What would you do if you weren’t afraid? Financial independence means having the security to back yourself to make the choices you want. If you want more freedom to embrace opportunities, check out these 8 steps to financial independence.
It’s a question that is often asked of us to prompt us to dream big. What would you do if you weren’t afraid? The issue is that many of us don’t have the bank balance to support those choices.
Enter financial independence. Financial independence is:
- Being in control of your money
- Not being phased by financial emergencies like the washing machine breaking down
- Being able to hop on a plane and move for a new job without stressing about moving costs
- Having the financial backing to quit a toxic job without worrying about how you’ll survive between jobs
- The freedom to make choices about how you want to spend your time
Sounds pretty great right?
Financial independence is essentially a superpower that others can’t see but the confidence you feel from having it can help power you through life and create more freedom in your choices.
Part of the reason I was drawn to being a financial literacy expert is because I wanted to learn how to become financially independent and then give that superpower to other people.
If you’re motivated to get more financial independence in your life, here are 8 steps to financial independence:
1. Cut expenses
- While you can try and earn more, lifestyle creep or spending more money as your income rises will hurt your ability to save money. Instead, many people chasing financial independence cut their expenses.
- This can mean relocating to a cheaper area where you’ll pay less rent, selling your car and cycling to work instead or getting a Costco membership to whittle down your grocery spending.
- The effect of cutting expenses if that you’ll have a lower cost of living and will save more money over time.
Question to get started: How can you cut down on your spending this month?
2. Create a budget
- Some people rebel against the word budget in the same way you might occasionally rebel against a healthy eating regime by chowing down on a doughnut.
- A budget means monitoring what you earn vs what you spend so that you can see where your money goes.
- You can then go one step further and set up some financial goals to direct your money to where you want it to go, creating categories for your spending so that you don’t end up splurging at the shops on an impulse.
Question to get started: Do you know where your money goes each week?
3. Save a specific % of your income
- After you’ve made a budget, you’ll know how much you are spending each week or month. You can then calculate how much of your income you save.
- If you’re anything like me and struggle with giving into temptation, you can automate your savings by transfer how much you want to save to a specific savings account.
- I make sure that this is held in a separate financial institution that takes three days to get a transfer from so that I can’t access my savings on a whim.
Question to get started: What % of your income do you save each month?
4. Build an emergency fund
- Life happens. People get sick, relationships break up, people can pass away unexpectedly and layoffs can happen without warning.
- Life is unpredictable but how much stress you want to experience can depend on whether you have an emergency fund.
- An emergency fund is money set aside for an emergency. It’s liquid cash that you can access quickly in an emergency.
- Washing machine breaks down? You got it covered.
- Car parts need replacing? No worries.
- This money means that you can sleep soundly through the night without worrying about money.
- And how much do you need? Most people recommend 6 months of living expenses but $1,000 is a great starting point.
Question to get started: How much money in an emergency fund would make you feel comfortable?
5. Pay down your debt
- Debt can feel like a stone you’re dragging around.
- Whether it’s credit card debt or buy now pay later service payments that you’ve accrued, a debt is a payment you owe someone.
- It can hold you back from future choices because the money you may want to spend on future opportunities is already committed to paying back that debt.
- What’s more is that debts often grow over time thanks to interest that builds on the amount you owe and can quickly add up over time.
- If you’re in this situation, pay down your debt now and as quickly as possible. Look at how you can make some extra spending money and direct this extra cash towards wiping out your debts.
Question to get started: How much do you owe in debt?
6. Start investing
- I am a huge fan of investing as a way to increase your wealth over time.
- The stock market does fluctuate but in the long term, the market always goes up. For example, a $10,000 investment in the S&P 500 index 50 years ago would be worth nearly $1.2 million today.
- If investing is too risky for you, buying a house is also an investment because you’re purchasing an asset that if you buy well, will rise over time.
- The intention behind investing is that your assets in shares or property will rise over time, increasing your net worth.
Question to get started: How can I get started with investing?
7. Save for retirement
- It can be really easy to think about retirement as a future you problem.
- Retirement planning is all too easy to put off until later but there’s much to be gained from taking action now.
- In Australia, we retire with superannuation or super and there’s a few things you can do right now to maximise your money.
- Consolidate your funds so that you’re only paying fees on one account.
- Check your funds are in an account that is performing well and charging reasonable fees for the market.
- Making these choices now will ensure that future you retires into cashmere rather than acrylic.
Question to get started: What steps can I take to sort out my retirement fund now?
8. Consider insurance
- We don’t tend to talk about insurance as a topic because frankly, it can come across as boring.
- However, if you’ve seen bushfires on the news in Australia, you’ll know the value of home insurance.
- Likewise, I ride a motorcycle so ensure that I have top health insurance in case the worst happens.
- If you have kids, you may want to invest in income or life insurance, to ensure that you can continue to provide for them.
- Insurance means protection against life’s uncertainties and can be worth investing in for your peace of mind.
Question to get started: Do I need insurance?
Financial independence is a superpower we all deserve to wield. We will all start from different places when it comes to our money. However, we can all improve our finances through the choices you make and the goals you set when chasing financial independence. Because the freedom of choice that comes with financial independence is so worth it.
Read More: 5 steps to financial fitness