When you think of financial independence, what comes to mind? It could be winning the lottery. You’ll have tons of money and can quit your job. What about landing that six-figure job? You’ll finally be able to keep up with the Jones’s. Despite what you’ve been told, this is not financial independence. A comfortable income helps you obtain true wealth. Yet, it is only one piece of the puzzle. So, what does it take to achieve financial independence?
What is financial independence?
Financial independence is when you have saved enough money to where you no longer need to earn an income. It is not obtained by spending every dollar you bring in. You acquire it by creating and maintaining good spending, saving, and investing habits.
Income does not equal wealth:
That six-figure job can help you get wealth, but only if the money is used wisely. If you have a high income and are drowning in debt, you are not wealthy. Truly wealthy people make sure to spend less money each month than they earn.
To calculate your wealth, you need to know your net worth. This is all assets minus liabilities. Does your monthly cash flow come solely from your job? Or do you have other things bringing in cash flow? This would be stocks, bonds, real estate among other things. The key to determining your true wealth is to see how long you could go without a paycheck. Do your other investments bring in enough for you to live on? If you can say yes, then you are wealthy.
Examine your finances under a magnifying glass:
This step is not the easiest. You may love that $5 cup of coffee on your way to work, but can you afford it? Going out to lunch daily is convenient, but how much is that convenience costing you? That brand-new car has all the bells and whistles you want, but it depreciated when you drove it off the lot. These buying habits will not make you wealthy or financially independent. You must analyze everything you spend. Pack a lunch, make your coffee at home, get a used car instead.
You need a monthly budget to become financially independent. You must spend less than you earn. Therefore, you must know exactly what you spend each month. Look at your fixed expenses. Rent or mortgage, insurance bills, and whatever else won’t change month-to-month. Assuming you are getting the best deal on these, you can’t change them. But, you can change your other bills. Think of ways you can save on electricity and food and find ways to avoid frivolous spending.
Taking ownership of your finances:
Currently, your job may not generate enough income to become financially independent. That is not the end all be all. Consider a side hustle or extra job to generate more income. This extra income can go toward your savings. Are there things you can cut out of your budget? Put that money toward your financial goals. Your job may not leave much left over at the end of the month. However, this should not stop you from pursuing your goals.
Financial independence is not strictly for CEO’s, doctors and lawyers. Anyone with the right drive can achieve it. Look at your income and budget accordingly and you will be on your way to financial independence. Get in touch with a loan officer that can look into how to help you maintain a healthy budget and financial lifestyle while getting you into your dream home!