FINANCIAL BLOG FROM YOUR CHIEF FINANCIAL OFFICER
Ten Steps to Financial Independence
April is Financial Literacy Month. This month I want to lay out a plan that could lead you to becoming financially independent if you follow the steps provided. “Financial Independence” is defined as having enough income to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others.
Long-term thinking is an important component of having enough wealth to achieve financial independence. The following are my ten steps to financial independence:
1. You must want to be financial independent: Your journey to financial independence does result in you making changes in your life, but do not be afraid. The changes you make will not happen overnight; they start with tiny steps. If you are new to saving, you do not start saving half of your paycheck. You start with saving $5.00 weekly then increase it to $10.00 weekly, then when you feel comfortable, increase to $20.00, and so on. Before you know it, you will be hitting that goal of 10 to 15% of your salary. Some employers will match your contribution up to a certain amount. Let’s say your employer matches your contribution up to 5%, you can start with 1% and increase it until you are setting aside no less than what your employer is matching, then continue to set aside the amount you have establish to get you to being financially independent. Remember, we learn to crawl before we walk, and we fall many times so do not give up. Start with tiny steps before you take that bigger leap.
2. To become financially independent, you must commit to this change of lifestyle, including.
- Define what financial independence means to you, as following someone else’s plan is not going to get you where you need to be.
- Get that budget in place (if you do not have one), as it will paint a realistic picture of where you really are.
- If you already have a budget review it and tweak it so you can and devise the right plan and do what you need to do to get you where you want to be.
- Get a realistic idea of what you need to give up because you will have to give up some things to get where you want to go.
- Get a realistic assessment of the obstacles that are in your path, and the challenges you will be facing when you decide to shift your mindset from dependency on others to financial independence.
- Set you goals as that will help you to become financially independent.
3. Create a series of steps that will get you where you want to go: Ready, Set, Go. Create a list of needs and wants to help you establish your financial priorities. Before you start setting goals, make sure they are SMART goals (specific, measurable, achievable, rewarding, timely). Also, you will need to categorize your goal as short (less than two years), mid (two to five years), and long-term (greater than five years), because your financial goals will differ in the length of time needed to achieve them. I would even recommend you include a legacy phase, which will be goals for the next three generations. These are your goals so set the appropriate time you need to achieve them.
Becoming financially independent is not a single goal, but a series of sub-goals that when followed would lead you there, however, you must commit to your plan to become financially independent. Steps such as:
- Increase your income
- Control your spending habits
- Eliminate all debt (i.e. student loans, credits, car payment)
- Increase your savings
- Define your long-term financial goals
- Obtain the best life insurance for your family
- Legacy planning
It is important to create such a list, with each step you must have goals that will correlate to each category. That will ensure you are moving your entire financial situation forward, rather than trying to do accomplish one category at a time.
4. Get Out and Stay Out of Debt: Review your debt situation. Get a copy of your credit reports and if there are errors on it, clean it up. Your credit reports can provide a snapshot of your overall financial situation, and it’s easy to obtain copies of your reports just visit annualcreditreport.com. Let’s be real, you can’t become financially independent when you owe money to other people. You should have a solid plan to get out of debt and to do it as soon as possible. Stop working for others instead of yourself. Have a plan to get out of debt within the next two to five years. Freedom from debt is an achievable goal for every family. The first step is to take control by taking an honest look at your current obligations. There’s no such thing as “good debt” when you’re trying to achieve financial independence. Once you get out of debt you will have so much more to invest.
5. Keep increasing your income: Make sure you are steadily increasing your earning power and maintaining your spending level to amounts below your income and you will reach all your financial goals before anticipated. You can increase your income by keeping your skills sharp, your mindset should always be in the adding value mode, be-the-best-at position and keep yourself open for better opportunities with your employer as well as other employers. If you are self-employed, keep your business moving up to the next level. Ask you clients how you can best serve them or ask them what challenges they are facing and how can you better serve them. The better you can serve people, the more value you bring to the table and the more you increase your income. Investing in yourself is one of the best ways to ensure a great return on your investment.
6. Make a Promise To Pay Yourself First, No Matter Your Income: One of my favorite books “The Richest Man In Babylon” by George S. Clason, states to set aside one-tenth of your earnings to keep for yourself, that will start you on your road to financial independence. This way you will make sure to earn money for yourself before slaving for others. Start now, save now to start your road to financial independence. You should always be saving money no matter what’s happening. This is one of the best ways to make sure you are always progressing. Writing down your goals will help you start the process, but reviewing them weekly, having an accountable partner, and having honest conversations about where you are financially, will determine your success or failure in becoming financially free. Stay committed and leave the excuses behind as this will determine your success or failure in becoming financially independent.
7. Invest Everything Above Your Emergency Fund: You must expect the unexpected. You will need to create a safety net by having an emergency fund. If you learn to expect the unexpected, you can keep minor financial setbacks from turning into a major financial crisis. You will need to determine the amount of money you need in your emergency fund. The goal is to have three to six months of living expenses, if you are a self-employed then you will need six to twelve months. The goal is to make smart choices by planning. Once you have achieved that, start to invest. Plan to invest in equity, no matter how the market is doing, invest consistently and the best time to start is now. Don’t get me wrong, investing is risky, however, this is probably the best time to invest, since no one knows what the future holds or what the markets will do in the future. You should have a certain amount of money invested in stocks, fixed income investments, real estate, peer-to-peer lending, so you can diversify your investments across several different asset classes.
8. Secure Your Financial Future: Don’t despair if you are behind on your retirement goals. If it is any consolation, you aren’t alone, most people are not adequately prepared for retirement, but you can change that and begin where you are now. You can catch up on your retirement contributions if you are 50 and over. Catch-up contribution provisions also exist for those who contribute to IRAs. For additional information, visit www.irs.gov/retirements-plans. Save extra in non-retirement accounts (Roth accounts). Change your retirement investment strategy and research other income sources, like starting a business or doing a side hustle that you can handle.
9. Make a Commitment: Remind yourself of your goals on a regular basis. Create a vision board if you must and keep it where you can see it every day (always keep your goals in front of you). In order to succeed, to really change your life, you must make a commitment to the process. Make a commitment on how you are going to live on less than you earn. I know it’s very easy to say, but not easy to do! The secret to keeping to your commitment is to make the plan something you can live and flexible enough to adjust to keep you on track. Remember to forgive yourself if you fall off the wagon and dust yourself off and get back on. If you don’t like where you are then make the commitment to change. Be realistic, be flexible, be forgiving and you will be successful! Set your goals, understand there will be challenges, clear your mind of any self-doubt, clear away negativity, embrace change, stay on course, and show the world it can be done, that is how you spell SUCCESS!
10. Commit to Refocusing on Your Goal Regularly: To become financially independent, you will need to become fully committed to your plan. Make sure your goals are on track and keep yourself focused on your goal of becoming financially independent. This is incredibly important, particularly the latter. It's very easy to get sidetracked on the road to financial independence. For example, you may find yourself getting very comfortable about two thirds of the way there and start to spend more money and save less.
Think of it as an affirmation in which you renew your commitment. You should do that at least annually, but you should do it as much as you need to.
Becoming financially independent isn't easy. That's why you need a detailed plan, and a commitment and stick to it. Use this list as a guide and modify it to fit your own circumstances. You'll get there if you don't give up! I believe in you.