How to gain your financial independence

While many people dream of gaining financial independence overnight by hitting the right lottery numbers, others are working year after year to make it happen. Financial independence requires dedication and focus, but many can achieve it through simple steps, rather than relying on the “wouldn’t it be nice” approach of trying to hit the jackpot.

Here’s how to gain your financial independence and create future opportunity.

What is financial independence?

Financial independence may mean different things to different people, but at its heart, financial independence is all about letting you do the things you really want to do without worrying about your income. While you may still have many of the same worries about life that everyone does, money won’t be one of them, and you’ll be able to pursue a special interest or a lifelong dream.

For some people, financial freedom is about leaving the rat race and settling into a quiet life. For others, it may be about ramping up their lifestyle, living a life of travel and luxury. Still others see financial independence as a means to do that kind of work that they really want to do rather than the work that they do only to get money. These folks might turn to volunteering or maybe open their own business now that they have the question of their income settled.

One of the most prominent groups focused on financial independence is the FIRE movement, short for Financial Independence Retire Early. FIRE participants often want to retire in their 30s or 40s, and make saving and investing key priorities. Of course, financial independence can be achieved at later ages, too, through the smart use of retirement accounts and a lifelong mentality of investing. They may become 401(k) millionaires through decades of investing.

How to become financially independent

Bankrate spoke with planning experts and those who have achieved financial independence to get their advice on the best steps to take and the pitfalls to beware of on your journey.

1. Imagine yourself being financial independent 

The first step to becoming financially independent is imagining yourself in that situation. What would it mean to you and what would you do? By imagining yourself in the position, you provide yourself the motivation for the work you’ll need to get there.

“My biggest mistake was not planning what I wanted my life to look like after financial independence,” says John Madison, CPA, who achieved financial independence at age 49. “I focused on climbing the ladder, not what I’d do when I reached the end. Consider why you want to be financially independent, not just how to get there.”

Lauren Anastasio, a certified financial planner at SoFi, recommends defining what financial independence means to you personally. “For some it may be the ability to work part time, but others may feel they’ve only achieved financial independence if they never need to work again,” Anastasio says.

It’s also important to understand your reasoning.

“Know why you want to be financially independent in the first place, especially if you’re going to retire before 59 ½, when you can begin withdrawing from IRAs and employer retirement plans without facing tax penalties,” says Mackenzie Bekeza, a certified financial planner at Millennial Wealth Management in Denver. “Is it because you do not like your current job? Do you not like working under someone else’s dime and time.”

Assessing your motivations can help you understand why becoming financially independent appeals to you. It’s important to come back to your imagination and vision of your financial future, so that you have the motivation to keep going over the years it’s going to take.

2. Stay focused

Once you’ve set your course toward financial independence, it can be difficult to stay on the path, however. There are so many things that may tempt you from your goal.

The biggest challenges are staying focused on your financial goal and not letting your friends or family pull you off course, say Billy and Akaisha Kaderli, a couple that achieved financial independence at age 38 and have traveled the world since then.

And your dream of financial independence may evolve as you change and grow. What made sense in your 20s may shift as your career and aspirations expand.

“Many people find that their biggest challenge to achieving financial independence is their continuously changing ideal state,” Anastasio says. “As our lifestyles evolve, our priorities can change and the moving targets for each stage of financial freedom can be frustrating.”

Besides the temptations of friends and family, even you can sabotage your own progress as your priorities change. So if becoming financially independent is really your goal, you have to maintain a steely resolve to achieve it.

3. Find someone who shares your goals

One of the best ways to maintain that steel resolve – and actually help you save the dollars to get there – is to find someone who shares your goals. That someone might be a financial planner, a community of like-minded individuals or a life partner. Whoever the person may be, you need them supporting you on your way to financial independence.

Bekeza suggests consulting a certified financial planner to keep you on the right path.

“One of our duties is to keep clients accountable for their actions, especially when it comes to goal setting,” he says. “If you do not have the means to work with a CFP or your budget currently doesn’t allow you to work with one, seek out an accountability partner.”

Turning to an online community such as one dedicated to the FIRE movement can also be a great way to share accountability with those focused on the same goals. It can also be a resource for tips and other financial tools that may help the journey become easier. Plus, you can always share your frustrations with other people who really do get it.

And it can’t be stressed enough: If you’re serious about financial independence, you need a spouse or partner who’s focused on the same goal and doesn’t undermine your dreams.

“Find a like-minded partner, sort out finances before committing to a long-term relationship and work out any differences,” says Akaisha Kaderli.

By getting on the same page with your partner, you benefit two ways: greater savings and reduced potential for a divorce, which can be financially destructive.

4. Take the long view on spending 

Spending on that new car may feel great today, but is it worth sacrificing your dream of financial independence? Would a used car do just as well and be cheaper too? Or maybe there’s a better alternative to a car entirely? When you’re focused on financial independence, carefully consider how you’re spending your money, because it’s money that could be invested.

