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Home / Lifestyle / Personal finance / Ten ways in which you can work towards financial independence

Ten ways in which you can work towards financial independence

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Sillin, nat            Nathaniel Sillin

AFTER the 2008 economic crisis, many people assumed they would never be able to reach true financial independence – the ability to live comfortably off one’s savings and investments with no debt whatsoever.
However, people willing to plan and adjust their spending, savings and investment behavior might just find that financial independence is possible. Here are 10 ideas to get started.
1. Visualize first, then plan. Start by considering what your vision of financial independence actually looks like – and then take a reality check. Qualified financial experts can examine your current financial circumstances, listen to what financial independence means to you and help you craft a plan. The path to financial independence may be considerably different at 20 than at 50; the more time you have to save and invest generally produces a better outcome. But, at any age, start with a realistic picture of your options.
2. Budget. The process of tracking income, subtracting expenses and deciding how to divert the difference to your goals each month is the essential first task of personal finance. If you haven’t learned to budget, you need to do so.
3. Spend less than you earn. It might be obvious but it’s one of the most difficult forms of financial behavior to execute. Adhering to a lower standard of living and expenses will help you put more money into savings and investments sooner.
4. Build smarter safety nets. Emergency funds and insurance are rarely discussed in combination. The traditional definition of an emergency fund is a separate account for cash that can be used instead of credit to repair a broken appliance or other expense that might run to a few hundred dollars. However, many people keep insurance deductibles high to keep premiums low. Would you have enough cash on hand to cover an insurance deductible if you had a sudden claim? If not, build your deductible amounts into your emergency fund.
5. Eliminate debt. Although consumer debt levels have generally fallen since the 2008 financial crisis, the federal reserve bank’s New York branch reported in February that home, student-loan, auto and credit-card debt began creeping up again in 2014. Getting rid of revolving non-housing debt is one of the most effective ways to free up money for savings and investment.
6. Consider your career. Financial independence doesn’t require you to quit a career you love, but you really can’t reach it without steady income to fuel savings and investments that will build over time.
Speak with qualified advisers about your income, benefits and retirement picture and see if you might be able to expand your sources of work-related income, such as consulting part time.
Also keep in mind that, once you reach 50, the IRS allows you to make catch-up contributions to both 401k and IRA accounts.
7. Downsize. You’ll generally reach financial goals faster if you can cut your overall living expenses. For some, that means selling your home and moving to a smaller one or to an area with lower living costs and taxes. You can also sell or donate property you don’t need and use the proceeds to extinguish debt or add to savings or investments.
8. Invest frugally. Become a student of investment fees and commissions because they can cut significantly into your principal. Make a full evaluation of fees you are paying on every investment account you have and, if you’re working with licensed professionals who sell you financial products, know what fees they’re charging for their investment and advisory services.
9. Buy assets that generate income. Stocks, real estate, collectibles and cash investments all have up-and-down markets. But do your homework and focus on investments bought at attractive prices that are likely to appreciate over time. Also, don’t forget to study the tax ramifications of any investment transaction you make.
10. Always know where you are financially. Financial planning isn’t about making one set of financial decisions and assuming you’re set. Lives and situations change and your financial planning must be flexible enough to withstand both positive and negative changes without derailing your hopes for financial independence.
If your forte is not investment, financial planning or tax matters, by all means bring in qualified experts to help. But financially independent people generally have their money issues at their fingertips, not only for their own use but for estate purposes as well.
Bottom line: Financial independence involves diligence and a bit of sacrifice but even the smallest moves can yield big outcomes.

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