But there are some ways by which you can achieve that financial freedom, let’s check them out:
1. Understand what is financial independence to you
What does it mean to be financially independent? It totally depends on the person whom you ask the question.
- A Credit card holder who has huge credit card balances, he/she may consider settling credit card debt as a sign of financial freedom.
- A borrower who has a mortgage or auto loan, paying off that loan entirely can be a sign of financial independence to him/her.
- A common individual who is struggling to budget his/her monthly expenses, creating a proper budget plan and reducing monthly expenses can be financial independence to him/her.
- A person may feel financially independent if he/she can build an emergency fund or a retirement fund like 401(k) or Roth IRA fund.
Every person is different, their mindset is also different. So, First, realize what is financial independence to you? Write down how much you should have in your savings account, what would be your lifestyle after 10-20 years and at how soon you want to achieve this goal. Be specific about your goals plan accordingly.
2. Spend wisely
One way to reach financial independence is to modify your spending habits. Reaching financial independence may include having enough funds to spend on important things.
You may follow a proper monthly household budget. This way you can buy necessary things and pay off all your bills timely. You may also make regular deposits in your savings account.
Sit with your spouse and tell her about what you want to accomplish. Make a budget for monthly expenses. If required, make a new budget every month.
You may like the idea of reducing your expenses to reach a level of financial independence. For that reason, you should track your spending and tally your expenses for several months.
If you see that lowering your expenses by cutting off spending habit is working, you can follow this strategy further.
Use the money to invest in things which are worthy, like creating an emergency fund, or deposit in 401(k) retirement plan or just invest a good amount of money towards house hacking.
3. Pay off credit card debts in full
Credit cards are high-interest consumer debts and very much harmful for your wealth. Too much credit card bills may break your savings and you may lose focus on being financially free. So, you can try to pay off the full balance each month.
If it is not possible for you, then you can consolidate your credit card debt by opting for a balance transfer method. There you can transfer all your high-interest credit card balances into a 0% APR card.
If it is too hectic for you to manage all these credit debts, you should read about how credit card consolidation program works. There are some non-profit credit counseling agencies that may help you to consolidate your multiple credit card balances. Guess what? You don’t have to make multiple payments in a month.
Student loans, mortgages and other loans typically have lower interest rates, so you must target to pay off credit card debts first.
4. Review your insurance
If you have a full-time job, it is possible that most of your insurance coverage may be provided by your employer’s group plan. But have you ever think of verifying it? Is it enough for you?
Check your life insurance requirements.
Make sure you are getting enough life insurance coverage equivalent to 10 times of your current income if you have kids under 10 years old, plus the amount to pay off debts entirely.
If the calculation is too hard for you, ask help from a professional insurance agent and review all your insurance policies such as life, disability, auto, home, etc.
Verify that you have adequate coverage in your books. Know about all the fees and charges, especially with life insurance.
5. Keep eyes on the credit
A person’s credit score may make the difference at the time of buying a home or determines the rate of interest when he/she apply for different loans. Credit score may also impact your insurance premiums.
When you have a constant income, then also credit score can impact your credibility. So, think again, what will happen when you retire early? Let me tell you…your income will be limited, your source of money will be restricted. So, in this situation, if you spend too much by using a credit card, later you have to face severe debt problems.
This is why it is important to check your credit report periodically so that there are no bad items listed in the report and damaging your name.
6. Increase your emergency savings
What will happen if a sudden crisis knocked down your finances for several months? How do you cope up with the expenses for that period?
Increasing your emergency fund is as important as paying off your credit card debts.
As a true financially independent person, it is your duty to create and increase the fund worth 3 to 6 month’s household expenses. It won’t be much harder for you as you might have paid your debts easily.
You may consider saving 3 months of expenses if you have a secure income. On the other hand, keeping 6 month’s worth of expenses will be wiser if your income fluctuates a lot.
You should keep this emergency fund in a savings or money market account. The interest rate might be lower, but the fund will be easily accessible and safe.
7. Educate yourself continuously
You should review all changes in the tax laws which are applicable to you. Keep yourself updated with the latest news about the current financial market. If you are interested in investing, check out the latest developments in the stock market and modify your investment portfolio accordingly. To avoid any monetary loss initially, you may invest in low-risk short-term investment options.
Getting enough information is the key to success. It is also the best defense you have against all the odds and risks being financially independent.
The bottom line
You might not like your job, or plan to retire early or not, the moment you achieve your financial independence, your life will turn magically. But achieving financial Independence without retiring early can be a big success and add another feather to your crown.
Make sure you become flexible with your finances. Your goals may change as your family grows, your spouse or partner shares his or her own financial goals or your career takes a U-turn suddenly.