in the context of financial freedom.”
Optimize your budget
Some ways to optimize your budget These include tracking and analyzing your expenses, finding ways to cut costs, living below your means, and meal planning. Start by keeping a record of your spending habits. Tracking all expenses, even the small ones, will help you understand where your money is going.
Once you have a better understanding of your spending habits, identify areas where you can cut costs. Create a budget that prioritizes expenses with needs and limit spending on non-essential items. To plan your meals, create a shopping list based on your meal plan and stick to it to avoid impulse purchases.
Certified financial advisor Steve Azoury, owner of Azoury Financial, warns against overdoing it when it comes to creating a spending plan. If your budget is too restrictive, it can tempt you to overspend.
“Financial freedom doesn’t have to be so extreme in nature,” says Azoury. “When it comes to financial freedom, many can fail due to the temptations of buying and spending that we all enjoy. It’s best to avoid going overboard by incorporating some ideas of financial freedom, but not in such an extreme way as FIRE, which can be unsustainable.”
Facing debts
Start by taking inventory of your debts. Understand the total amount you owe. This can help you visualize a payment plan.
“Reducing debt, especially high-interest debt like credit cards, is crucial,” says Shirshikov. “Debt overleveraging, especially for impaired assets, can impede progress toward financial freedom.”
Pay off debts with the highest interest rates first, known as debt avalanche methodor start with the smallest debts to get quick wins, known as debt snowball method.
Also, consider paying more than the minimum and making payments more than once a month to reduce your principal faster. Embrace small savings by cutting unnecessary expenses and redirecting those funds toward your debt.
Prioritize investing and saving
Start by listing all of your financial goals and determining how much you need for each one. Rank these goals by importance, focusing on necessities first, such as saving for retirement, paying off high-interest debt, and building an emergency fund. Bankrate’s Annual Emergency Savings Report found that just under 6 in 10 (59%) U.S. adults feel uncomfortable with their emergency fund.
Start investing according to the time horizon of your goals. For short-term goals, use low-risk investments like savings accounts or certificates of deposit (CDs). For medium-term goals, consider a mix of bonds and stocks. For long-term goals, focus on investments with higher growth potential, such as stocks.
Arrangement automatic transfers from your salary to your savings and investment accounts to ensure you are contributing consistently. Regularly review your portfolio and rebalance it to maintain your target allocation.
Increase your income
The quickest way to increase your income is to negotiate a raise with your current employer or look for a job that offers higher pay. A side hustle can also add an income stream. This can be anything from freelance work to consulting or starting a small business.
If you have access to a company 401(k), take advantage of your employer match, which is essentially free money. It is important to understand the vesting schedule and contribute enough to get the full match.
Choose the best savings accounts for your situation
Choosing the best savings account for your situation depends on your financial goals, flexibility needs, and time frame for accessing your funds. High Yield Savings Accounts are ideal for emergency funds because of their above-average interest rates and quick, penalty-free access to cash. At the time of this writing, the top rate among the banks we monitor was 5.30%, offered by BrioDirect.
Money Market Accounts Certificates of Deposit (MMAs) are suitable for medium-term goals because they offer higher yields than regular savings accounts and provide liquidity with check-writing and debit card privileges. While shorter terms are available, certificates of deposit (CDs) are better for longer-term savings goals, where you can lock away your money for a fixed period in exchange for a higher interest rate. Health savings accounts (HSAs) and retirement accounts such as 401(k) offer tax advantages and can be part of a broader savings strategy.
Explore passive income ideas
Gain passive income can be a strategic way to generate additional cash flow with minimal ongoing effort. While it often requires an initial investment of time, money, or both, the returns can be well worth it in the long run.
“Passive income is money earned with little or no effort, as opposed to active income, which includes wages, salaries, tips, or commissions that are earned by physically working a specific job,” says RentRedi co-founder and CEO Ryan Barone. “For example, when you accrue interest on money in a high-yield savings account, you are not doing anything to earn that passive income.”
Barone says one of the best ways to earn passive income is rent property. He recommends starting small and then building up from there.
“You can start small by renting extra space in the house you currently live in,” Barone told Bankrate. “This is called house hacking and usually involves renting out extra rooms in your house. But you can also rent other spaces such as garages, attics, basements, patios, sidewalks, closets or sheds for storage or parking spaces.”
Carefully consider expensive purchases
Deciding whether to buy an expensive item requires careful planning. Consider the impact of big purchases like a house, a new car, and a wedding.
For all purchases, it is best to observe a waiting period to avoid impulse buying. You can also use this time to look for deals and discounts. Taking a step back will help you make an informed decision and ensure that your purchase meets your financial goals.
Keep learning about personal finance
Building financial education can help you manage, save, and invest money effectively. Subscribe to financial newsletters, listen to financial podcasts, read personal finance books, and follow financial experts on social media.
Additionally, consider meeting with a financial professional for personalized advice. Being proactive in these areas can boost your financial literacy and help you make better financial decisions.
Conclusion
Achieving financial freedom is possible with careful planning. It means having enough savings and investments to live the lifestyle you want without worrying about your finances. By taking the right steps, you can take control of your finances and achieve financial independence.