The FIRE or financial independence and retire early movement has grown in popularity over the last decade. The Great Recession saw many retirement savings wiped out through poor financial decisions coupled with the worst recession of our lifetimes. The traditional retirement mold has been broken. Why wait until your later years to leave a job you’re not happy with or passionate about to finally work on your terms or not work at all? Becoming financially independent allows you to have the flexibility, choice, and freedom to “work” when, where, and how you want. Whether that involves starting a business, volunteering, or simply working a low-stress, slow-paced job that you enjoy, the freedom to choose is what embodies financial independence and why financial planning is such an important practice to engage in while young. Achieving financial independence is no easy task, however, it’s journey is one that can still be enjoyed. This article will explore 7 habits to help you achieve financial independence.
1. Set your Priorities and Goals
Maintaining sight of what actually adds value and happiness in your life is key to achieving financial independence. It allows you to cut out the unnecessary expenses in your life. If they aren’t valuable or a priority for you, why spend on it?
If you have a goal to become financially independent by 40, starting to track that goal and prioritize it ahead of other goals, may be what’s necessary to reach it. Setting goals are important, but if you have so many that you can’t realistically achieve them all, it can spread your time, money, and patience thin, and likely inhibit progress towards the ones that are most meaningful to you!
Take the time to sit down and write out your goals. If financial independence would help you achieve other long-term goals, you should prioritize it first and foremost. Our finances allow us to pursue things that we enjoy and add value to our lives. Such as traveling, starting a business, or going back to school for a new degree.
2. Invest for the Long-Term and Don’t Be Afraid to Take Risks
For young professionals, it’s important to take risks when it comes to investing, especially if you have a goal of financial independence. You’ll likely have to earn equity-like returns with your investments to reach your goal by an early age. Participating in your employers stock purchase plan, negotiating for more restricted stock units or stock options, starting a side hustle, or building a sizable brokerage account or rental property portfolio, can all help you reach your goal. However, all involve inherent risk!
It’s better to try than to not try at all. Taking risks while you’re young can pay off, or unfortunately, result in failure. The good news is we have time on our side to recover, and start anew. Failure is also our greatest teacher, we should not fear it’s embrace, but embrace its lessons and apply them to future endeavors to increase our likelihood of success!
3. Pay Yourself First
If there’s one habit you take away from this list, this might be the most important and easily maintained! Over time, as we earn more, we become subject to a “lifestyle creep”. Meaning, as our earnings grow, our lifestyle expenditures grow as well. For the sake of argument, if you were never to increase long-term investments/savings, and spend the increase in earnings every year to improve your lifestyle, you’d fall far behind on your goal of becoming financially independent. To catch up you’d have to save significantly more in actual dollars than you would have if you had just invested the money and used compounding and time to assist you.
In order to avoid “lifestyle creep”, always pay yourself first. If you receive a raise of 3% on average every year, increase your savings and investments by 2%. Use the additional 1% for new lifestyle expenses. If you receive a large bonus or some sort of equity compensation, set aside a large chunk first, before enjoying the rest. Making it a habit to always set aside money for your future self will put you in position to become financially independent sooner.
4. Avoid Keeping Up With the Joneses
Social media has done a fantastic job of bringing people together regardless of distance. Sharing pictures, videos, and providing updates on your life are all a great way to stay in touch with people whom you might otherwise not have. Yet, it clearly also has its drawbacks.
We all have that friend or person we follow on social media who’s apparent life includes beaches, concerts, yachts, private jets, or high flying lifestyle activities. Good for them. Maybe they’ve already achieved financial independence, maybe not.
What’s important is not to get caught up in the NEED to do all these things. It all ties back to priorities and goal setting. There has to be a balance between what you’re willing to spend money on today and what you want to achieve in the future. The more you set aside today, the greater impact it will have in the future with the added time and compounding. You by no means should restrict yourself from taking vacations or enjoying your hard earned money today, however, don’t let the Joneses make you think you HAVE to be doing these things. Especially if it’s not something that actually makes you happier or adds value to YOUR life. For all you know, they could be drowning themselves in debt.
5. Avoid Consumer Debt
The kryptonite to achieving financial independence is consumer or credit card debt. Compound interest works against you when it comes to high-interest debt such as credit cards. If left unchecked, it can snowball out of control very quickly. If you have a spending problem, address your habit and avoid credit cards until your debt is paid off.
It’s not a problem to use credit cards as long as you’re paying off the balance every month. There’s no reason to hold a balance that accumulates interest. If you’re unable to pay off the balance in full but making minimum payments, consider not using the credit card for awhile and switch to cash or your debit card until the balance is paid off. Just to be sure you don’t let it get out of control.
6. Run on a Surplus
If you’re unsure of your current cash flow situation, it’s always a good idea to get a better understanding of whats coming in versus whats going out. Use our personal expense worksheet or our free financial tool to see your budget in real time.
If you’re running on a deficit, you’re likely accruing some form of debt. Which, as we just reviewed, is not a good financial habit! Prioritize what you actually NEED to spend money on, then on what actually adds value to your life. Cut out everything that’s unnecessary.
Once your cash flow is positive, start allocating it to various investments. Whether that’s a brokerage account, saving for a home downpayment, or business fund. Next, automate the contributions, this will ensure you’re not spending the money and eventually you’ll start to see meaningful progress. Over time, increase your cash flow towards investments by paying yourself first!
7. Stick to Your Plan
If you’ve successfully implemented the previous 6 financial habits into your life you’re likely on the journey towards financial independence. All these aspects play into a comprehensive financial plan and you’ve now got the foundation for it. Of course, big financial decisions such as how to start a business, where to invest money, or how to purchase real estate still loom. But that’s where a trusted advisor or financial planner can help hold you accountable, maximize financial decisions, and track towards the goals you’ve outlined. Having a financial plan in place that’s reviewed annually, adjusted when your goals, life, or priorities change, puts everything in perspective so you can see meaningful progress and greatly increases your chances of success!
If the traditional retirement mold doesn’t fit your schedule for living the life you want, schedule a free consultation with us today and we’ll discuss how achieving financial independence can be a reality for you!
Levi is the Co-Founder, Financial Planner of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!