Many people dream of financial independence, the always-green plateau of no longer relying on official salaries and being able to do what you want. For some, it means they can retire. But that's not all that financial independence can offer. It can also mean that you can start doing the work you truly love. That could include authoring a book or earning money while travelling globally.
Financial independence, however, requires a high degree of discipline. Also, the quicker you want to become financial independent the more disciplined you will have to be. If you adhere strictly to the rules that you have laid down for yourself, attaining financial independence is certainly possible.
Here are the top five practical steps towards achieving that goal:
- Widen the gap between what you earn and what you spend
No matter how much you endeavour towards financial independence, you will need to widen the gap between the amount of money you earn and the amount you spend. This could mean you would need to do a few prerequisite actions:
- Spend a lot less than what you make. This is mostly a matter of character than just financial management. One way to spend less is to identify the unnecessary items and prioritise your expenditure on essential needs instead. You could even save on essentials by eating home-cooked food instead of food bought outside.
- Earn more at a traditional job. This would mean being promoted, getting salary raises or moving to a higher paying job.
- Work more hours at your day job, or get a part-time job. Some jobs are paid on an hourly basis so you can actually increase your salary with this practical way.
- Look to invest your savings
Finding a way to gain income that only depends on the hours you spend at work will tire you out eventually. Whatever line of work you are in, if an increased salary means an increased number of hours at work, then you will need to find a new way of income that increases even when you are not present at work.
We call this scalable income, and this comes from a few sources of sustainability, for example:
- Income from investments.
- Buying Properties and renting them out.
- Royalties from inventing something.
- Royalties from selling something.
- A business you own, but don't run.
- Pay off all your consumer debts as soon as possible
In accounting terms, consumer debts are liabilities, and these are exactly what you need to clear away before making your way towards financial independence. It seems simple but many people still struggle with keeping their credit card bills clear. The moment you realize that paying with actual cash is a far wiser choice than with credit cards will be the moment that you will start accumulating actual financial wealth instead of having to fulfill unneccessary bills. Phone bills, magazine subscriptions and Cable TV bills fall under the same category.
- Research on which Sustainable income source would be best for you
Now, that you have decided to put your savings into sustainable income methods, you have to decide which one is most worthwhile for your current savings level. At the end of the day, you would do well to observe a general rule of risk and reward. In the case of Stock Market investments, you would typically require a higher amount of capital to bolster the higher risks involved. This is why investing should always be left to a stage when savings are high. Safer methods of attaining sustainable income, like rental properties, would serve better in the beginning when the risk is low and funds required aren't so high.
If you want a quicker rate of financial growth, it would be advisable to go for more than one sustainable income source. Of course, this is subject to whether your savings can accommodate more than one. If not, going for just one but staying on it for a substantial time would still mean tremendous savings for you.
- Calculate exactly how much you need to be financial free
Having a concrete goal would serve well as a finishing point to when you can finally be financially free. This is because it would be the perfect motivating factor for you to make the dream a reality. After all, isn't the capability to retire comfortably strictly dependant on the amount of money you have amassed?
I present to you a simple method: take the average amount you spend every month and multiply by 300. If your average monthly expenditure is 1,000, then you will need 300,000 to last you for at least 25 more years. Retiring at 30? You retirement fund should last you till 55 years old. Then double that amount to live sufficiently till 90. That's a perfect period of time to stay financially free, wouldn't it?
Of course, this doesn’t take into account external factors like inflation, health costs and market fluctuations, but it is still an important gauge for you as you aim for financial independence!
Jeremy is a writer at ShopBack Singapore. He loves all things tech and gives timely financial advice to people around him. Follow him on Twitter at @Speedygi81 for other interesting stories.
