How to Become Financially Independent
There is no one-size-fits-all answer to how to become financially independent. However, there are a few important steps that would be helpful for you to take to get started on the path to financial freedom. In this blog post, we will discuss seven important steps that can help to bring you closer to financial independence and why it is important for you to be financially independent.
Look at Your Expenses
The first step is to look at your expenses and find ways to cut back. This may mean lifestyle changes, such as eating out less often or cutting back on unnecessary purchases. Eating out less often and cooking dinner at home can reduce expenses because home-cooked meals are usually cheaper than restaurant meals.
Another way to save money is to reduce your utility bills, such as by turning off lights when you leave a room or lowering the thermostat in the winter. Unnecessary purchases such as extra clothes or shoes can also be reduced to save money. Making lifestyle changes such as working out at home instead of going to the gym or taking public transportation instead of driving everywhere can dramatically cut down everyday expenses you might not realize are burdening your budget.
Create an Emergency Fund
The second step is to set up an emergency fund. This is important because unexpected events, such as a job loss or medical emergency, can happen anytime. Having an emergency fund gives you a cushion to fall back on so you don’t have to rely on credit cards or loans to get by. Ideally, your emergency fund should be enough to cover three to six months of living expenses. You can set up an emergency fund by setting aside a certain amount of money from each paycheck into a savings account.
If you have difficulty remembering to set aside money, try to save a specific percentage of your income each month or biweekly. You can also set up an automatic transfer of funds to a bank account for your savings.
Investing
Investing is important because it will help you to grow your wealth over time and make you more financially independent. You can reach out to a financial advisor to help you start the process of investing in stocks and bonds.
You can also invest in yourself by taking courses and learning new skills. This can help you to be more financially independent because it will make you more marketable and allow you the possibility of a higher salary. Learning new skills can also help you to start your own business and be your own boss.
Have a Second Income Stream
The fourth step is to have a second income stream. This can be through freelancing, investing, or starting a side business. A second income stream can help you to become more financially independent because it provides you with extra money that can be used to pay down debt, save for retirement, or build your emergency fund. A second income stream can also become your main one if you enjoy it and it becomes more profitable than your current job.
Many jobs can become a second income stream, including:
- Freelance writing- this is an option for people who enjoy writing and want to make some extra money
- Designing websites- this can be a good option if you are creative and have experience with design
- Graphic design- this is another option for people who want to use their creativity to make some extra money
- Photography- this can be a good option for people who enjoy taking pictures and are good at it
- Start a blog- this can be an excellent way to share your interests with others and make some money through advertisements or affiliate marketing
- Virtual assistant- this is a good option for people who are organized and enjoy helping others
- Dog walking- this is a good option for you if you love animals and enjoy being outdoors
- Babysitting- this is a good option for people who are responsible and enjoy taking care of children
- Create an online course- this is a good option if you are an expert in a particular subject and want to share your knowledge with others
Create a Budget and Stick to It
The fifth step is to create a budget and stick to it. This will help you to track your progress and make sure you are on track to becoming financially independent.
There are many different ways to create a budget, but one of the simplest ways is to use the 50/30/20 rule. This means that 50% of your income goes toward necessities, 30% goes toward wants, and 20% goes toward savings and debt repayment.
- To create a budget:
Start by writing down all of your income and expenses for a month. - Categorize your expenses into three categories: necessities, wants, and savings/debt repayment.
- Once your budget is created, stick to it by tracking your progress and adjusting as needed.
If you want to read more about creating a budget, check out this blog post in which we cover how to create a budget.
Save for Retirement
Saving for retirement is also an important step to take because it will help you to have a comfortable retirement and not have to worry about money.
There are many ways to save for retirement, but one of the simplest is to start contributing to a 401(k) or IRA. A 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a portion of their paychecks before taxes are taken out. An IRA is an individual retirement account that anyone can open and contribute to. If your employer offers a 401(k) match, meaning that they will match a certain percentage of your contributions to your 401(k), make sure to take advantage of this offer.
You can also save for retirement by investing in a Roth IRA. This is a good option if you want to have access to your money before retirement age. A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars and withdraw the money tax-free in retirement. The money you contribute grows tax-free and can be withdrawn tax-free in retirement.
Live Below Your Means
The seventh and final step in how to become financially independent is to live below your means. This means spending less money than you make and saving the rest.
One way to do this is to create a budget and make sure you are sticking to it. You can also automate your savings so that you are automatically transferring money into savings each month. This is especially helpful if you are a fairly busy person who tends to forget to do certain tasks.
Living below your means will help you to become financially independent because it will allow you to save more money, giving yourself a cushion of savings for the future, an emergency fund, or the finances to invest.
Reach Out to Iron Point Financial for Help
If you’re wondering how to become financially independent but you aren’t sure where to begin, reach out to a financial advisor at Iron Point Financial. We can help you to create a budget, save for retirement, and invest in yourself. Contact us today to learn more about how we can help you to reach your financial goals!
We serve the Grove City, Greenville, Erie, Cranberry Township, and Boardman, OH areas.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 1/2, may be subject to an additional 10 % IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions.
To qualify for the tax free and penalty free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 1/2 or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
