Financial freedom is a goal that many seek to achieve. When I wanted to plan my financial freedom, I looked over all the necessary steps that I needed to take to retire early and have all the time in the world to do what I want.
Financial Independence is having the freedom to live life on your terms, where you do not have to stress about money. A big part of being financially independent is making money works for you, which means that all your assets are on autopilot that generates income for you while you enjoy life.
One of the key differences between financially independent people and others who are not is that they understood that trading your time for money will not get you far in life. You might receive a high income from your daily job, but that does not mean you are rich. If you lose your job, you lose the ability to make money.
Therefore, you need to know that building passive income is the most critical step to become financially independent. I wrote an article about What Rich People Do That Poor People Do Not that you can check if you want to learn more.
9 Steps to become financially independent?
Being financially free will allow you to retire early. Many people think that to be free, you must have millions of dollars in your bank account. In 9 steps, I am going to show you why you do not need a million to retire and become financially free:
1- Evaluate your current financial position
Evaluating your current position will make you critical of your monthly expenses and your debt. In this step, you need to find week points in your financial position. It could be that you are not saving enough money, you have lots of credit card debts, or that you are spending money on things you do not need.
In addition, evaluating your position will help you to understand how expensive your current lifestyle is. Working toward your financial independence will require few lifestyle changes. For example, you need to start getting the consumer mindset out of your lifestyle. I am not saying you should turn to a tightwad, but you need to be mindful of what you spend your money on because you are going to direct that money to build your financial independence.
2- Become Financially Literate
This is a crucial step in your road to financial freedom. Becoming financially free means that you have to change your mindset to cope with the lifestyle changes. Financial literacy is the way you educate yourself to become excellent with money, saving and investing.
People think that becoming free, is having lots of money in your bank account. The truth is, money sitting in your bank account will not give you financial freedom because of inflation. However, if your money is sitting in an index fund, it will earn money for you. That is what financial literacy will teach you.
If you want to learn how you can become financially literate by yourself, I have written an article on seven steps you can follow to achieve Financial Literacy.
3- Live below your means
It is not how much you make, but is how much you keep. If you make $100K a year, it does not make you rich if you spend $80K. Therefore, it does not matter how much you make if you spend almost all of your money.
Therefore, you have to look into your lifestyle and see where you can make cuts that are not necessary. If you financially educate yourself, this step will become easier to do. The best way to get over this step is to write every expense on a piece of paper. Then label every expense as essential or non-essential. It will give you an idea of where you can cut expenses. When you make this list, ask yourself the following:
- Is this expense essential to my survival?
- How can I reduce this expense?
- Will cutting this expense, reflect negatively on my lifestyle?
Do not cut expenses that can affect your happiness. For example, if you cancel your Netflix subscription because it is not essential, but it can make you depressed.
More than often, you will realise that you are paying for things that you do not use, or paying too much for them. For example, if you realise you are paying too much for your car insurance, then you should call your insurance to see if they can offer you a royalty discount, or maybe you should look for cheaper options.
4- Eliminate bad debt
There is no big secret to getting out of debt. You have to eliminate the source that got you into debt in the first place and pay for your debts as fast as possible. Here are steps you can take:
- Write down all your debts and organise them from the lowest to the highest.
- Pay for your lowest debts first. It can be as low as $100 that you own to a friend, and work your way up to the highest ones.
- Try to eliminate credit card debt early.
- If you have a high car loan that you do not think you can repay soon. Then you should think of selling your car and downsize to something more affordable.
- Leave your home mortgage to the end. Pay all the other debts first before paying extras for your mortgage.
This step can be difficult for someone with massive credit card debt. Cutting debt is important because if you are paying 14% a year on your credit card but your investments bring you 10% growth a year, it means that you are losing money. If you were able to make cuts in your expenses (Step 3) then you can direct that money to pay your debts quicker.
5- Set financials goals
You can start setting financial goals such as getting out of debt and saving money for investing. The best way to plan for financial goals is to set up a percentage of your monthly income toward those goals. The best way to achieve this is to set up three bank accounts:
- The first one is for expenses: For leisure and essential expenses.
