Financial independence can help you relieve anxiety about money and create a safety net when unprecedented situations occur, like job loss, a health problem, or even a pandemic. It can also mean that you have the financial resources necessary to do the things you have dreamed of, such as enrolling in a new program, switching careers, or traveling the world.
However, it is not always easy to achieve financial independence. Fortunately for you, we have this blueprint detailing the top rules for financial independence.
What are the top rules for financial independence?
Earn more than you spend.
Your first step toward financial independence is to always ensure that you earn more than you spend. You can never achieve real financial independence if you spend more than you earn.
Create an emergency savings net.
Prevent yourself from accumulating debt by ensuring that you have the funds necessary to handle an unexpected event. Such events could be a medical bill, car maintenance, or home repairs. You can start small by saving a certain amount of cash, like $500 or $1,000. Then, build up to one month’s worth of expenses, then three months, then six months.
When you reach this goal, you can then shift into automatically saving a certain percentage of your monthly income. Over time, this account will steadily grow and give you peace of mind that is worth far more than a new pair of shoes or other object.
Save for future needs.
You should always have at least three long-term savings goals that are more important than any short-term indulgence. These plans may include early retirement, buying a home, supporting a cause, traveling, or other goals.
A diversified, long-term investment strategy that is automated is a good option to ensure that you are putting enough money away for your future needs.
Create multiple income streams.
In previous generations, people stayed at the same company all of their life and then retired with a pension. However, today’s job market is often much more volatile. People may lose their jobs unexpectedly with little in terms of severance pay. They may switch jobs several times during their lifetimes. By having multiple income streams, you reduce the risk of being financially crippled if something goes wrong with a solitary job.
You may be able to create new income streams by working an extra job, freelancing, or running an income property, just to name a few. Consider what side hustle you may be able to create that is lucrative and can add to your monthly income.
Considering the effect creating multiple income streams has on your financial independence, it was a must-include on this list of tops rules for financial independence.
Understand your cash flow for perfect planning.
Avoid being derailed on your path to financial independence by an unexpected expense by having a firm understanding of your cash flow. How often are you paid? Which bills can each of your paychecks cover? Do you have less regular expenses, like paying for property taxes or car maintenance?
Take a close look at your overall finances to better understand your cash flow. Write down the day of the month that each bill or expense is due. Do this each month to anticipate what bills are coming and when you will need to pay them.
Write down all of your less regular expenses that you accumulate over the year and divide that number by 12. This way you can set aside an equal portion to handle those expenses each month.
Protect Yourself Financially
If you entangle your finances with another person, such as you go into business with someone, you invest your money with a broker, or you plan to marry the person, take steps to ensure you know who you are dealing with.
Always investigate public records when making important financial decisions that concern another person. Using a public records search tool will help you avoid entangling yourself with someone with a questionable criminal history, too many debts, or other shady characteristics.
Embrace better spending habits.
Spending too much money on non-essentials can quickly get you off your path to financial independence, so it is important to embrace better spending habits. This tip is easy to overlook but can be very powerful. Based on this it is one of the top rules for financial independence.
This tip is multifaceted, and there are several things you can do now including:
Pay Yourself First
Resist the urge to spend all of your paycheck by getting rid of some of it first. Contribute to your work retirement plan so that this amount is taken off the top of your earnings and you do not have access to it.
Also, save with a traditional investment account that is not handled by your employer. Set up automatic transfers to your savings accounts so that any time you receive a direct deposit, you are filtering some of the funds to these accounts.
Debt and financial independence do not generally go together, especially unnecessary debt like credit card debt. The more things you can purchase with cash, the better. This is because debt usually comes at a cost, better known as interest.
If you purchase something for $1,000, but you pay 10% interest on it and take a year to pay it off, you really paid $1,100 for that item. If you do not have the money in your bank account to buy the item, you might want to reconsider purchasing it at all.
Track Your Spending
You may be surprised by where your money actually goes each month. You may be paying for apps you don’t use, monthly subscriptions you don’t benefit from, daily cappuccinos that add up to more than the cost of a cappuccino machine, or $700 in take-out each month.
There are a variety of free tools, apps, and other resources to help you gain better insight into your spending so that you know where your money is going and can take steps to route a new course.
Set Up a Budget
Setting up a budget can help you designate where your money goes before you obtain it. Then, once you are paid, you can simply follow your own predefined goals and pay the bills you need to pay.
Create a Debt Plan
List out all of your debt and create a plan on how you want to tackle the payments. One way to do this is by using a debt snowball spreadsheet. The debt snowball spreadsheet is easy to understand. It breaks down debts into a simple payment plan.
By following the steps above, you will be well on your way to financial independence. Enjoy the journey.
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