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For many millennials and Gen Zers, achieving financial independence feels daunting and unattainable. Rising inflation rates are leading to increased living expenses, more expensive housing, and an overall higher cost of living.
However, while achieving financial independence in the modern age is difficult, it's not impossible. Through wise, disciplined, and responsible financial planning, your path to financial freedom may be closer than you think!
While everyone is unique and has their own goals in life, the FIRE (financial independence retire early) mindset is extremely common among millennials and Gen Z. The FIRE movement is when people desire to save as much money as possible in the hopes of earning an early retirement.
The FIRE movement also emphasizes spending time with friends and family and doing what you love rather than being stuck at work forever. Unfortunately, given our current economic issues and interest rates, people must be more disciplined than ever.
Rather than throwing in the towel, however, take heart and know that with the right planning, investment strategies, and know-how, you can make this dream a reality.
Gaining financial independence requires a combination of discipline, planning, and calculated risk. While we can't instill these character traits into you, we can lay down the groundwork necessary to create a financial plan for the future.
Here are the six foundational steps you need to follow to gain your financial independence.
Creating a budget and setting financial goals are the two most important things you can do if you want financial freedom. Without goals and a clear plan, saving money is tough because you don't know what you're saving for. Whether you want to buy your first house, purchase a vacation home, or retire by age 55, it's important to set goals and create a plan to achieve them.
The best way to make your financial goals attainable is to have a budget. Growing up, the word "budget" was like nails on a chalkboard to me. Rather than seeing budgets as a good way to be responsible with my money, I saw it as a spending restriction keeping me from having the things I wanted. However, now that I have a family and a future to consider, having a comprehensive budget is the only way forward.
Your budget should include your monthly income, including money you earn from side gigs or a second job. In addition to money coming in, your budget should include all your expenses, such as rent, student loans, utilities, subscriptions, etc.
Your expenses also include any money you're putting towards savings, mutual funds, the stock market, and anything else in your investment portfolio. Every dollar should be accounted for so that you know exactly where your money is going. Overspending is one of the biggest pitfalls people fall into, and a budget will help prevent that.
Apart from financial goals and budgeting, most financial advisors will tell you that debt management is one of the most important financial concepts to master. According to Business Insider, the average American has roughly $104,000 in debt, with student loans, mortgages, and credit cards being the main culprits. The worst part about debt is that it accrues interest, making it even harder to pay off.
If you're serious about making headway and paying off your debts as quickly as possible, there are two basic options. First, you can opt for the debt snowball method, where you aim to pay off your smallest debts first. Here's how it works:
The debt snowball method involves building momentum by paying off small debts first. That momentum will carry over into your larger debts and help you pay those off until you're debt-free.
You can also opt for the debt avalanche method. The goal behind this method is to pay off your debts from greatest to least in terms of interest rates. That way, you'll pay as little interest on your debts as possible.
The downside of paying off your high interest rate debt first is that it could take years to pay off your first one, if it also happens to be your largest. Therefore, it's easier to lose hope and give up because it takes longer to see results.
Having an emergency fund is another important aspect of being confident in your financial situation. Also known as a rainy-day fund, your emergency fund is there to cover unexpected expenses. These include hospital visits, medical bills, car and home repairs, etc. Ideally, you should have a minimum of $1,000 in your emergency fund and up to $5,000.
Having an emergency fund gives you a cushion or barrier if you're faced with an unexpected financial crisis. It keeps you from having to dip into your savings or investment accounts when you're faced with unforeseen costs. That way, you can stay on track with your financial goals, even when the unexpected happens.
Once you have your emergency fund in place and you're making headway on your debts, you're ready to start investing in your future. Between real estate, cryptocurrencies, ETFs, the stock market, and others, there are more investment opportunities than ever.
While having a wise investment strategy is the best way to achieve financial independence, it's also the hardest. Most people, young and old alike, don't have the risk tolerance necessary to invest their financial resources.
If you're one of these people and don't have the financial education necessary to make wise investments, you should contact a financial advisor. They have the training and knowledge necessary to make safe and savvy investments and are experts at financial planning.
If you want to invest on your own, however, here are some of the most common investment options:
In addition to making financial investments that will pay off here and now, you also want to invest in your retirement. The best way to do that is by opening retirement accounts, such as Roth IRAs and 401ks, or seeing if you qualify for a pension fund. Pension funds are often available to government workers, such as police officers and public school teachers.
It's common practice nowadays for most employers to offer 401k plans to their employees. Where these retirement accounts get extra lucrative is if they offer to match your contribution. Most employers will match up to 6% or more of your contributions, which means they'll contribute $6 for every $100. While it doesn't sound like much now, those contributions add up quickly.
The Roth IRA (individual retirement account) is another common type of retirement account. The main reason these types of accounts are so popular is that they're tax-advantaged accounts. In English, that means you won't be paying taxes on any money you put into a Roth IRA.
In addition to providing a safe place for your money, Roth IRAs also build interest, which means your money will increase without you doing anything. However, you'll need to take the initiative with a Roth IRA because employers typically don't provide these types of accounts.
Finally, it's important to maximize your income potential. This means making the most of your talents, qualifications, work history, and job opportunities to make as much money as possible. Here are a few ways you can do that:
By maximizing your income potential, you'll be well on your way to achieving financial independence.
In addition to each of the steps above, here are a few other tips and tricks to stay on track with your goal of financial independence.
By following the tips and steps in this article, your path to financial independence may be easier than you think. As long as you maximize your income potential, invest wisely, and stick to your budget, you'll be well on your way!
It's also important to remember to be humble and realize that you don't have all the answers. Therefore, don't be afraid to talk to a financial adviser, friend, or family member when you need help or advice.
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