6 tips for becoming financially independent

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Few things may sound as appealing as the idea of becoming financially independent. Though financial independence can mean different things to different people, it typically refers to being able to live comfortably off one’s savings and investments with no debt whatsoever.

In some cases, it may also mean the ability to retire early, though financial independence doesn’t necessarily have to mean leaving a career you love. It’s about working because you want to, not because you have to.

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Sound appealing? Achieving financial freedom could be easier than you think. The process of getting there often comes down to a relatively simple principle: Spending less and saving more. Below, we take a look at what it means to become financially independent and explore some practical strategies for achieving it.

Related: 33 ways to celebrate the holidays affordably

What Does Financial Independence Look Like?

While there is no set definition for financial independence, the term often means getting to a point where you don’t have to work to pay your living expenses. Usually, financial independence is achieved by relying on savings, investments and other forms of passive income to pay the bills.

Though financial independence doesn’t have to mean leaving behind a job or career path, it can. In fact, the term is often used as a synonym for early retirement, and the two phrases are commonly strung together in the popular acronym FIRE, which stands for “financially independent, retire early.”

Benefits of Financial Independence

There are myriad benefits to becoming financially independent. One of the biggest perks is the ability to have choices. You can choose to keep working if you enjoy it or you can kick back and relax. You can save money to pass on to future generations or you can splurge on a trip around the world. 

Becoming financially independent can also enable you to enjoy work more. If you’re no longer doing it for the money, you can structure your job responsibilities so you’re only doing the things you want to do. 

It can also benefit your mental and physical health. Having the ability to work less allows you to exercise more and get more sleep. Financial independence may also allow you to spend more time with a partner, kids, family and friends. Having stronger relationships can lead to increased happiness in life.

How to Be Financially Independent

Becoming financially independent typically requires having a clear plan in place and being willing to roll up your sleeves and get to work. Here are some key steps that can help you get there. 

1. Setting Realistic Goals

Being financially independent can look different for everyone, so a good place to start can be to define what being financially independent means to you. What do you visualize? Maybe you want to be debt-free by 40 or you’d like to retire at 50. Or perhaps you’d love to relocate to someplace warm and sunny in 10 years.

As you develop your goals, you may want to give them a reality test by consulting with a financial advisor or chatting with a trusted financial mentor. You may find that you need to re-jigger your vision based on your financial situation and how much time you have to achieve your dream. 

Once you’ve honed in on some specific, achievable long-term goals, you can begin to figure out what you’ll need to do to make them a reality — whether that’s cutting your spending, boosting your income and/or saving and investing more than you currently are each month.

2. Understanding That Income Isn’t Everything

Many people have a tendency to fixate on how much money they are making. And while income is an important part of your financial big picture, it isn’t everything. Yes, it’s easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make.

For example, if you are making a comfortable salary but haven’t gotten into the habit of saving and investing, then you may not be leveraging your income to its full potential. Becoming financially independent often requires an understanding that the amount of money you make is just one piece of the puzzle.

The path to financial independence may become a little less daunting once you realize that a high income alone is not necessarily going to lead to sustainable wealth. There are several other factors that play a role in how much you can grow your finances, such as how much interest your investments are making and the rate at which you are able to save.

More than a high salary, financial independence typically requires foresight, long-term thinking and a holistic understanding of how your income overlaps with your expenses, lifestyle and future goals.

3. Building a Budget

No matter what your income level, one of the keys to getting ahead and achieving financial freedom is to spend less — and potentially a lot less — than you are earning. And doing that typically requires coming up with a budget.

Budgeting is the process of measuring income, subtracting expenses and deciding how to divert the difference toward reaching your goals. It’s often considered the essential first task in achieving financial independence.

You can set up a monthly budget by first assessing what you are currently earning (after taxes) each month. Next, you can tally up your actual spending by looking at the last three to 12 months of bank and credit card statements and recording your expenses on a spreadsheet. 

Seeing it all laid out in black and white can help you identify unnecessary expenses you might be able to cut out. You can then put the difference towards your long-term goals instead. One rule of thumb is to try to put 20% of your monthly take-home income into savings or investments. Working couples might try to bank a substantial part of one salary if possible. 

