How to Become Financially Independent (25 Effective Ways/Tips)

You can learn how to become financially independent by taking the right actions.

Such right action can start with reading this article as it contains 25 very powerful ways and tips that can help you become financially independent.

 

Importance of Becoming Financially Independent

As it relates to being independent there are many ways that work and more importantly that reality can be experienced in our lives.

We can be independent thinkers and not have any boundaries as it relates to our thinking, we can be independent politically and not be bound by the rules and authority of a governing country or nation.

We can also choose to be independent in our relationships and not be entangled in the lives of others if that is our wish.

Also, we can be independent financially and not worry about the financial entanglements or financial actions of others.

Let us in essence, go to “war” against the actions that would keep us dependent on finances and move on a path of being independent financially.

Let us look at ways that we can achieve our financial independence.

 

25 Effective Ways & Tips to Help You Become Financially Independent

 

1. Know What is Financial Independence 

The definition of financial independence is having sufficient financial resources to cover the expenses of life over your remaining years without the need for further wages from employment.

Additionally, it means being independent without having to rely on other individuals for financial support.

 

2. Budget

The first basic strategy on the road to becoming financially independent is through the financial tool of budgeting.

A budget is a listing of all items that can be classified as income on one side of the ledger and all items that can be classified as expenses on the other side of the ledger.

 

3. Income 

The income side of the budget is all of the streams of revenue.

Those streams of revenue can be wages and earnings, return on investments, additional jobs taken, etc.

The income side of the budget should at least match the expense side of the budget as it relates to totals but ideally would be a greater number than what is being expended.

 

4. Expenses 

As it relates to the expense side of the budget, these are all of the expenses that an individual or household is obligated to pay as well as choices of expending their money.

The expenses can be classified as fixed expenses and non-fixed expenses.

Fixed expenses are those expenditures from the household that are hard and fast.

They could include the paying of rent, a mortgage, utilities, insurance, etc.

These items that need to be paid are not subject to discussion.

On the other hand, non-fixed items can include line items such as entertainment, cellular phone service, automobile payments, etc.

These expenses may or may not be necessary and as such can be cut or reduced from the budget without there being any significant ramifications.

Also, a critical component or line item of the expense side of the budget is saving a specific percentage of the income and expending that out on the expense side of the budget.

 

5. Keep a Financial Journal 

A great discipline on the road to financial independence is to not only be cognizant of the expenses as reflected in the budget but the spending of money that can be classified as spontaneous or compulsive spending.

The journaling discipline requires that an individual write down every purchase that is made what the item was and the amount.

By keeping a financial journal an individual will be able to see where and how much the purchase of an item was and whether it was budgeted.

This can be an eye-opening process to be made aware of how unplanned purchases can be made and impact our budget and savings.

 

6. Live Within Your Means 

An ideal commitment to achieving financial independence is to live below your means.

If for example, your income for the month is $4000, it is important that your expenses stay within that range.

In addition, any windfalls such as bonuses or pay increases could be considered as not having occurred but maintaining your current standard of living.

 

7. Set Goals 

In order to develop a plan of action, as it relates to savings, goals need to be clarified and adhered to.

It is difficult to know how you are doing and whether you are being successful if there are no goals that have been set up as achievable outcomes.

Also, there should be milestones attached to your goals so that you know where you need to be at any point in your financial independent strategy and if not then adjustments need to be made.

 

8. Payoff Credit Cards 

A significant strategy and commitment to attain financial independence is to not carry any balances on your credit cards.

To carry a balance and pay the credit card company interest on that balance is counterproductive as it relates to achieving financial independence.

It is never a productive financial strategy to be paying a high rate of interest on a balance to a financial institution rather than that money being put into your financial portfolio and you receiving the interest on that money.

 

9. Have Automatic Savings 

A proven way of amassing your assets to become financially independent is to automate the process.

This means that the individual should be contributing to their investment vehicles by utilizing a financial transaction process that automatically, without your having to think about it or do it, contributes money to your investment portfolio.

 

10. Taxes 

It is important to remember that it is not necessarily how much you make but how much you keep.

