November 18, 2023

Key Steps Toward Financial Independence

A common definition of financial independence, or financial freedom, is a state of having complete control over one’s finances, including sufficient savings, little to no debt and the ability to live one’s desired lifestyle. The goal of achieving financial independence can seem like a lofty one, especially if you’re just beginning to get your financial house in order. However, the following key tips can help improve your chances of achieving financial freedom in the future and empowering yourself in the process.
Develop a financial plan
One of the best ways to achieve financial independence is by establishing and following a comprehensive financial plan. A custom financial plan puts you in control of all aspects of your finances and provides you with actionable strategies to address the challenges you face, one step at a time.
A comprehensive financial plan is essential to growing your wealth, avoiding potential pitfalls and remaining on track to achieve your goals. Financial planning can help increase your level of confidence, result in more beneficial financial behaviour and ensure your family will be provided for in unexpected circumstances. Ultimately, a solid financial plan puts you in control of your future and establishes a path toward financial independence.
Create (and stick to!) a budget
Budgeting is a powerful tool that can help you take charge of your finances and feel more confident about your spending and saving habits. Start by taking an objective look at your savings, spending, investments and debt. Be honest with yourself about where you stand today versus where you want to be and don’t look at a budget as being restrictive or like putting yourself on a financial diet.
Track your spending for 30 days to gain an understanding of where your money goes.
Make a list of all debts, including their outstanding balances and interest rates.
Make a list of all your assets, including emergency savings, investment accounts, checking and savings accounts, retirement accounts, etc.
Make a list of your long- and short-term goals to determine whether you’re making progress toward achieving them, then identify areas for improvement.
It may be helpful to view your budget in terms of your priorities and values. What’s most important to you? Spending time with family? Pursuing a hobby? Saving for a down payment on a home? Following a budget can help you focus on those values while working toward your goal of achieving financial freedom.
Save and invest for the future
The sooner you start saving and investing, the closer you’ll be to financial independence, thanks to the power of compounding interest. That’s why it’s important to set aside a portion of your income each month to save for the future. Investing that money in a diversified portfolio that’s in line with your goals and risk tolerance allows your assets to grow over time, thanks to investment gains. As gains continually accumulate in the account, they increase the balance and begin earning their own interest. Over time, this can add up to a significant amount, hopefully allowing you to achieve financial independence.
Pay off debt
Debt is one of the biggest hindrances to achieving financial freedom. Regardless of whether you carry student loan, credit card or any other type of debt, the sooner you pay it off, the closer you’ll be to financial independence. It’s especially important to pay off high-interest debt as soon as possible, as interest and fees on outstanding debt can quickly spiral out of control if not properly managed.
Two effective strategies for paying off debt include:
• The snowball method – This method involves paying off your smallest debt balance as quickly as possible then moving on to the next-smallest debt. The benefit of this approach is that it can help you gain a sense of accomplishment as you knock out one loan after another.
• The avalanche method – Using this method, you begin paying on whatever loan has the highest interest rate. Once it’s paid off, you move on to the loan with the next-highest interest rate and continue doing so until all loans are paid off. This approach allows you to pick up speed as your go, because each payment saves you more money than the one before.
Educate yourself
Take time to learn about personal finance and the capital markets. Read books, attend webinars and follow reputable financial websites in order to understand concepts such as budgeting, investing, taxes and retirement planning. Avoid resources promoting a shortcut to financial success or financial advice from disreputable social media sites. Also, keep up on relevant changes in tax laws to help ensure you’re maximizing your deductions. Educating yourself on relevant financial topics is one of the best ways to make informed decisions and take control of your financial future.
Diversify your income sources
Relying solely on a single source of income can limit your ability to achieve financial freedom should that income stream be interrupted for a period of time. Consider additional opportunities to diversify your income stream, such as starting a side business, investing in rental properties or freelancing. Incorporating multiple income streams can provide added stability, increase your earning potential and help you achieve financial freedom more quickly.
Spend intentionally
Achieving financial freedom isn’t about hoarding cash for 65 years. It’s about making intentional spending decisions. Ask yourself, “What brings me the most joy and fulfillment?” “What do I want to accomplish in life?” and “How can I help the people who matter most to me?” These questions can help you identify your values and priorities. Once you have a clear understanding of what’s most important to you, you can align your spending accordingly. Before making a major purchase, take time to consider whether it aligns with your priorities. If it does, go for it! Adopting mindful spending habits can help you avoid impulse purchases and make choices that support your journey toward financial freedom.

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