Becoming financially independent is a goal for many young people, but the path can seem daunting without a clear plan (or a deep understanding of what it really means). For some, financial independence means having enough income to cover your living expenses without needing to work. Sounds like THE dream! But the more common definition—and probably what you are looking for—is to become responsible for your own expenses, not needing to depend on somebody else.
This freedom allows you to live life on your terms, pursue passions, and enjoy peace of mind. Let’s explore what financial independence truly means and learn 10 doable tips to help you get there.
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What does being financially independent even mean?
Financial independence means having the ability to cover all your living expenses through your income, without relying on financial support from others. It signifies the ability to support yourself, make your own financial decisions, and live without financial dependency on anyone else.
If you’re reading this, you might be financially dependent on another person or entity that is covering your living expenses, such as your parents, partner, a former spouse, the government, loans, insurance, or a friend or family member.
Anyone wondering how to become financially independent should know it requires planning, discipline, and continuous learning. The reward? Have the freedom to live life on your terms, decide how to spend your money without needing the approval of others, and the peace of mind that comes from financial security.
Financial freedom vs. financial independence: Is there a difference?
While these terms are often used interchangeably, they have distinct meanings. Financial independence is about taking responsibility for your own expenses and not depending on others.
Financial freedom, on the other hand, means having sufficient wealth to afford the lifestyle you desire without any financial constraints. Financial independence is the first step toward achieving complete financial freedom.
“Financial freedom allows you to pursue your passions, travel, and enjoy life without the constant worry of financial strain,” says Andrew Smith, financial expert and founder of Starnote Lookup.
What do I need to do to become financially independent? 10 tips
“Becoming financially independent requires a strategic and disciplined approach,” Smith says. Here are 10 main things that you can do to help you on your journey, according to Smith:
1. Assess your current financial situation
Begin by taking a thorough look at your financial situation. Do you have a stable income from work? What’s preventing you from covering your expenses? Understand if the dependence is due to insufficient income, high expenses, or both. Knowing this will help you identify areas for improvement.
List your assets, liabilities, income, and expenses. This assessment will give you a clear picture of where you stand and what changes are needed. Understanding your financial starting point is crucial for setting a realistic timeline and creating a plan to achieve it.
2. Set clear financial goals
“Clearly define short-term and long-term financial goals and create a plan to achieve them,” Smith says. Whether it’s moving out, buying a car, or traveling the world, having clear goals will provide direction and motivation.
Write down your goals and break them into manageable steps to track your progress, and establish milestones to celebrate small successes along the way. This will keep you motivated and focused on your larger goal of financial independence.
3. Create and stick to a budget
This is essential for tracking your income and expenses. Allocate funds for necessities, savings, and discretionary spending. Use budgeting tools or apps to track your spending and stay accountable.
Review your budget regularly and adjust it as necessary. Include a category for debt repayment if applicable and track your progress towards reducing dependency. (Here’s how to make a budget in seven simple steps.)
4. Build an emergency fund
“Save at least three to six months’ worth of living expenses for unexpected situations,” Smith says. This fund will cover unexpected expenses and prevent you from dipping into savings, going into debt, or returning to your previous situation.
Start small and gradually increase your savings. Consider setting up a separate, high-yield savings account for your emergency fund to avoid the temptation of using it for non-emergencies.
5. Pay off debt
Debt can hinder your progress toward financial independence. Prioritize paying off high-interest debt first, such as credit cards. Consider using strategies like the debt snowball or avalanche method to pay off debt efficiently.
These are two popular strategies for paying off debt. The debt snowball method focuses on paying off the smallest debts first, regardless of interest rates. Alternately, the debt avalanche method prioritizes paying off the ones with the highest interest rates first. This approach minimizes the total interest paid over time.
Paying off debt is always worth it, but it’s seldom easy. Don’t be afraid to seek professional advice if you are struggling to manage multiple debts; there are many financial consultants that could help you, and even some tools online.
6. Increase your income streams
“Don’t rely solely on one source of income. Consider side businesses or investment opportunities,” Smith says. Diversifying your income sources can help bring in more money on a regular basis. You might explore side hustles, freelance work, investments, or starting a business. More income streams provide financial stability and growth opportunities.
Look for ways to monetize your skills and passions. Network and seek mentorship to explore new opportunities. And remember: Building multiple income streams takes time, so be patient and persistent.
7. Invest wisely
Educate yourself on different investment options like stocks, bonds, real estate, and mutual funds. Start investing early to take advantage of compound interest.
Consider low-cost index funds as a starting point if you are new to investing. Diversify your portfolio to spread risk and maximize returns. “Focus on acquiring assets that appreciate in value and generate income,” Smith says.
8. Automate savings and investments
Set up automatic transfers to your savings account and investment accounts to ensure consistent contributions. This approach minimizes the temptation to spend. Reassess your automated contributions periodically to increase them as your income grows.
9. Cut back on your expenses
Avoid lifestyle inflation. Focus on needs rather than wants, and find ways to reduce expenses. Living below your means allows you to save more and invest in your future.
Track your spending habits to identify areas where you can cut back. Prioritize experiences and long-term goals over short-term gratification.
10. Continuously educate yourself
Stay informed about personal finance and investment strategies. Read books, attend seminars, and follow financial blogs. Continuous education helps you make informed decisions and adapt to changing economic conditions.
Also, “periodically review your financial plan and make adjustments as needed to stay on track,” Smith says.
FAQs
We got you covered! Here are some answers that you probably were looking for.
How to become financially independent as a student?
Independence is tricky when you are spending most of your time going to classes. Start by managing your money wisely. Budget your expenses, avoid unnecessary debt, and look for part-time jobs or freelance opportunities. Save and invest any extra income, no matter how small.
How to become financially free in five years?
Doing a shortcut requires aggressive saving and investing. To become financially free in five years, try to cut expenses drastically, maximize your income streams, and invest in high-growth opportunities. This path involves significant sacrifice and risk but can yield rapid results.
At what age do most become financially independent?
The age at which people achieve financial independence varies widely. Many reach this milestone in their 40s or 50s, but it depends on individual circ*mstances, career choices, and financial strategies. According to Pew Research Center, 45% of young adults age 18-34 in the U.S. say they are completely financially independent from their parents.
How to be financially independent without a job?
To become financially independent without a job, focus on generating passive income streams. Invest in assets that produce income, such as rental properties, dividends from stocks, or royalties from creative works.
How does inflation affect financial independence?
Inflation erodes purchasing power, meaning you’ll need more money in the future to maintain your lifestyle. Consider inflation when setting financial goals and adjust your savings and investment strategies accordingly.
How can I teach my children about financial independence?
Start by teaching them basic money management skills like budgeting and saving. Encourage them to set financial goals and understand the value of money. Provide them with opportunities to earn and manage their own money.
Bottom line
Almost everyone desires financial independence, free from economic stress and the need to ask anyone for permission before making a purchase.
Financial independence, contrary to what some people might believe, does not imply being a millionaire or achieving retirement early. It is really about living without surprises, thanks to having an income that covers the current expenses.
