Defining Financial Independence
Financial independence can mean different things to different people. According to a 2013 survey from Capital One 360, 44 percent of American adults define financial independence as being free from debt, while 26 percent see it as having an emergency savings fund, and 10 percent associate it with being able to retire early.
Financial independence can be defined as the point in life when your assets produce enough income to cover a comfortable lifestyle, making a day job optional.
Planning for Financial Independence
If you’re not planning for financial independence, chances are you won’t reach it. The future may be filled with unknowns, but setting a goal and timeline for achieving financial freedom is a crucial first step.
Having clear goals, such as retiring before age 65 or traveling the world after reaching early retirement, can help motivate you to start saving as soon as possible. Using calculators like Networthify and setting up automatic transfers to your savings account can also assist you in building that nest egg.
Dealing with Debt
If you’re carrying a credit card balance each month, financing cars, or only paying the minimum on your student loans, compound interest is working against you. Creating an aggressive plan to pay off debt quickly should be a top priority for anyone serious about achieving financial independence. Otherwise, your money works for your creditors instead of you.
Two popular debt management methods are the Debt Snowball Method and the Debt Avalanche Method. Both are effective, but which you choose depends on your preference for paying off smaller balances or tackling higher interest rates first.
Resisting Lifestyle Inflation
A high income does not automatically make you wealthy. As your career progresses, resist the temptation to upgrade your lifestyle to match your income. By continuing to live modestly, you can put more money towards your goals, such as travel or retirement, and achieve financial freedom sooner.
Overcoming Fear of Missing Out (FOMO)
FOMO is the modern equivalent of keeping up with the Joneses. Instead of feeling pressure to spend your money on lavish vacations, clothes, or other extravagances due to social media comparisons, focus on your own financial goals and avoid letting others influence your spending habits.
