Financial Independence is a way of thinking, and some people handle Financial Independence as a lifestyle rather than just a way of thinking. The concept of Financial Independence has been around for quite a while, and numerous different talk show hosts and public figures, such as Dave Ramsey, popularize Financial Independence and the many different routes that individuals can take to achieve it.
What is Financial Independence?
The Financial Independence way of thinking is about becoming independent of one’s finances, not letting their finances be the definition of whom they are, and getting rid of debts. Financial Independence is a way of thinking so that one may have the option to retire early (the RE part of this blog). Being Financially Independent is to have the opportunity to do whatever is most pleasing to you. It also is to have the option to live comfortably away from the paycheck-to-paycheck cycle that so many people live today. The idea behind Financial Independence is to reduce expenses, live below your means, and to invest for your future.
Build the Life You Want to Live
Here you arrive at your first big challenge, building the life you want to live. Before you do anything before you make any significant changes to the way you live, I want you to create the life you want to live. Define how you want to live when in retirement.
Thoughtful questions:
- Does the life you want to live mean that you will be living on a beach in Monaco?
- Does that life include you and only you?
- What about a significant other?
- What about children, how do they come into this life, if at all?
- Do you want to live in a ranch-style house in the suburbs of a mid-size city with a paid-off mortgage, a paid-off vehicle, and zero debt to your name?
- Would you want to live in a two-story house in the center of a mid-size city?
- What about a big city?
- How will living in your dream city impact your finances?
- Do you want to live in a low cost of living city? What about the high cost of living city?
- Do you want to host all of your family gatherings for any holidays?
I know that the above is a list of questions that you may not have every answer for. My point is not to cause you grief, anxiety, or depression. My goal is to get you thinking, get your understanding of what you need to do to build the life you want to live, define your dream life. Without defining your dream life in advance, it may be complicated for you to make the changes needed to form the life you dream.
Figure Out Your Budget
Your second big challenge, figuring out where your money is going. After having defined your dream life, you must start preparing for this life. How might you do so, you might ask? You (and your significant other, if applicable) must figure out your budget. I recommend that you dig into your expenses and understand all forms of income.
Some Realizations
One thing I realized when I had set out to know where I had been spending, is just how bad my finances were. It has been a while since I last sat down and took account of all of my expenses. I remember that I had been spending nearly $500 a month on going out to eat and not spending that much on actual groceries. Also, I had found that I was spending about $400 a month on extraneous expenses, unnecessary things. Then, I realized that I was spending nearly $250 on Amazon buying things that I did not need.
Figuring out how much each bill, utility, loan, credit card, streaming service, and any other expenses will enable you to understand where your money is going. By going through this practice, it will allow you to mentally attack your costs and prepare to move forward with the Financial Independence way of thinking.
Thoughtful Questions:
- Mortgage / Rent
- Insurance(s)
- Health
- Car
- Home/Renter’s
- Etc
- Dining Out / Restaurants
- Snacks / Drinks (think convenience stores / gas stations)
- Credit Card Payments
- Loan Payments
- Utilities
- Internet
- Natural Gas
- Electric
- Propane
- Water
- Sewage
- Garbage Collection
Lower Your Expenses
The third big challenge, lowering your expenses. This challenge is one that most people find to be the most grueling, most painful part of this process. After having taken the time to understand where your money is going and how much you make, you really must think about and determine what expenses you can cut. Here are some questions that I really want you to think about and consider:
Yet more thoughtful questions:
- Do you need to be paying for Netflix, Hulu, Disney+, Cable/Satellite all at the same time?
- How much are you paying per month on your vehicle insurance? How long has it been since the last time you shopped around for new car insurance? What about calling your insurance carrier and seeing if they have any options on lowering your payments?
- How much are you paying per month on the cost of your vehicle(s)?
- Do you have multiple cars? Do you need multiple?
- Could your existing vehicle be downsized to something that might be more viable for fuel efficiency, monthly payments, interest rates? Think to move from a Chevrolet Suburban to a Nissan Rogue. This idea might be something that you (and your family) are able and willing to change.
- How much are you spending going out to restaurants? No, really, how much are you spending on restaurants? OK, fine, how much are you spending on restaurants and also spending on getting snacks and drinks from the local convenience store or gas station?
- Seriously, consider just how much you are paying… I would genuinely suggest that in your budget, you have categories for Restaurants/Dining Out and also for Snacks/Drinks. It may help you to break down your spending habits a bit more and understand that you may be spending too much money in one area.
The Idea
The idea here is to take each expense that you have and consider its value to you (and your family). By doing this exercise, you can start to understand whether the expense is: essential, wanted, extraneous. Now, I italicized those words as a visual queue for you to clue you in on categorizing your expenses. No, in this case, I am not talking about your budget categories (which you should have already started looking at), but instead determining whether the expenses are for things you physically cannot live without, you like to have, and things that are not necessary at all and should be the first things to go.
Now, I need you to understand; this exercise is not about being cheap or living poor. I need you to know that each person and family prioritize expenses differently, and that is perfectly acceptable. Now, I am not suggesting that you need to live a life without any fun money or any joy. However, I am suggesting that you create a category for those types of expenses and keep that budget in check.
Increase Your Income
The fourth big challenge is finding a job or career that both increase your income (benefits included in this) and also provides you satisfaction. This section may not apply to everyone, but it is another step in the process of Financial Independence that most people consider. There is a certain point at which you (and your family) are no longer able to reduce your expenses. This point is where increasing your income becomes necessary.
The Challenge
The challenge of increasing your income is not something that I suggest lightly. I realize that the job market is always fluctuating, and finding new jobs that pay higher wages or salaries is not always possible. However, I do encourage you to continue looking for jobs that pay better than your current situation. As an example, if you are making $10 per hour at a job that schedules you for 32 hours a week, you may be living paycheck-to-paycheck and getting by.
Further Employment
However, I implore you to seek employment that either compliments your current job (a second job) or replaces your current career with a higher paying job. If you can increase your wages by even two dollars, that is a 20 percent increase in your pay. WHOA. What about raising from $10 to $15? That is a 50 percent increase in your salary. Sit back and think about that for a minute. You have the ability, yes you, to make an additional five dollars per hour, you just need to apply yourself and seek different employment to increase your earnings. The better jobs you take on, the more experience you gain, and thus the more hirable you become to companies that require your expertise.
Fourth Challenge thoughts
Keep in mind that this challenge is not something that you do once; increase your income by $5 an hour, and then quit looking. This challenge is something that you continue to do throughout your life and keep pushing yourself to strive higher.
Closing Thoughts
Financial Independence is not for everyone. However, I do believe that it is for most people. If it is not for you in whole, I think that it may assist you in part. Financial Independence is most certainly a way of thinking. Still, I believe that making it a way of living will enhance your life overall and set your family up for success.
Financial Independence is a goal of mine and many others in the world, and any questions you may have, feel free to reach out and ask.
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