The biggest challenge, says Madison, is forgoing spending today for future spending.

“Understanding opportunity cost early in your career is key. Yes, spending extra today can be fun, but if you consider not just the amount spent, but also the potential earnings on this amount over many years or decades, the total cost of the fun can be staggering,” says Madison.

Money that you don’t spend can go into your investments, and that amount can increase substantially over time. For example, at the stock market’s average annual return of 10 percent, a $1,000 investment would be worth nearly $2,600 in a decade. That $30,000 new car costs nearly $78,000 in lost investments over a decade, not including insurance, gas and other costs. Over a 20-year period, that car costs more than $200,000 in returns that you might make.

This Bankrate investment calculator can help you quickly figure out how those savings could pile up.

“Of course, finding the balance between too much and too little spending takes time and practice, but it can be done,” Madison says.

Focus on the big expenses – housing, cars, trips – and don’t sweat the small stuff like the lattes.

5. Track your spending

To help you focus and take the long view on spending, you need to track your spending, according to the experts. By measuring where your money is going, you can have a better handle on how to save and adjust your spending to areas that are more meaningful to you.

“Constantly live below your means, pay yourself first and save and invest as much as possible as soon as you can, as time is on your side,” says Akaisha Kaderli. “Track your spending and know what you are spending daily, monthly and annually.”

To do this, Bekeza recommends using budgeting software and linking your accounts to track all of your spending in one place. “I can’t tell you how much of a time saver this is,” Bekeza says.

Bekeza also recommends preparing a personal balance sheet, which includes all your assets and debts, and shows your net worth.

By tracking your assets and spending, you’ll be able to follow progress toward your goal, helping you maintain your motivation. To get motivated even further, you could even track how much money those savings – such as going with that used car – will turn into in the future.

6. Use credit responsibly

It can’t be stressed enough to keep debt to a minimum. Of course, if you’re reducing your spending, you’re already going to start minimizing any debt. But avoid carrying any debt on your credit cards, since interest rates may be over 20 percent annually – stunningly high.

“Eliminating high-interest rate debt is one of the best ways to make your dollars work effectively,” Anastasio says.

She draws a distinction between “good debt” and “bad debt,” however. Good debt is that which can help you build wealth, such as student loans or mortgages, while bad debt is high-rate debt, including that on credit cards or personal loans.

But remember that any spending is already money that you can’t save.

“Even 0 percent interest debt requires payments that could be invested instead,” Madison says. “The interest cost is the lost growth you could have earned if you hadn’t been forced to make monthly payments.”

And beyond that, it’s important to build and monitor your credit, says Marina Vaamonde, a real estate investor and founder of PropertyCashin.com in Houston. “A great credit score will allow you to acquire the funds necessary for education or an entrepreneurial venture you want to pursue,” she says, advising not to let your score dip below the 700s.

“Also remember that taking on too much debt will not only drop your credit score, but can be a major risk factor if you don’t have the funds to pay it back,” she says.

One final point about using credit responsibly is having the resilience to not need it. By having an emergency fund, you’ll avoid the necessity of hitting up your cards when times get tough.

7. Get aggressive with your investments 

Those aiming for financial independence, especially early in life, can’t rely on bank accounts alone anymore. The days of 6 percent CDs are gone, and would-be independents need to be aggressive with investments. Yes, they always need accessible low-risk cash, but those looking for independence need investments, such as stocks and real estate, that really grow over time.

What that means can be different for different people, though.

The Kaderlis use a Vanguard index fund to build their wealth and take advantage of dollar cost averaging, too. Their approach allows them to earn the market’s average long-term return, pay minimal expenses on their investment funds and “be the market.”

“Don’t try to outsmart the market. You won’t,” says Madison, who recommends keeping investment costs low and staying well-diversified.

Those looking for more stability may consider other allocations of their money. For example, if you want to rely less on volatile stocks and have more reliable income, then you can turn to more bonds, especially if you plan to use the income in the next few years. By having more bonds, you won’t have to sell stocks into a market that may be down when you need the money. However, you likely won’t receive the potentially high return of stocks, either.

But you also have to worry about having too much in fixed income such as bonds and CDs, lest inflation erode your purchasing power. Having a healthy allocation to stocks – that is, being more aggressive – can help your portfolio grow and sustain your lifestyle over time.

Finally, a Roth IRA is a great option that allows you a lot of flexibility on withdrawing your money while also enjoying many tax advantages – such as tax-free withdrawals in retirement.

Bottom line

So much of financial independence comes down to living beneath your means and rolling up enough cash so that it can work for you. By amassing enough and living lean, you’ll be able to withdraw money from your nest egg and still allow your money to grow over time.

“If you have more money on the table to invest in the first place, you will have a higher chance of achieving your financial goals, although it’s never guaranteed,” Bekeza says.

Featured image by Ezra Bailey of Getty Images.

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