One of the significant impacts on our earnings and investments is taxes.

Obviously, as good citizens, we need to pay our fair share and are legally bound to pay our taxes.

However, there are credits and deductions that can be legally claimed on investments and contributions.

It is important that you understand these opportunities of utilizing the tax code to your advantage and retain as much of your income and investments as possible.

It is always a good idea to consult with a professional tax advisor or CPA as it relates to the preparation of your taxes.

A qualified individual will be able to help you with your tax return and take full advantage of any legal deductions or credits that are provided to you.

 

11. Education 

As it relates to education, it is always a good idea to invest in yourself.

The more education you receive equates to a greater amount of knowledge that will serve you in your professional life.

It stands to reason that an individual with a higher degree will command a greater salary in the workplace.

 

12. Learn How to Invest 

Also, as it relates to education, it is important to educate yourself about your personal finances and learn from authors who are knowledgeable and have experienced the reality of what they know and have put it into practice.

You may have the greatest and most knowledgeable personal financial advisors available.

However, it is important to remember that it is your money and no one is going to be “jealous” of your money as you are.

It is important that you be educated as it relates to investing your hard-earned dollars.

 

13. Investing 

Investing is a critical way for your money to work hard for you.

Simply putting your money into a savings account or other low-interest-bearing investment vehicle is not going to be sufficient to help you towards your goal of being financially independent.

Therefore, an individual should look at investing in real estate, REITs, stocks, mutual funds, ETF’s, etc.

It is important to do one’s homework in looking at these investment opportunities, understanding them, and learning about other options to invest your money as well.

 

14. Have the Right Financial Advisor 

Engaging a financial advisor may be a good strategy if you the investor wants to use the professional and knowledgeable individual as it relates to investing on your behalf.

They will question you about your goals and your perceived level of risk and help you in achieving those outcomes.

As part of their service, they will work with you in achieving your financial goals, recommend a number of financial planning services, and will continually review your portfolio to make sure that what is occurring is consistent with your goals and target as indicated by your financial plan.

 

15. Health 

It is important not to neglect your health as it relates to your goal of being financially independent.

If you do not exercise, eat properly, and take care of your self your financial independence goal will be sidetracked due to the possibility of illness or possible diseases that may occur because of neglecting your well-being.

Additionally, it is better to be preventative in caring for yourself than spending money on treatments that could have been avoided if proper care had been maintained.

 

16. Own Investment Property 

A great way of working towards financial independence is through the purchase of the real estate as an investment.

Specifically, by purchasing a rental home, you can then become a landlord and realize rental income on a monthly basis.

You can be involved in this process as much as you wish or you can hire a property management company to take care of all of the particulars as it relates to leasing the property.

In addition, there are certain tax advantages of being a landlord.

 

17. Have a Nest Egg 

A nest egg is a financial independence strategy in which an individual or family sets aside money that is available in the event of an emergency.

An emergency could include a medical issue, loss of a job, household repairs, major appliance purchases, etc.

Most financial planning experts suggest that the nest egg should range anywhere from three months to one year of money available which equates to the monthly income times a particular number of months.

For example, a six-month nest egg for an individual who is earning $5000 a month would be a goal of $30,000.

 

18. Control Your Spending 

A significant action as it relates to becoming financially independent is to control one’s spending.

The spending should be informed by the budget and stay within the parameters of the expense side of the budget.

A great way of putting this financial commitment into words can be summed up by saying you don’t buy something unless it “is the bank or in the budget.”

Also See: How to Become Rich and Wealthy in 5 Years.

 

19. Purchase Your Own Home 

A goal that should be endeavored to achieve is the owning of one’s own home.

If an individual is renting a home, the reality is that the money is being given to your landlord to work towards their financial independence rather than your own.

By owning your own home you can build up equity which adds to your financial independence goal of not having to worry to pay rent once your home mortgage has been completely paid off.

 

20. 401(k) 

If you work for an employer that offers a 401(k) then you should endeavor to match your employer’s contribution to your retirement fund.

