Financial independence can be defined in a number of ways. However, when most think of financial independence they dream of a time in their lives when they are generating enough income to cover the essential expenses so that they never have to work again. For some, financial independence is far off into the distance, for others it's within close reach. Wherever you fall on the spectrum, here are 10 financial rules to never break if you want to achieve full financial independence someday:
1. Earn More Money Than You Spend
You obey this principle by always living below your means. Follow this simple rule, no matter what your income and everything else will fall into place. As your income goes up, so will the extra money for savings and investment.
2. Make a Budget and Stick to It
You cannot live within or below your means without knowing what your expenses are and where you can start cutting. It doesn’t matter if you make $10/hour or $200,000/year, if you don’t control your money, it will end up controlling you. The path to financial independence cannot be found without a budget. There are dozens of free budget templates online and apps in the app store. Fill in the template blanks and you’ll learn some rather eye-opening facts about where your money is going. Follow a budget and see how controlling where your money goes gives you an immediate leg up on financial independence.
3. Eliminate Unnecessary Living Expenses
Take a critical look at your budget. Are you spending over $100 for cable TV, for example? Cut the cable and save an extra $1,200 a year. Keep track of your monthly bills and look for ways to cut down on energy expenses, for example. Look everywhere and be ruthless.
4. Get Into Daily Financial Awareness Habits That Result in Wealth Accumulation
If your daily habits include a stop at Starbucks in the morning for that $5 latte and a glass of wine or two at night, you are spending $450 a month — another $5400 a year. If you’re married and both doing it, that’s over $10,000 a year. Make your own frothy caffeinated beverage from the mixes on sale at your grocery store and workout after work to take the edge off. You’re paying for that gym membership anyway. Might as well use it. Also, use a shopping list when you go to the store and stick to your budget. Know what you need first then look for coupons and sales just for those items.
5. Concentrate on Doing Well at and Keeping Your Job
Have you read A Message to Garcia by Elbert Hubbard? It’s online. Look it up. You cannot obey financial rule number one without the income from your present employment. If you value your job, make sure your boss can see it in your behavior and performance at work. There is a correlation between job satisfaction, promotion and ever-increasing earnings. If you are bored, unchallenged and unhappy with your work, you need to take steps to resolve the matter or you will be stuck in a financial rut. It’s time to move on or start a gratitude journal.
6. Avoid Money-Making Schemes and Scams
No matter what the slick infomercials and bombastic websites shout out, there is no shortcut to wealth. The vast majority of people who advertise that buying their plan or paying to attend their seminar is mainly only interested in making money from you. That meets their financial goals, but detracts from yours. Do your homework and have a specific purpose in mind to help make sure your aren’t falling into a trap or otherwise wasting your hard-earned money.
7. Pay off Your Debts
If you are bogged down in heavy debt and your monthly expenditures are beginning to leapfrog your income, it’s past time to take control of your personal finances. Make a list of your debt showing the minimum payment, the balance and the interest rate you are paying on each one. Since you created your budget in step 2, you already know how much extra money you have each month to pay off your debt. Pay the minimum on each one except the one with the highest interest payment. Put your excess income there each month to pay it off first and then go after the one with the second highest interest rate and so forth.
8. Pay Your Monthly Credit Card Bill on Time
If you’re carrying a monthly balance on your credit card, you’re swimming upstream in your quest to get out of debt. Consider instead using a bank debit card, or at least get into the habit of paying off your monthly credit card balance.
9. Pay Down Your Mortgage
Your budget will show that your monthly mortgage payment is one of your biggest expenses. Paying off your mortgage early takes discipline and can eat into those excess funds you will begin accumulating through following steps one through eight. However, once your home is free and clear, you have the true wealth of the worth of your home’s market value. When the mortgage payments go away, you likewise have the income excess that becomes a powerful savings and investment resource.
10. Begin a Savings and Investment Plan
Start slow if you must, but save something each month. You’re in this for the long term and your goal is to be debt-free and to accumulate real wealth (i.e., to be financially independent). The savings and investment plan that is best for you depends on your age, situation and how much you need for a comfortable retirement. Again, look around. There are financial experts and expertise out there ready to help.
Fran McKay, CFP®
Please consult legal, financial or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered personal advice or a solicitation for the purchase or sale of any security.