Financial independence (FI) is the stage that you are having enough income to pay for expenses for the rest of life while not being employed or dependent on others. To reach the financial independence stage you need to have a financial plan and budget to track where your money is coming and where is going out. Make a clear view of income and expenses and design a proper strategy for your goal. If someone can make enough income to meet their needs from sources other than their primary job. They achieved FI irrespective of wealth, age and salary. Many people think for being wealth they need a high-paying job. Though it’s easier to gather assets if you have higher income each month but the main key to increasing your net worth is to waste less than you make.
Categorize financial independence
How can you categorize financial Independence? We can say that you can define it with these categories as per our professionals research:
Financial independence from parents
Children who no longer need any financial support from parents are at the beginning of the financially independent stage. This means the child can bear financial obligations without the help of parents.
What can Young Adults Do to Become FI?
Adult child in this stage has to track the expenses and make a budget. While making proper choices to reduce expenses such as sharing a flat with roommates, traveling by public transport. And trying to increase the income by joining for the second job.
Ways for Parents to Encourage Child For Financial Independence
Parents have to limit their help to the child. Manage a set of time to plan and prepare a child for becoming FI. parents should stop solving children’s problems otherwise they won’t learn how to satisfy their needs in the future. And even cause more time for the child to reach FI stage. Parents should take the situation as an adult discussion rather than instructing them what has to be done.
Becoming Financially Independent from Work
The other stage of FI is being independent of work. And it has to be the future goal for everyone. Simply this means that reaching in such a stage that you have enough income to spend on your own for the rest of your life without working anywhere. Some people will reach the financial stage at an early age but some have to wait till their retirement. Though there are many people who even after reaching FI, are still working which is not due to earning money to pay for their expenses because they can afford their lifestyle that they deserve even without working anymore.
Finding Your Way to Financial Independence
Here there are tips to help you for FI and secure retirement:
- Life without working. Plan your future accordingly and discuss it with your close one.
- Work alternative. You should not wait till retirement and do the same work. Sometimes the situation brings different opportunities.
- Make sure you have a record of your debt and pay them off. Pick up the debt which has a higher interest as your first to be paid.
- make a record for your income. If you get an any better way to increase your income then take initiative.
- Use some tools for helping you write down your expenses and try to reduce those expenses which could have been avoided.
- Set a monthly budget plan and stick to it.
- Always make sure you have that much of saving which can help you in unpredictable situations for a few months.
- Keep some of your income for investment purpose whether is buying land or gold. But make sure you invest your money someway.
- Keep the record of your net worth and try to build the passive income which helps you to generate sufficient income for your expenses.
- Don’t forget the inflation and be calculative about it.
Obtain Financial Independence
Regardless of which level of FI you’re searching for, you’ll be less dependent on someone else ultimately! The adult will be on their own once they do not want money from their parents. And if you have enough income to fulfill all your desires and the lifestyle without being required to work again, you’re now not dependent on your employer. Your financial house might be built, and also you’re future financially strong. Both ways are good enough because you have more time and money to spend on your own.
Steps to be followed for reaching in Financial Independence
No matter where you are on your finance journey, your goal should be financial independence. Having enough money to pay for your living without having to work requires you to concentrate on:
|F||Freedom from an employer and paycheck to focus on what you want most in your life.|
|I||Investing– Saving isn’t enough_ Invest to ensure you have sufficient funds in retirement|
|N||Needs vs Wants– know the difference between them and what wants your budget can support.|
|A||Alternative investment– diversifying your portfolio can protect against risk.|
|N||Netwrork– to grow it, increase your assets and reduce your liability.|
|C||Compound intrest– the earlier you invest the more money grows.|
|I||Inflation- unless you protect against it, as prices go up the purchasing power of your goes down.|
|A||Automotive finance– save time and energy prevents you from being forgetful or making mistakes|
|L||Life insurance to protect yourself and your family by being properly insured in all areas.|
|I||Investing in yourself, go to conferences, take classes. Spend money to learn and build skills.|
|N||Negotiation skills, learn to create a win-win situation to improve your bottom line.|
|D||Debt– Remember still good debt is still debt, limit liabilities and keep debt to a minimum|
|E||Expense– tracking your expenses helps you create a realistic budget and stick to it.|
|P||Partner and money– find the ways to work with your partner, not against them. Work towards FI together.|
|E||Emergency Funds– sleep better at night with money to cover 3 to 6 months of expenses in a bank|
|N||Nuptial agreements– while they may not be romantic but consider whether you need pre or postnup|
|D||Documents– learn what is important to keep. For how long and where to securely store them.|
|E||Earnings– maximize income_negotiate higher salary|
|N||New Business– start your own business can be risky but also incredibly financially rewarded.|
|C||Career– whether you chose profile or passion, you will have more career flexibility when you are FI|
|E||Estate planning– create a plan for when you are gone that helps your loved ones to seek FI too.|
How to Become Financially Independent
There are few concepts that help for a better understanding of how to be financially independent which are explained as under:
Income vs Wealth
Income cant be longterm wealth and people usually are misunderstanding it. Itis a part of wealth and wealth can have different definitions. Many people get in to trap and consider wealth as their total net worth. Overall, wealth can refer to the part of the balance sheets that considered equity.
To collect more wealth and achieve the FI you need to have a long term plan. There is much consideration for long term wealth planning which is different from person to person.
Assessing Your Balance Sheet
There must be some organic investment while you check your personal balance sheet that you can depend on in your quest for FI. mostly wealth generates capital gains, income, and profits. The higher rate that you invest quicker you get into the desired FI stage.
Reaching a Goal
The real value for your income is the time that you can invest to get a financial independence goal. Setting goals is helping to maintain your perspective on income in check. Your goal helps you to maintain your lifestyle without being required to work. This means the level of wealth you have can be measured through your long term planning. It’s much better to get the help of a financial adviser to set your goal.
You Must Have Surplus Funds to Invest
To get the advantage of investment opportunities is needed to invest money. There is always a certain point that anyone reaches critical mass and the investment can change your life. To increase money for investment there are only three ways; either to increase income, reduce the costs or even both.
Taxes Matter A Lot
Depending on your income, the tax rate is changing. The basic issue is those people with little or no wealth are making a lot of taxable revenue. But those with having financially independent make large unrealized earnings in the form of real estate appreciation and profit made through tax-free accounts or tax-advantaged.
Control Over Your Time
To be able having full over your time is usually one factor of reaching financial independence. You may not have completely moved the investing goal that enables you to support your lifestyle without an extra paycheck, but having entire control over how you spend your day can be a variable factored into how you explain wealth.
Grades Have No Correlation With Wealth and Financial Independence
There is one important confusion that people are thinking the higher is the grade of people during their schooling is going to lead them to be more successful and having a better economic situation. Which is nothing but a myth.
This post focus was on financially independent (FI) and refers to different types of FI stage. Being with one FI from parents and second, FI from working but the focus is more on the second stage. Also, here we explained with steps to ease your way of reaching financial independence. Hence for having better clue about how to become FI, we went through a comparison of wealth and income with the hope that this post can ease your path for your decision making and strategy planning to obtain your goal as early as possible. Because as we discussed there is no age, wealth and limit on your way of success.