If you’ve dreamt of becoming financially independent, where you have more income than you do expenses, why waste any more time? Make 2023 the year you begin on that path.
Financial independence, in a nutshell, “means that you have enough money saved and enough passive income to supply all of your needs; so, you don’t need a paycheck to pay for your expenses,” said Stefan Ateljevic, CEO and founder of TrinityRank. Keep reading to learn just how you can get started establishing financial independence in the new year.
Becoming financially independent means becoming financially literate, which can be a learning curve for anybody who has never done more than put money into a savings or an employer-sponsored retirement plan. Adam Garcia, owner of The Stock Dork, said, “Make sure you can manage your own personal finance, create a monthly budget that matches your need, understand the expenses, how to create reasonable and timely financial short- and long-term goals, how much to save, and how to avoid bad financial habits such as overspending and over-shopping.”
Have a Plan
Wealth building requires planning. “You need to calculate how much you spend, how much you earn, how much you can save, and how much you can invest,” Ateljevic said. “Having a clear and defined budget will help you get a number of how much money you need to fulfill your needs without needing to work.”
Make a Budget
Jay Zigmont, PhD, CFP®, and founder of Childfree Wealth, urges people to determine their goal, whether that is the goal of early retirement or to have more options, and then get on a budget. “You need to have a plan for all of your money. You may have to make sacrifices now to get to your goal in the future. Work on a budget that reflects what you must, should, could and won’t spend money on.”
Keep Realistic Expectations
Unless you win the lottery or have great luck in the stock market, you’re unlikely to reach financial independence quickly. “Unless you’re a millionaire, it’s almost impossible to reach financial independence at 20. You can reach it by 42 though, that’s a realistic age,” Ateljevic said.
Instead, “focus on setting a more attainable goal, like reducing (or eliminating) your debt, setting up an emergency fund with several months worth of expenses, or maxing out a retirement account,” said Sam Zelinka, founder of a personal finance website for federal employees.
Diversify Your Assets
Growing wealth requires putting it in a variety of different investments. “It’s not good to put your eggs all in one basket. Same goes with your investments and financials. It’s always better to diversify. This way you can keep your income safe and won’t have to just rely on the success of one,” said Dominic Harper, founder of DebtBombshell.
On that note, David Wurst, owner and CEO of WebCitz, suggests that putting your money into savings accounts is “the worst place to put anything other than emergency funds because the expected return is below inflation.” He recommends that you start investing in a mix of stocks.
Pay Off Debts
Anything you’re still paying off is a step backward, away from financial independence. “Debt is stealing from your future,” Zigmont said. “Pay off your debts and get the risk-free return that comes with it. Cutting debt out of your life means you can focus on your goals, not paying banks for borrowed money.”
Once you’re already in motion toward your goal, you need to pay attention to your goals and track progress. It will take time to fully achieve financial independence, and nothing fancy can reliably get you there faster. The best way to reach your goal is to continue taking the same steps, over and over, toward it.
The easiest way to see your money grow is to automate saving it. “First and foremost, pay yourself,” said Jeff Mains, CEO of Champion Leadership Group LLC. “Participate in your employer’s retirement plan and take advantage of any corresponding contribution benefits that may be available to you. It’s also a good idea to set up an automated withdrawal for an emergency fund…as well as an automatic allocation to a brokerage account or anything of the same kind.”
People get rich not by spending money but by learning how to cut corners. “Learn to be more frugal and spend less than you earn,” said Andrew Lokenauth, personal finance expert and money educator. “Many millionaires are wealthy because they know how to keep and invest their money, and not spend it on unnecessary things. Being frugal can help you build wealth, because by being frugal, you are being more resourceful with your money. Being frugal is prioritizing your spending so that you can focus on building wealth and spending your hard earned money on what is important to you. Use your money to build wealth.”
Protect Your Wealth
Don’t forget to protect your wealth as you build it. Consider insurance and investment products that can be a place to park your assets while minimizing tax and other associated liabilities. Or try a source that provides assets in the event of a death or other future event that could impact either you or your family.
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Ashleigh Ray contributed to the reporting for this article.