4. Establishing A Safety Net

Achieving financial independence also means thinking about financial security. Having a dedicated emergency fund that can help you weather a health emergency or another large, unforeseen expense means you may not have to run up credit card debt or dip into your investment or other savings account to cover these costs.

If you haven’t already started an emergency savings account, consider whether or not you would be able to afford a sudden car repair or if you could handle paying out of pocket for an unexpected dental procedure.

Experts often recommend having at least three to six months’ worth of living expenses set aside in an account that earns interest but can be easily accessed when you need it. The more effective you are at dealing with financial emergencies, generally, the faster your savings and investments can grow.

5. Putting a Debt Pay-Off Plan Into Action

Taking care of your debt is another important step to achieving financial independence. Today, debt can take many forms — whether it’s student loan debt, a home mortgage, a car loan or credit card debt. If you currently have debt, consider incorporating a debt reduction plan into the budget you create and calculate how you would need to tweak your current spending habits in order to prioritize becoming debt-free.

It can be wise to start with the debt that has the highest interest first since borrowing from those creditors is costing you the most money. If you have multiple credit card balances, you may want to target them one at a time. You can do this by paying more than the minimum each month on one balance (paying just the minimum on the others) until that balance is wiped out, then move on to the next. 

6. Being a Smart And Savvy Investor

Becoming a smart investor is another key step you can take on your journey to financial independence. The world of investment can be confusing and carries risk, but it also has the potential to be lucrative. Because you earn interest not only on your contributions but also on accumulated interest, small amounts can grow over time. 

You may want to first focus on tax-advantaged accounts. If you have an employer-sponsored plan, such as a 401(k), it can be a good idea to contribute some of each paycheck, especially if your employer offers to match your contributions. Depending on your situation, you may be able to open a traditional IRA, Roth IRA or SEP IRA, as well. 

If you have children, you may also want to start a 529 plan to help you invest for their college educations

If you’re able to invest additional funds, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundle different types of investments together), or, if you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.

If you’re new to investing, you may want to consider opening an investment account through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio, and typically charges relatively low fees.

The Takeaway

Not everyone inherits a fortune or makes a huge salary. But even if you don’t have those advantages, it doesn’t mean you can’t achieve financial independence. Getting there, however, can take work and spending discipline. Some steps that can help you get there include creating a budget, trimming expenses, building an emergency fund, paying off debt and setting up a smart saving and investing strategy that factors in your timeline and tolerance for risk. 

Once you set up a plan to work towards financial independence, it can also be a good idea to check in regularly on how well the plan is working and to make adjustments when necessary. 

Whether you decide to schedule quarterly meetings with a financial advisor, monthly money talks with your significant other, or use apps that help you track your expenses and investments, consider creating habits that help you stay on top of your goals.

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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5 ways to achieve financial security

5 ways to achieve financial security

We all have a vision for our financial futures, whether it’s a vacation home on a tropical beach, a completely debt-free (and work-free) retirement, or selling everything to buy a cabin on that cruise ship that travels the world. And while each of our dreams is uniquely personal, they all have one thing in common — they probably aren’t free.

Whether dreaming big, small, or somewhere in between, achieving financial security might be one way to make it a reality.

The government definition of financial security is “a state of being wherein a person can fully meet current and ongoing financial obligations, can feel secure in their financial future and is able to make choices that allow them to enjoy life.”

In other words? It’s being able to pay the bills (without having to check account balances first), and not being worried about where the next paycheck is coming from. But beyond the physical state of having the money when it’s needed, financial security is also a state of mind.

Related: Are you bad with money? How to know and what to do

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Perhaps the most important aspect of the definition above is the part that says “able to make choices,” because deciding what it means to be financially secure is entirely each person’s choice and how they answer one question: “What are you financially okay with?”

For some people, it’s all about the numbers — how much they own, how much they owe, the size of their portfolio, or their net worth. But for others, it could mean traveling the planet with all their earthly possessions in a backpack, working odd jobs wherever they land until they make enough money for a ticket to their next destination.

