Most people aren’t expecting to acquire great wealth in their lifetime, but everyone wants to be financially independent. Financial independence is marked by having enough income or accrued wealth to be able to live comfortably, without the assistance of others. It usually involves getting out of debt, saving a portion of your income, and investing in retirement.
Start an Emergency Fund
Most financial experts agree that the first step to financial independence is to start an emergency savings. To start, simply save $1000, and commit to never touching it except for emergencies. This should be enough to get you out of a bind if you sustain a minor injury or accident, or to cover your typical surprise expense. If you do have to withdraw from your emergency savings, replenish it as quickly as possible. After you have $1000 in your emergency fund, it is time to pay off your debts.
Pay Off Your Debt
The next step toward financial independence is to pay off all debt, besides your home. You can do this using a variety of methods, but one popular way is using the snowball method. The premise behind the snowball method is to start with your smallest debt. Pay as much as you can toward that one, while paying the minimum on the others. Once that debt is paid, use the money you were contributing toward the first debt-payoff to pay down the second largest debt, and so on. When all your debts are paid, you can start to think about your mortgage. You can pay off your mortgage sooner by making additional principal payments. Now is also the time to gradually increase your savings to 3-6 months of necessary living expenses.
Invest Toward Retirement
It is never too early to start thinking of retirement. If your employer offers a matching 401(k) plan, consider maxing out on your monthly contributions. Most financial advisors recommend saving a total of 15% of your monthly income, including any funds contributed by your employer, for retirement. If you are unable to afford the employer-matched limit, try to increase your amount contributed by at least 1% every year.
Financial independence is possible. It just takes a healthy amount of economy and prudence. More than anything, you need to be able to look beyond what you want in the moment, and always keep your long-term goals in the forefront of your mind. With some time and careful planning, you can gain the peace of mind that comes from being financially secure.
Check out this article on why you should put your assets in a trust!