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Financial independence is simply the stage in life when you won't have to work to pay your living expenses. According to data collected by the Census Bureau, most Americans expect young adults to be financially independent by 22. However, only 24% of young adults are actually financially independent by this age.
If financial independence and early retirement is something you've dreamed about, here are 4 tips to guide you.
1. Map Down a Plan to Financial Independence
To be financially independent, you need to grow your net worth to 25 times your annual expenditure. To achieve this goal you need to develop a plan. This plan will be the map you will use to arrive at your destination of financial independence.
Before you can start mapping down the financial plan, you need to think about how you wish to live once you become financially independent. Where would you like to live? What will your hobbies be? Will you travel a lot? You need to be as thorough as possible because your lifestyle will greatly influence your financial target.
Once you have the lifestyle you wish to live in mind, you need to project your expenses. You will need to grow your net worth to 25 times of this expenditure to be truly financially independent. By simple division with the number of months you aim to be financially independent, you can be able to get the amount of money you need to save and invest to be financially independent.
Keep reviewing your financial plan periodically so that you know whether you are on track or not. You can always adjust your plan whenever you notice you're not on track.
2. Create a Budget
The secret to financial independence is to spend less than you earn and to invest whatever remains. A budget is a simple tool that can help you control your spending.
To create a budget you need to know your total income and all your monthly expenses. Jot down a list of all the expenses you foresee during the month. Some expenses may be fixed like rent, insurance and utilities. Other expenses may be variable like entertainment, gifts and groceries. If your total income is higher than your expenses, this means that you have enough to save.
The 50-30-20 Rule
The 50-30-20 rule is a good measure of how financially sound your budget is. 50% of your earnings must go to your needs. This includes expenses like rent, groceries, utilities, fuel and health insurance.
30% of your income should go to your wants. That pair of sneakers or high heels that you've been dreaming of is an example of a want. Other wants can come in form of vacation expenses, dinner out or a play at the theater.
Finally, 20% of your income needs to be directed to savings.
Discipline in Sticking to Your Budget
Making a budget is one thing, sticking to it is a whole other thing. Sticking to your budget is important if you want to achieve your financial independence goal. This will require you to be intentional and disciplined.
The mistake most people make in budgeting is they don't track their monthly expenditure. They just spend money blindly until they realize that they don't have any more. To ensure that you stick to your budget, you need to account for every penny you use.
For tracking purposes, you could use the old fashioned pen and paper or you could use Excel spreadsheets. There are even mobile apps for tracking expenditure. Leave no penny unaccounted.
3. Build Multiple Streams of Income
For most people their salary is the sole stream of income. However, to attain the goal of financial independence early, you need to build multiple streams of income. COVID-19 has taught us the importance of diversifying our streams of income.
You could start a business. The business could deal in selling physical products like printed t-shirts, pastries, jewelry or home décor. The business could also focus on offering services like career coaching, business consultancy, child care services or social media management.
If you aim to start a business look for a need gap that exists in society. Next, you need to see if you have the skills and passion to provide a good or service that fulfils this need that exists.
The real estate sector can also be a great passive income stream. The high initial capital is usually what turns off most people from buying rental properties. Real estate crowd funding provides an easier way for anyone who wants to get into real estate. With real estate crowd funding, you can buy a portion of a rental property for as little as $500.
You will never grow rich from a savings account. The only way to grow wealth is by investing. So what investment opportunities are available out there?
The stock market is the greatest way to grow money. Due to compound interest, money increases exponentially over time in the stock market. However, the stock market requires a lot of patience. You can expect a 7% annual return on investment from stock markets.
Index funds are also great for investors looking to save up for retirement. In an index fund, rather than buying stocks for one company, you get to buy a fraction of stocks from a whole range of companies. Stocks you could buy in an index fund for example would be from companies in the S&P 500 for example.
By implementing these four tips, you journey to financial independence and early retirement will be smooth sailing. Never forget that this journey is for the few and it will demand patience and discipline.
Bii Edwin on August 05, 2021:
This is a great and informative article Kenya especially when it comes to multiple streams of income. COVID has taught us never to put all our eggs in one basket but to diversify.
Felix on August 05, 2021: