The signing of the Declaration of Independence is marked every year by the Fourth of July holiday. As you celebrate the independence of our nation with hot dogs, fireworks and pool parties this year, consider this: it could be the right time for you to start finding your own independence. Financial independence, that is.
Almost everyone shares the dream of eventually achieving financial independence. It brings you the personal freedom to do whatever you want. For most Americans, however, debt is a significant factor standing in the way of achieving their financial goal. In fact, the average adult has around $90,460 in debt.1 This number includes all types of consumer debt such as personal loans, auto loans, student loans, credit cards, and mortgages.
There is a bright side, though. There are strategies you can use to pay down debt and work toward financial independence. Here are five actionable ways to start walking the path towards more financial freedom this year.
Action #1: Make a Budget and Stick to It
If you want to feel confident that your bills will be paid and your savings goals will remain on track, then you need to set a monthly budget and do your very best to stick to it. If you’re used to spending and saving as you please, sticking to a strict budget will feel very hard at first. But the pain is worth it. Over time, consistency in your spending and saving habits will make following a budget easy and natural. Holding yourself accountable can help deter impulse buys, splurges and make your savings goals a bigger priority.
Action #2: Pay off Your Credit Cards in Full
Credit cards tend to have high-interest rates that can grow your debt every month in which they aren’t paid. If you’re able, pay off your credit card balance in full each month. If you aren’t able, you need to take a hard look at your spending. Always make sure to pay credit cards on time to help you build good credit. It’s best to treat your credit card like a debit card, meaning you don’t spend more than you have. Once you have high-interest debt like this paid off, you can focus on low-interest debts like mortgages, auto loans and student debt.
Action #3: Automate Your Savings
One of the most effective ways to save more money is to automate the process. Determine how much you’re able to contribute to your savings account each month and set up an automatic transfer with your bank. Soon enough, you’ll forget this transfer is even happening.
If your company offers a retirement savings plan like a 401(k), you will likely have the option to automatically defer funds from your paycheck to the account. Again, this is something that will happen on a regular basis, without action from you, making it an easy and convenient way to build your retirement savings.
Action #4: Look For Income Increasing Opportunities
Increasing your income is easier said than done, but it is far from impossible. If you’ve been at your job for a while and have taken on added responsibilities, now may be an opportune time to speak to your boss about an adjustment in your pay. Alternatively, searching elsewhere for opportunities could result in a bump in salary.
If you have a hobby you’re passionate about, look for opportunities to make some money with it. Put your art up for sale online, offer classes (cooking, dancing, gardening, etc.) through your local rec center or find odd jobs you can do on the weekends.
If you do find that you’re able to increase your income, be sure to revisit your budget and determine how that additional money would best be used. If you find yourself spending it frivolously, it’s not helping you work toward greater independence.
Action #5: Begin Building Your Portfolio
Once you have control over your debt, you’ll want to focus on building passive income - which can be done through investments. Start off simple by contributing to a retirement account, like a 401(k) or IRA. Due to the power of compounding interest, even small contributions now can grow significantly toward retirement.
If you’re looking to expand, consider utilizing a robo-advisor or working with an investment advisor. A robo-advisor allows investors to take a DIY approach to managing their portfolio, while an investment advisor can provide tailored, complex investment strategies.
As you involve yourself further into investing, you may find other opportunities to invest your money, such as real estate, collectibles or other alternative investment classes.
Achieving financial independence isn’t something that happens overnight. However, if you plan and save appropriately, it will really pay off for you down the road. Not only does it help you to build savings, but it starts strong and positive habits for the future. If you're unsure where to start, an experienced financial professional can help by answering questions, addressing your concerns and developing tailored strategies to start moving you forward.