Ask ten people what financial independence means and you will get ten different answers. The responses are as different as the financial situations and desires of the people you ask. But ask ten people who consider themselves financially independent how they got there and their answers will include a combination of most of the following 10 guidelines.
1. Buy only what you need. Everyone needs to splurge every once in a while. But financially independent people live within their means. Concentrate on the big items. Do you need a new car every three years? Of course not. If your aging car’s repair costs begin to increase dramatically, then yes, you need a new car. But do you really need a brand new Lexus? Before you buy any big ticket item, ask yourself if you really need it, or just want it. Will an expensive late model car in the parking lot impress your boss enough to give you a raise? If you truly believe that, then find a used one. The thousands you save can be used to pay down your credit card debt or bump up your contributions to savings.
2. Spend only what you have. Debt is a good thing sometimes. A mortgage, for instance, is one of the best ways to increase your net worth. And when your home equity builds up, you can tap it for additional causes. A car loan may be a necessity. But you can’t be financially independent if you run up credit card debt. Financially independent people only go into debt if they know they will make money off of the debt in the long run.
In America, we live in a society that expects instant gratification. You do not need a plasma TV to watch television. You do not need a McMansion as shelter. And you certainly do not need to update your entire wardrobe every year, if you purchased quality to begin with. If you can’t afford it, don’t buy it.
3. Get organized. Lost the rebate slip again? Do you have the inch finishing nails you need somewhere in the garage, but buy a new box anyway since you don’t know where they are? Missed paying a bill because you left it in the wrong stack of papers? We throw a lot of money away by missing deadlines, buying duplicate items and paying finance charges and penalties. And we waste valuable time searching for things we need time that can be better spent improving our financial condition.
4. Save regularly. To be financially independent, you need to build wealth. Put the money aside ahead of time for the inevitable, unplanned events in your life, such as leaky roofs, unexpected car repairs and layoffs. Treat your savings like a monthly bill the cliche is to make it the first check you write each month and don’t waiver. Start small and increase your contribution with each raise, bonus or lottery winning. The money you have in savings increases by just being there. And do take advantage of your company’s 401K or other tax deferred savings plan. If your employer matches your contribution, you get free money. Do not remove retirement funds unless you are in dire circumstances. Retirement is the most important time of your life to be financially independent.
5. Set goals. Start saving for college when your kids are babies. With compound interest, a little goes a long way. Saving you and your children from the burden of student loans will move all of you closer to financial independence. Put a little aside for weddings, too. Why borrow and pay exorbitant finance charges when you knew you’d probably reach this point at some time in your life? Mortgages are cheaper if your down payment is bigger. So set a goal to buy a house in a future year and put the money away monthly. Shorter term goals need to be set aws well. That car will eventually need to be replaced. Set a time frame and set put some regular savings away for the next car.
6. Stay healthy. Many bankruptcies are caused by out of pocket medical expenses. And a big portion of these happened to people with health insurance. A catastrophic medical event could leave you in hock to your local hospital for decades. While many health problems are unpredictable, many problems that don’t occur because of genes or bad luck are preventable. Why put yourself at risk? Learn how to eat healthy, exercise and avoid unhealthy conditions and habits, such as smoking, bad personal hygiene, and avoiding regular medical screening and checkups.
7. Don’t nitpick. A recent trend toward building wealth focused on the small things. Give up the Starbucks and put the coffee money in savings. Pack your lunch. Clip coupons. These activities are fine for saving nickels and dimes. To be financially independent, you need to save quarters and silver dollars. Focusing on the little things is time consuming and very discouraging when you don’t see quick results.
8. Insure yourself. Insurance is the vehicle that gets you back to where you were before an incident incurred. Maintaining insurance for items that would cost you thousands to replace is crucial to achieving financial independence. Health insurance, homeowners or rental insurance, auto insurance and umbrella liability policies are the basics you shouldn’t be without. If you worked hard to get where you are, why do it all over again? Premiums you pay seem outrageous, until catastrophe hits.
9. Take calculated risks. Every new pursuit a new job or career change, moving to a new location, starting a new business is a risk. Most financially independent people have taken on risk to get where they are. But only a few lucky ones jumped in without researching first. If you go into a venture blindly, you are likely to miss warning signs that would have told a reasonable person to turn away. You need to determine the pros and cons of your new venture, by examining all the angles. Many new business startups fail because the entrepreneurs did not calculate the amount of money or manpower needed, or even the need for their services, before they quit their day jobs and plowed their life savings into the business.
10. Continue your education. Additional formal education will open doors and keep you valuable in a changing job market. But even informal education helps financially independent people keep their fingers on the pulse of business and economic changes. Reading, enlisting the help of professionals and networking with other financially independent people helps them to preserve the wealth needed to be financially independent, and to gain more wealth, as well.
Unless you are lucky, or come from a rich family, the path to financial independence requires hard work, commitment and some sacrifice. But in the long run, the piece of mind it brings will be worth it.