Financial independence is the state of having sufficient personal wealth to live, without having to work actively for basic necessities. Most of us dream of the day we can quit our day jobs and live life on our own terms, but few of us are setting ourselves up to attain that goal. Financial freedom seems like an overwhelmingly impossible task, and many people don’t know where to begin.
In order to achieve financial freedom, it is best to break down the tasks into smaller steps:
1) Define your personal financial freedom goal.
We each have our own definition of financial freedom. Some may feel they are financially free if they eliminate debt. Others feel financially free when they have enough income to cover debt, living expenses, and leftover money to spend on family and fun. Many people dream of having enough money to travel the world, enjoy their favorite hobbies, or serve their communities.
Only you can define your personal financial freedom goals. Once you determine your objectives, you can figure out how to get there.
2) Create an emergency savings fund.
Saving for emergencies should be a top priority for everyone. Maintaining an emergency savings account may be the most important difference between those who manage to stay afloat, and those who sink into debt. The general rule of thumb is to have 3 to 6 months’ of living expenses. Emergency savings allow you to easily meet unexpected financial challenges such as:
- Car repairs
- Job loss
- Major home or appliance repairs
- Unexpected medical procedures or emergency room visits
- Unplanned travel expenses
- Replacement computers or tech devices
It can be difficult to set aside money at the end of each month, but there are creative ways to find funds to build your emergency account. Small but steady changes in your spending habits can add up, such as:
- Set up an automatic payroll savings account. You won’t miss the money since it never hits your checking account, and you’ll be more motivated to save additional money as you notice your emergency savings balance increase.
- Deposit your tax refund.
- Contribute your loose change in a savings jar.
- Cut down on the number of streaming subscriptions.
- Meal prep when possible to avoid eating out.
3) Pay down credit card and other debt.
Debt can be overwhelming and often snowballs out of control if credit card balances are not paid in full each month. This NerdWallet article breaks down the real cost of making only minimum payments.
Making monthly minimum payments could take years to pay off. Credit card companies do not mind their borrowers paying the minimum about because they make more money by charging interest. That interest then gets added to your outstanding principal and existing interest so that you are continuously paying interest on interest.
Break the cycle by increasing your monthly payment on the credit card with the highest interest rate. Once that balance is paid, do the same with the card with the next highest interest rate until you pay off all your credit card balances. The money you were throwing away to pay interest can then be used to pay off other debt. Once you are debt-free, you will be in a position to start purchasing items that you can really afford.
4) Pay yourself first.
Begin by building your retirement fund. It is easy to get started with an employee sponsored 401(k), so find out from your human resources department if it is available. If not, you can always start a Roth IRA (if you are eligible) or a Traditional IRA (if you’re not eligible for the Roth).
It is a good idea to start slow and gradually increase your savings to 15% of your income. Most people start by contributing a lower percentage and add one percent to their retirement fund each they get a salary increase. Since you never had the money before, you will not miss it. Start saving for retirement early and steadily, and avoid lifestyle creep. The following chart shows how beneficial it is to begin the savings process early.
5) Create and maintain a workable budget.
Make a monthly budget based on your income, not your expenses. Once you determine how much money you have to spend, trim down your expenses to live within that income. This is also known as living beneath your means. You will create a lifestyle you can afford, and still have money left over.
Spending less than you make is the gold standard of financial freedom. The secret for living below your means is to buy only what you need, and want what you have.
You now know the basics of how to start your journey towards achieving financial freedom. It won’t be always be easy, especially here in Hawaii, but the fact that you are reading this puts you ahead of many of your peers.
Visit our Learning Center for more ways to help reach your financial goals.