Talk about opposite ends of the spectrum.

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For those who haven’t received a huge inheritance or won the lottery, achieving financial security is likely to involve lots of hard work, determination and a DIY attitude.

Why? One reason is because the safety nets intended to protect Americans in retirement are starting to unravel. The Social Security trust fund is on the way toward depletion sometime after 2030. And that may sound like it’s far enough in the future for flying cars, but the reality? That’s only a decade away.

The good news is, it’s never too late to get in the game. And achieving financial security may even help achieve emotional wellness at the same time. Win-win!

Here are a few smart strategies that could help with laying out a financial security plan.

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Financial goal-setting can be like jumping ahead to the last chapter of a book. It starts with the endgame, such as paying for kids’ college, traveling, or upgrading a home or vehicle.

From there, “reading” goes backward by breaking those goals into bite-size steps until the arrival at chapter one — an overview of the current situation and a plan to meet those long-term goals.

Short-term financial goals could include things like paying off high-interest debt, student loans or car loans, increasing a credit score, or growing an emergency fund.

Once those are achieved, money could be shifted into longer-term planning, such as retirement, buying or upgrading a home, paying off a mortgage, or investing.

No matter how long it takes, checking something off a goals list can be a huge feeling of accomplishment, as well as motivation to start the next chapter.

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As a good witch from the North once said, “It’s always best to start at the beginning.” And when outlining a plan for financial security, that can mean taking a refresher course on personal finance basics.

Getting reacquainted with simple concepts like avoiding credit cards, paying bills on time and creating a budget could be a good way to help focus on a plan that’s all about individual goals.

It could also help kickstart a habit of tracking cash flow, because creating a budget that curbs spending isn’t likely to work if where the money is going is a mystery to begin with.

And remember that joy of checking off boxes? Every time money that used to be spent instead goes toward a savings goal, it could trigger that same feeling of accomplishment.

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This strategy isn’t about stashing cash under the mattress. In 21st-century terms, keeping money safe is more about making decisions that will protect an investment.

Tactics like diversifying a portfolio to include some low-risk investments, cash-based savings investments, or even commodities, can help keep that portfolio steady if the market has a bad day.

It could also be as simple as keeping finances organized so it’s obvious what money is where, knowing the penalties and late fees on each account, when bills are due and how much interest is being earned.

And when much of today’s money management is done online, keeping money safe can also mean protecting identity, passwords and offline financial documents.

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If those monthly credit-card payments didn’t exist, where would that money go instead? Paying off debt could free up a potentially big chunk of money to put toward those big dreams. And knowing calls from collectors will no longer be a worry can provide real peace of mind, too.

Creating a debt-payoff strategy can take just as much time and effort as creating a financial wellness plan, but if one is dependent on the other, it’s an essential step.

Two popular methods include the debt snowball, which calls for paying off the lowest balance first and then applying that entire amount to the next-lowest balance (on top of the minimum), and the debt avalanche, which is similar but focuses on the highest-interest debt first.

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Saving and investing are two similar concepts but have many differences. One of the biggest is risk. One school of thought is that the shorter term a goal is, the less risk should be taken.

If, for example, someone wants to build an emergency fund equal to three to six months’ salary, they might decide that a high-interest savings account is the safest route (it can also provide the easiest access to money in a pinch).

For the longer term, there’s goals-based investing, which is different from traditional portfolio investing in that instead of focusing on which assets will give the best returns over a period of time, strategy is adapted to meet individual needs.

An investment strategy to save for a down payment, for example, is different both financially and psychologically from saving for retirement in 15 years or more.

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The “How to Achieve Financial Security” list can be long and varied, but as the old saying goes, there are two ways to make money: You work for it, or make it work for you.

One way to put money to work could be to make investments that will earn the best returns. For example, contributing the maximum to a 401(k) that an employer is willing to match at 100%.

It’s like doubling an employee’s contribution. Add to that the magic of compounded interest, and money can seem to grow right before your eyes.

Learn more:

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA/SIPC. The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Money
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA/SIPC. Neither SoFi nor its affiliates is a bank.

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