When your debt is no longer under control and you work hard for your creditors instead for yourself and your family you might talk to yourself: “Enough is enough, I badly want to get out of debt and achieving financial independence soon.” You want to stop it from controlling your life and do drastic measures to get out of the trouble.
However, sometimes that approach doesn’t work because you’re too close to the problem.
Another way to make it works is to view your current financial situation from the distance or from a higher place. For that purpose, we would suggest you deal with your debt using a financial independence perspective. This way lets you look at debt repayments as part of the overall processes for reaching your financial freedom goal.
Being financially independent is much more rewarding and meaningful than being debt-free. Though it demands more efforts from your side it will help you shape and strengthen your characters, which is useful for you to deal with other life’s issues.
What is Financial Independence?
Financial independence loosely means freedom from having to work for money. It happens when your savings and/or income producing assets can cover your monthly expenses for the rest of your life.
Some experts relate financial independence with early retirement. Both terms have the same meaning, where the key point here is not retirement but the ability to choose whether to continue working or not.
If you’re financially independent you don’t have to work because work is no longer a necessity. Being financially independent means you can choose a job that allows you to accomplish your life’s mission or work for reasons other than fulfilling basic necessities.
Good Reasons to Build Your Early Retirement Fund
1. It starts with a plan. The good thing about declaring financial independence is that you need to devise a plan first. This involves setting your independence day and deploying strategies to achieve that objective. A good plan and a discipline implementation can help improve the way you manage money.
2. Save for the future. You can reach financial independence by accumulating money you set aside each month along your plan’s life. The more efficient you control your income and expenses the more money you can save for the future.
3. It frees you to do what you really want to do. Whether you want an early retirement or not retired you can pick your preference. You don’t have to work and you’re free to work at a job you’re passionate about.
Determine Your Financial Independence Day
According to Networthify your saving rate determines how fast you will reach your financial independence goal.
For example, with current annual income of $50,000 and current annual expenses of $20,000 or 60% saving rate you can retire 12.4 years. It will increase to 21.6 years with 40% saving rate, which is almost twice the time of the 60% saving rate.
Using the calculator you can set your saving rate to find out how long you will be financially independent. Alternatively, you can also decide the time required to reach your financial independence day and discover the saving rate you will use as a basis for creating a budget.
5 Strategies for Reaching Your financial Freedom Goal
1. Control your expenses and pay off debt. Note down the amount you spend on every item by studying your credit card statement and other bills that you pay cash.
If you carry credit card balance try to look for ways to pay in full or, at least increase the payment amount. Go through your expense list and eliminate all expenses that you can sacrifice. With your current income, look for ways to set aside money each month.
2. Increase your income and make extra money. Whether you can save or not make sure to find opportunities to increase your sources of funds.
You may want to try a part-time job or set up a side business. If you have revenue generating assets like a rental property use them to generate passive income.
3. Save for emergencies. Create a savings account to build an emergency fund for rainy days. Put the money you can set aside each month to the savings account till it covers 6 to 8 months of your monthly living expenses.
4. Save a percentage of your income for retirement. If your employer offers you a retirement plan like the 401k plan take full advantage of it. Put in the maximum contribution possible that your employer will have to match. This is one of the best returns you will ever earn on your money.
5. Invest the rest of your money. Have your finance under control, which means you have no debt, have an emergency fund that covers expenses for six months and are maximizing your contribution to your 401k plan.
Once you can save some money every month, you are ready to start investing. This involves setting financial goals, finding type of investment to choose from and understanding your risk tolerance. As a beginner you may want to start with mutual funds that allow you to invest with as little as $500.
Execute Your Plan
1. Review your progress every 3 months. Check your achievement every month for the first 3 month and then every 3 months after that.
Can you reach your saving target? Are there any other ways to increase your income? Follow the above process and don’t move to the next step before you have completed the previous one.
2. Review and adjust your plan. There are two ways to speed up your goal achievement: increase income and reduce expenses.
Find out which is easier for you to do: making extra money or lowering your standard of living. If you prefer the first try to focus on doing that only.
3. Check how much your investment worth. If you’re not satisfied with the returns get investment advice on picking stock mutual funds based on your risk tolerance and financial goals.
Is It all about Money?
Personal financial independence is not just about freedom from having to work for money. It’s more about what you think and feel about money. It’s also about how you look at money and other people with their money.
If money means a good thing to you and you believe by working hard and helping people you can make more money, you will have no problem in building your financial freedom fund.
Role models whom you would like to follow also affect your view about money. If you like a person who does charity and organizes events for the handicapped, you will do the same things like your hero or heroine does.
So even if you suffer from your debt load now, financial independence is within your reach.
Just find a good role model to follow and learn how he or she manages money. Apply what you have learned from the mentor to manage the journey for reaching your financial independence day.
Above all, make sure you understand what you value most in life and use your finance to turn your aspirations into a reality.