March 14 2018
Just about everybody wants to become financially independent - so why do so few people get there?
One of the secrets to attaining financial independence is that it doesn't usually "just happen".
It starts with a detailed plan, and a willingness to commit to that plan.
To help you get going in the right direction, here are 10 steps to become financially independent.
1. "Decide You Want It More than You Are Afraid Of It"
OK - that quote is from the recently discredited Bill Cosby, but it's brilliant nonetheless. And it's an important point too. One of the reasons more people don't reach financial independence is they're afraid - not of being financially independent, but of the changes in their lives they'll have to make to get there.
If you are new to the financial planning process, it's important to remember you don't need to go from zero to sixty overnight. Just like a fitness trainer would be hesitant to recommend an all-out body straining routine on your first day in the gym, I wouldn't expect someone to start implementing advanced planning techniques in the first week. Pick a reasonable and attainable goal, and get used to achieving small wins on your track to financial independence.
For example, if you are new to saving, you don't need to immediately put aside half of your paycheck. Start with a small amount - maybe #10,000 per pay period - and increase it as you get more comfortable with the process. Starting out slow will help you build the confidence needed for long-term success.
In order to become financially independent, you have to have a serious heart-to-heart talk with yourself.
2. Create a Series of Steps that Will get You Where You Want to Go
Becoming financially independent isn't a single goal, but a series of sub-goals. This is because your financial life has several facets. In order to reach your overall goal of financial independence, you'll have to establish goals in the various areas of your financial life, including,
Increasing your income
Controlling your spending habits
Paying off your student loan and debt
Understanding your savings patterns
Determining your investment objectives
Defining your long-term financial goals
Purchasing the best life insurance for your family
Implementing a legacy plan for your heirs
We're going to go over each of these categories in some detail, but it's important you create such a list, with a corresponding goal relating to each individual category. That will ensure you are moving your entire financial situation forward, rather than trying to do it one category at the time.
3. Commit Now that You Will Live Beneath Your Means for the Rest of Your Life
If I can pick one step out of this list 15 that's more important than the rest, it's this one. That's because no other steps you take will be possible unless you fully commit to mastering this one.
The reason it's so important is it's the single step that will provide most of the spare cash you will need in order to accomplish most of the other steps. Learning to live beneath your means is one of the central costs of learning how to become financially independent. And if you have not mastered this technique in the past, doing so will range anywhere from uncomfortable to downright painful.
"Setting goals is the first step into turning the invisible into the visible" Tony Robbins
4. Block Out the Spendthrifts in Your Life
Are there one or more people in your social circle who you could reasonably characterize as a spendthrift? If so, one of the sacrifices you may need to make to reach financial independence will be to either reduce your contact with this person (or people), or even eliminate them from your life altogether.
I know that sounds harsh, but is also totally necessary. The people who we keep company with can have a profound effect on how we view and spend money.
If you are surrounded by people who "live for the moment" - meaning they mostly spend their money having fun rather than saving for the future, you will inevitably get pulled into that behavior.
5. Always Keep Your Career or Business Moving Forward
In Step 3 I said that living beneath your means is the single most important step on this list, and that's true. But you can give yourself a major assist in that effort by making sure you steadily increase your income in the future. If you can steadily increase your income - while keeping your spending level - you will reach all of your financial goals much more quickly.
You can keep your career moving forward by keeping your work skills sharp, and increasing your value to your employer. You should put yourself in the running for promotions where possible, and hold yourself open for better opportunities with other employers. If you are self-employed, it means steadily working to keep your business moving up to the next level.
If you are self-employed, that just means you have a lot of "bosses" that you serve. So, periodically ask those "bosses/clients" how you can better serve them. I have done this in the past through simple surveys. I simply ask what challenges they are facing and how I can better serve them. The better you can serve people, the more value you bring to the table, the more it helps you become a higher earner.
6. Vow to Always Save Money - No Matter What Your Income Is
Don't be one of those people who says "I'll start saving money when..." The problem with telling yourself that is "when" never comes.
The better position? When is now! When is always. You should always be saving money no matter what's happening. That's one of the very best strategies to make sure you are always moving forward.
If you don't have enough room in your budget to save money now, then the answer is to increase your income, lower your expenses, or both.
As John Maxwell says "You'll never change your life until you change something you do daily. The secret of our success is found in your daily routine."
7. Insulate Yourself in the Short Run - Creating a Safety Net
If you have been living paycheck-to-paycheck up to this point, your first savings goal should be to create a safety net. You can do that by creating an emergency fund.
An emergency fund should be held in a perfectly safe account - like a savings account, money market account, or a short-term certificate of deposit. It's not for investment, because investment involves risk, and that's not the purpose of an emergency fund.
Your first goal should be to accumulate a sufficient amount of cash in the account to cover 30 days worth of living expenses. Once that's achieved, your goal should be to add another 30 days worth of living expenses. The account should have between three months and six months of living expenses if you're a salaried employee, and between 6 and 12 months if you have a self-employed job or paid entirely by commissions.
8. Invest Everything Above That
Once your emergency fund is adequately stocked, you can begin thinking about investing your money. This is important, because investing is about using your money to earn more money. The larger your investment portfolio becomes, the closer you get to financial independence.
Ideally, your efforts to save money should never slow down once you have built your emergency fund. Instead, increase your efforts to fund your investment accounts. That should be easier to do once you have an emergency fund in place.
9. Invest No Matter What the Market is Doing
In hindsight, it's obvious there have been better times to invest than others. But since no one knows what the future holds, you can't know when that will be in the future. Plan to invest no matter what the market is doing. If you're investing periodically, you'll be dollar cost averaging into the market, which will minimize the risk you're taking should the market decline.
If you do feel it's a bad time to invest, then simply cut back on how much you are investing in equities. But at the same time, continue accumulating cash and fixed income investments in your portfolio, that way it'll be there to buy when the timing looks little bit more favorable.
10. Diversify Your Investments
This gets back to not knowing what the markets will do in the future. The best way to protect yourself against unexpected surprises is to diversify your investments across several different asset classes.
Big picture, you should have a certain amount of money invested stocks, fixed income investments, peer to peer lending, cash, natural resources, and real estate. That will keep you from taking a big hit in the event any of those sectors crashes, while at the same time taking advantage of strong markets wherever they may be.
Also, don't get crazy with your investments. Stick with index funds for stocks, since they have lower investment fees and don't generate a whole lot of capital gains taxes. Keep your real estate investments in real estate investment trusts, which are actually something like real estate portfolios themselves.
Think of it as an affirmation, in which you renew your commitment. You should do that at least annually, but in reality you should do it as much as you need to.