Becoming Financially Independent – The Basics

7/5/2017

Becoming Financially Independent – The Basics

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Financial Independence as a journey and how to get started.

For some people when they hear the term financial independence they think of someone who doesn't have to work and can do what they like each day rather than going to work.  So, this is someone with 100% passive income.

But that's not realistic for most people.

 

What if we defined financial independence as:

“Being able to pay your bills on time, pay down your debt, save for your retirement and have money left for entertainment.”

So, let's think of financial independence on a scale.

At one end is ‘Dependence', for example a child is completely financially dependent on their parents. But, most adults fall somewhere along this scale of financial independence.

At one end are people living in a deficit where they are spending more than they earn and heading deeper into debt, while others in the middle may be simply breaking even or saving small amounts of money.  If you're able to save some of your income, then you're on your way to moving towards the other end of this scale and financial independence.

Somewhere in the middle of this scale, as people attain control over their finances, their lives become less stressful. When you are in control of your finances, can cover an unexpected emergency expense, save for your future and have a portion of money left to spend on the fun stuff, you've attained a level of financial independence.

So how do you get to this point of financial zen? The answer lies in 5 basic personal financial principals.

1. Create a budget
2. Spend less that you earn
3. Have an emergency fund
4. Pay down your debt (and don't incur more unnecessary debt)
5. Save for your future

This is all well and good on paper, but you need to know the day to day practical steps to take to get financial control.

Let's look at each step.

1. Create a budget

First of all, create a budget! If you need help doing this, a credit counseling agency such as Navicore can provide a budgeting session to guide you and get you on the path to financial understanding.

Once you have a budget, you have an idea of what is coming into your bank account and what is going out. This is the first step. Now it's time to maximize your budget, so you're spending less that you're earning and therefore increasing your savings.

Pro tip: Make sure you budget in some ‘fun money' to keep life interesting, but don't overspend. That way you're less likely to give up on becoming financially independent.

2. Spend less than you earn

There are 2 ways to increase your savings. One is to spend less and the other is to earn more!

To spend less, take a look at the budget you just made and see where you can cut the fat. Check your credit card statements for old recurring expenses like subscriptions that you aren't using any more and cancel them. Make your lunch at home and generally be aware of where you are spending your money and if you can cut it.

You can also earn more each month to help balance your budget. If you need to earn more, you can get a part time job, work extra hours or establish a side business. You can even sell unused items online from around your home.

So by spending less and earning more, you will have a surplus of cash at the end of each month. It's ok if this is just a small amount. The important thing is to start moving along the scale of financial independence at your own speed.

3. Establish an Emergency Fund

Once your budget is balanced, you need to establish an emergency fund. Put some savings regularly in a separate bank account and don't touch it unless there is an unexpected and sudden financial need like a large car repair. If you need to use some or your entire emergency fund, don't forget to replenish it again so it's there for your next emergency.

4. Pay down your Debts

Once you have a small emergency fund, switch your focus to paying down your debt. Destroy your credit card debt as a priority. Pay more than the minimum every month until you have a zero balance. Try to use your card only as needed and to pay it off at the end of every month.

Similarly, once you have taken care of your credit card debt, shift your focus to your car loan or student debt. Systematically destroy all your debts.

By this point of the financial plan you should be feeling empowered and much more in control of your finances. Your financial independence will have increased. The more you take an active and positive role in your financial future, the closer you get to that feeling of financial Zen.

5. Save and invest for your future

Once your debts are under control, you can invest your extra cash into your savings and retirement.  By now you should be feeling confident about your finances. Keep your budget up to date at least every 6 months so you know where you stand and don't lose sight of the awesome job you're doing.

For more free financial education check out our education library and blog

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