- The second one for financial goals: Investing or paying your home loan.
- Third, for an emergency: Just in case that you need to pay a fine.
This strategy works really well if you set up scheduled payments when you receive your income. For example, 60% of your income for expenses ( Including all your bills, your mortgage, food, monthly subscriptions, petrol, shopping). 30% of your income can go toward your financial goals if you want to start investing or pay off your home loan early. Finally, 10% for emergencies because life is unpredictable, and there will always be a fine or expense that you have to pay.
Your emergency account will do two good things for you. First, it will make sure that you maintain a healthy lifestyle, and you will no be forced to make sudden changes to accommodate for unexpected financial hardship. Second, it will ensure that you will not go into debt to pay for something. Regular monthly payments as little as $50 can make all the difference. It is also a good idea to deposit at least $1000 as a starting balance into your emergency account, so you will never have to stress about money ever again.
6- Boost your income
This one requires hard work, but you have plenty of options to boost your income. Here are some options:
- Go back to school to land a better job.
- Compare your pay with the market average and ask your employer for a raise if you think you are getting paid less.
- Ask for a raise, if you think your current position is worth more than what you are getting paid for, then show your employer your value to the company (But be careful not to overestimate your situation).
- Go solo or open your own business.
If you have successfully eliminated unnecessary expenses and increased your income, you can get to financial freedom much faster.
7- Buy assets that generate passive income
This is the most important step in achieving financial freedom. Building assets will set you up to escape your daily job and into a life where your money works hard for you. There are few ways to building a passive income. Here are some options:
- Online Income: Blogging, Youtube, E-commerce, Internet marketing ….etc.
- Stock Market: Investing in stocks where you can make capital gains when you buy low and sell high. You can receive dividends on stocks you own. You also can invest passively in an index fund where you put regular payments and earn compounding interest on your investment.
- Rental Property: where you leverage your money to buy a property you can rent.
It is critical to know that there is no passive income that is fully passive, at least not in the beginning phase. Many assets require a tremendous amount of work before you can automate them. Even after you automate your assets, it will still require you to check on them from time to make sure that everything is running smoothly.
8- Plan your retirement and nail your retirement number
You do not need a million dollars to retire. But you need to grow your assets to accommodate your lifestyle expenses. Once you know how much income you need monthly to retire comfortably, you can build your passive income to match that number. Having a comfortable retirement is being able to live your life freely where you can travel and do things as you like.
Therefore, you need to increase your knowledge in a specific area so you can build and improve your passive income. In addition, there are always government retirement plans you can contribute to without getting taxed heavily by the government.
9- Protect your assets
You have to protect your investments, which means checking back on them from time to time to make sure everything is okay. If you purchased stocks in a company, you need to check if the company is doing well financially and they are growing each year and will not go bankrupt. If you own an investment property you have to make sure that your tenant is well-behaving and will not trash the place.
You have to be ready to make changes to protect your assets. It also means seeking help from professionals when needed. So you can make the best decisions that can protect you and your family. This can require you to be fully invested in something. You do not want to sell all your assets and keep all your money in the bank because inflation can reduce the value of your money.
Can you become financially independent in 5 years?
Although it can be possible to work hard and invest strategically, it can also be extremely hard. Especially if you are expecting some life changes in future such as marriage and kids or you need more time to get your financials in check. However, it can be highly achievable within 10-15 years if you stay consistent.
In the end, it all comes down to the individual and how much do you need to retire. If you think that $5000 a month is sufficient for you and your family, then it is much easier to retire than someone needing $10,000 a month to retire. The idea is to work hard to earn your retirement comfortably. Therefore, it is best to be patient and have fun while doing it.
Nothing comes easy in life especially money, but enough knowledge can make the process much easier. Therefore, if there is one thing you should focus on is financial literacy. It will open a world of possibilities for you, where you can achieve every financial goal. You can read more on Financial Literacy here.