If the employer matches up to 4% of your salary towards your 401(k) then by every means possible, you should contribute 4% as well so that no money is left on the table as it relates to your 401(k).

 

21. Start a Business 

Another great way to move towards being financially independent is to start your own business.

By pursuing your dream you can work for yourself and enjoy benefits as it relates to taxes.

In addition, by running your own business you are provided multiple streams of income as it relates to the business that you have created and are being successful at.

 

22. Diversify 

As with anything, it is important not to put all of your eggs in one basket.

This is especially true as it relates to your financial investments.

Your investment strategy should span a number of investment vehicles.

That way, if there is a downturn in one of those investments, the reality is that your money is invested in other sources of returns that will help to mitigate any losses.

 

23. Have Adequate Insurance

It is important to have adequate insurance.

Insurance is like an umbrella that you carry even though it is not raining.

Therefore, when it rains or something challenging happens in your life, you have the insurance or the umbrella to protect you and your assets.

 

24. Will & Estate 

The reality of life is that none of us are immortal.

Therefore, it is important to remember to protect your accumulated assets while living and protect your financial hard work upon your demise.

This can be accomplished by formulating a will through estate planning.

The hard-core reality is that if an individual dies and has not let their wishes be known through a will, the state will intervene and disperse the estate as they decide.

The estate most likely would go to the courts to determine the distribution.

There would be expenses and fees associated with this process if your estate goes into probate.

 

25. Have the Right Attitude

One of the significant steps towards achieving financial independence does not involve any physical action or investing of any money.

The most powerful step towards achieving financial independence starts with the mind and pertains to the attitude of the individual.

If the attitude of the individual is one that is positive thinking that they can do this, that will go a long way in achieving the objective.

It is important to be saturated with positive affirmations, read stories of individuals who have been successful and be motivated by their story, and be around individuals who have that financial perspective.

 

Personal Story

Yogi Berra aptly said when you come to a fork in the road take it.

My fork in the road was highlighted with dollar signs rather than the typical sign indicating a particular direction.

I could go to the left and continue on the spiraling journey downwards into indebtedness or I could go to the right and take a different path that led upward out of the indebtedness that I was mired in.

My fork in the road was while traveling back with my two children after picking them up from their mother and experiencing a flat tire.

Due to poor decisions, I had $24 in my checking account and not many prospects of that increase in the very near future.

The fork in the road was to continue making those poor choices financially or, for the sake of my children and myself, go down a different path or road and allow the dangerous path I was on to only be a reflection in my rearview mirror.

Fortunately, the decision was made and the better road was chosen which led to a more secure future for me, my family, and one that continues on in the direction of financial independence.

 

Becoming Financially Independent FAQs

 

What Are the Advantages of Being Financially Independent?

An individual attaining financial independence or working towards that goal is not dependent upon other people or things to meet their financial needs or goals.

Their hard work and discipline have paid off to the point where they are interdependent on the financial ups and downs of life.

 

How Do I Know When I Have Reached Financial Independence?

There are two answers to this question.

The first answer is for you personally when you feel comfortable about where you are at with your investments, the setting aside of a nest egg, not being in debt, and your ability to weather any financial storms for a considerable length of time.

The second answer could be when you have reached that level where you have set aside 25 times what your annual spending is.

At this point, you are not dependent upon a paycheck and have sufficient financial resources to weather those 25 years.

 

You Can Do It

We value our independence.

It is our nature to think for ourselves and do what we want to do knowing that we are responsible for our actions.

Most likely this independence was demonstrated at an early age when we declared to our parents that “we’d rather do it ourselves.”

That same attitude is prevalent today in all aspects of our being and personality.

 

Conclusion

Achieving the status of being financially independent is an attainable goal.

It is important to remember that it doesn’t just happen but as a result of engaging every aspect of an individual’s being which ranges from strategizing, developing a plan, working the plan, and making financial sacrifices along the way.

The hard part is working on the plan and being disciplined in following through towards the achievement of the goal of being financially independent.

It is one thing to declare your independence.

It is another thing to fight for that independence.