7 Steps to Becoming Financially Independent

30 July 2019 by National Bank
Financial Independence

Financial independence doesn’t mean you stop working. It means you have the opportunity to change jobs, start a new business or work part-time.

For some, financial independence involves investing in real estate or a profitable business. However, these are not essential criteria.

It’s also not a question of salary. You earn $45,000 a year? You have just as much of a chance to achieve financial independence as someone who earns double or even triple that.

Here's how you can get there:

1. Define your goals and objectives

Writing down specific objectives on a timeline will help you resist the temptation to buy the latest technological gadget or fall into the traps of overconsumption. Remember, your goals must be measurable and realistic. It's much easier to save when you have a set goal to reach.

2. Make a budget

How many times have you started a week with $60 in your wallet only to realize a few days later that the money is gone, without really knowing what you spent it on? Keeping a budget up to date will help you become aware of your expenses and make managing your money simpler.

Whether it's an Excel file or a more complex document, compiling cash inflows and outflows into a table saves you from spending more than you earn. It’s a simple rule, but a very important one.

3. Manage your debts

Whether you’re handling a student loan, a credit card balance or a mortgage, it is essential to liquidate the debts with a high interest rate first.

Of course, this could mean having to make some concessions by putting your money in the right place. Remember that improving your financial health and having less debt will also save you a lot of stress.

4. Put money aside

The simplest way to do this is to opt for systematic savings. For example, schedule an automatic transfer to a savings account the day after your pay is deposited. Without even thinking about it, after a few months, you will accumulate enough to invest wisely.

Go easy on yourself. Be realistic when determining an amount to set aside. If it's too high, you'll have a hard time keeping up and eventually get discouraged.

5. Create an emergency fund

It’s difficult to predict the unexpected, such as a having to stop working due to illness, a roof that leaks suddenly or your car breaking down. Setting aside an amount in an emergency fund will help you avoid going into debt again.

Your emergency fund should correspond to three months of your regular salary. With a budget, you can raise the amount you need more easily. This money must remain readily accessible.

6. Follow your plan

Becoming financially independent shouldn’t be a dream. It is an achievable goal that requires a lot of determination, rigour and discipline.

After writing down and setting your goals, develop a step-by-step plan to get there. Share this plan with your partner and children so that everyone works towards the same goal.

7. Reassess your needs

Reassess your budget, your fixed expenses (rent or mortgage, insurance, heating) and your various expenses (restaurants, movies, clothes) on a regular basis.

This exercise may allow you to save more money so you can start investing and get closer to your goal of financial independence.

The salary increase problem

It is always tempting to celebrate a cash inflow, such as a bonus or a higher tax return, by treating yourself to a new expense or a little luxury. You could be tempted to do the same thing after a salary increase.

Be patient and use this money wisely so you can reach your financial independence more quickly. If you were doing well on a salary of $60,000, do you really need to move homes or change cars if your income rises to $75,000? Review your goals and take a look at your plan to find the answer.

Between retirement and financial independence

What defines a successful and enjoyable retirement? If you’re saving for retirement today, you are actually saving for financial independence. In any case, retirement as seen by Baby Boomers is very different from what Generations X and Y are looking at. The goal is not to stop working, but rather to continue doing what we love.

With good planning, you can count on passive income to cover expenses and maintain your financial independence after 65. These may include more or less risky investments, or real-estate investments that generate recurring revenues.

Depending on your profile, a financial advisor can help you take control of your finances and establish a scenario that will pave the way for your financial independence and... freedom!

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