‘Save money and money will save you’ – Jamaican proverb
While financial independence may mean different things to different people, all ideas have one thing in common: Financial independence can only be achieved when you have a firm plan in place. You can always amend or change your plan along the way, but in order to do that, you have to first have a plan to begin with.
Here is a simple and useful guideline to get started on the road to financial independence:
Have a clear idea of how much you earn
Salaries are often subject to a host of taxes plus other deductions. In the UK, deductions typically include income tax and national insurance. The salary that you get before taxation is called ‘gross salary’. You must calculate exactly how much you get on hand. Other deductions could include pension or retirement savings schemes.
Calculate your living expenses
If you do not write down your living expenses, you might not have a clear idea about how much you spend each month. Remember to include rent, debt repayments, mortgages and monthly bills. Always add 10% to your estimated expenses to account for any hidden expenditure.
Get rid of any outstanding debts
Your very first step should be to get out of debt. No more excuses and no more procrastinating. If you want financial independence you need to take control of your finances right now, starting with your debts.
Work out your current investments
Make a list of your current investments. Calculate the rates of interest earned (you can ask your financial advisor for help). Rates of interest often fluctuate with economic climate and market forces prevailing at the time.
You might want to consider more lucrative forms of investment. It’s a good idea to compare interest rates on different types of investments including CDs, fixed deposits, stock trading etc. For example, you may find that index funds give you a higher rate of return compared to ETFs.
Develop passive streams of income
Do you own a house or apartment that you may want to rent out? Are you good at writing books? Investing your time and effort into creating one or more streams of steady, passive income will help you attain financial independence sooner than you expect.
Save first, spend later
Try and save at least 20% of your gross income. For example, if you earn a gross salary of £2000 each month, consider squirrelling away about £400 as savings. If 20% is a difficult target, start with saving at least 5 to 10% each month.
Treat yourself as a debtor
You’re looking at the last point and thinking that there is nothing left in your budget at the end of the month which you can save. That’s exactly why you should pay yourself first. As soon as your wages hit your account, transfer your savings out of it. What you’re left with is what you have to budget with at the end of the month. Why work hard just to pay everyone else? Don’t you deserve at least 5% of your hard-earned cash? Treat yourself as the debtor you simply must not fail to pay – every month.
The secret to creating financial independence lies in paying attention to your finances and exploring alternate sources of passive income. What other tips would you add to the list?