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Financial Independence May Be Closer than You Think

Financial Independence May Be Closer than You Think

Last updated on: July 11, 2012 at 8:00 am by Kevin

Financial Independence May Be Closer than You Think 2012-07-11T08:00:40-05:00 Kevin

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Most people think of financial independence in terms of money—like a lot of it. They might think of a high powered career with an outsized income, or a seven figure bankroll that will enable them to live the rest of their lives in comfort without ever having to work another day in their lives.

It’s exciting to think about such things, but it’s mostly a fantasy. And it may not be a harmless fantasy. If your definition of financial independence sets the bar too high you might conclude that you’ll never get there and give up the effort to reach financial freedom.

financial freedom

Please don’t. Financial independence isn’t some lofty monetary goal that you’d need a winning lottery ticket to attain. It’s really the ability to live the life you want, relatively free from worries over money. The ways to reach financial independence are actually a lot simpler and easier to obtain than you might think. It’s mostly about financial lifestyle—get that going in the right direction, and the rest will take care of itself.

How do you get there?

5 Keys to Reaching Financial Freedom

1. Live Beneath Your Means

Most financial concerns come from living at a level that our financial resources can’t sustain. That’s when bills pile up, debt enters the picture and credit problems can surface. If you can learn to live beneath your means, all of those problems will go away. Life may not be as comfortable as you like but you won’t be worrying so much about money.

Not worrying about money is the beginning of financial independence. That starts with living beneath your means; when you do, everything else begins to fall into place.

2. Pay Cash for Everything

The great thing about paying cash (or equivalents like checks and debit cards) is that when you do you can’t overbuy and you never flirt with debt. You only buy what you can afford, and you learn to do without anything you can’t. That operates as a fail-safe that forces you to live beneath your means. If you pay cash, you don’t borrow, and if you don’t borrow you’re independent of lenders. A lot of people would love to be in that position right now!

Paying cash can also force you to save—if you don’t use debt, you’ll be forced to save up for major purchases. That can set the stage for saving money for any purpose.

3. Get Out of Debt

If we can think of one thing that stands in the way of financial independence for most people, its debt. Debt is financial bondage and that’s the exact opposite of financial independence. Debt isn’t just about owing a certain amount of money, it’s also the claim it has on future earnings. Simply put,debt reduces income.

If you aren’t earning a high income, at least make sure that 100% of what you make is yours and not earmarked for some creditors vault. Stop borrowing, gradually payoff any current debt, and when you’re done, never go back into debt again.

Financial independence will be the payoff.

4. Stay Liquid

One of the major reasons people don’t reach financial independence is that all of their money is tied up. Debt can soak up much of your paycheck, but owning too much stuff may be draining your cash reserves too. In a time of crisis, would you be better served by having a $10,000 boat or by an equivalent amount sitting in a money market fund?

Having cash available for emergencies—and for the occasional indulgence—is how it’s possible to be financially independent when you don’t have a fortune. All you need to be financially independent is enough to run your life, and the more of it that’s in liquid form, the better you’ll feel.

5. Have 12 Months Living Expenses Saved

You don’t need a million dollars to be financially independent. A cash reserve equal to 12 months living expenses will give you all the independence you need to live your life free of financial concerns.

With that kind of money, you wouldn’t be too worried about emergencies, you’d have all but the worst ones covered. And if you lost your job suddenly, you’d be ready for that too. You could take some time off or you could start a business, knowing that even without a job, your survival wouldn’t be in doubt.

Maybe you can’t save a million dollars in your life, but if you could save 12 months of living expenses you’d have as much financial independence as you need to live your life relatively free of money worries.

If financial independence has escaped you this far in life, maybe you’ve been aiming too high. Living on less than you make, being debt-free, paying cash for everything, having enough money to live on for a year without working, and having it liquid and available—that sounds like financial independence to me.

How do you define financial independence, and how much will it take for you to reach it?

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