As you plan for the year ahead, it’s a good time to consider how reaching financial independence fits into your long-term goals.
What is financial independence? Independence means freedom from being dependent and from outside control. So financial independence means just that – financial freedom.
How can you work toward achieving financial independence? The simple answer: have more income than expenses and strategize your savings plan.
Income
If you’re living paycheck-to-paycheck, you’re not financially independent – you depend on a job for money. Compare income with others employed at your position and skill level and negotiate your salary and benefits package. Get a raise or land a new, higher-paying job. Diversify and multiply your active income streams through a second part-time job, freelance/contract work, or starting a business.
Then plan to generate passive income: e.g., income from investments such as retirement accounts, stocks, bonds, annuities, and real estate investments.
Expenses
Minimizing your expenses is the next part of the formula. First, classify your expenses into fixed (rent/mortgage, car payments), periodic (car registration, gym memberships), and variable (groceries, personal care). Then evaluate how you could reduce them. Talk with a tax professional about lowering your tax burden. If you examine your needs carefully, you may be able to eliminate some expenses altogether.
Savings
The next step is building up savings. Start saving as early as possible in life and develop a habit to “pay yourself first” — put money in savings before you pay your bills or spend on anything else.
A savings plan has three components: emergency fund, short-term savings, and long-term savings. The emergency fund covers emergencies like job loss or unexpected repairs. Short-term savings holds money for the fun experiences you enjoy, like vacations or entertainment. Long-term savings is where you set aside money for future investments. That’s how you will fund your sources of passive income down the road.
Vince Shorb is a leading advocate for financial literacy and CEO of the National Financial Educators Council (NFEC). You can find Vince on his LinkedIn.