5 Steps To Financial Independence

Financial Independence is to live stress free because you have Savings so even if you lose your job you would still be able to provide for your family . These Are the steps :

• Make a Budget
• Build your emergency Fund
• Get you 401(K) Company Matching
• Pay off your Debts
• Open a Roth IRA

With These Five steps you will be better off than 90% of the Population and set to succeed in financial independence for life . I would like to touch on each point in more detail below .

But what does it mean to be financially independent ? I believe it is a state of mind where even if things go wrong in your life, you would still be OK. The way to achieve financial independence is to have an army of investments and sources of income that continuously work for you even when you sleep.

Einstein once described compound interest as

“ The eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

So what does that mean in real life and in numbers ?  how much do you actually need to be financially independent? Believe it or not, there are people who have conducted a study that describes exactly how much you need to be able to live at least 30 years of your life without worrying to go back to a full time job.

The Trinity study that was done at Trinity University , San Antonio TX ; designated the “4% rule” and concluded that 4% withdrawal rate within the first year and subsequently adding adjusted inflation in later years should be able to last at least 30 years. The study considered anything less than 30 years a failure with an emphasis on planning well beforehand.

Even during times of mid course corrections, great uncertainties in the stock and bond markets;  this rule should have still been applicable.

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Step 1: Build a budget to know how much you need

Having a budget . That’s where we’re going to start from; the very beginning. To Be able to know what you’re working for you need to know what you have right now . you need to have a budget ! 

A budget allows you to know the essential spending habits that you absolutely cannot live without (utilities, rent, mortgage, car payment ) And it also allows you to find the inefficiencies in your spending ( Recurring payments , splurges , eating out often , expensive bad habits).

we will be posting another article about budgeting in detail in the near future. but for now make it a mental homework to yourself to understand what you absolutely cannot live without and what are the areas that you could maybe cut back your spending .

Step 2: Emergency Fund For bad times

Build an emergency fund. we mentioned earlier financial independence is the freedom from stress . so what do you have in case of a stressful situation without withdrawing anything from your investments? You build an emergency fund !

should typically be in a savings account and – from our previous budgeting- you should know that you have a certain amount of money per month that you need to pay all your bills . This should be built up 3 to 6 months worth of those absolute necessity expenditures . 

At first I would start with a small amount typically the amount of an emergency room visit ;  anywhere between $500-$1000. But then later you would build it up more. Example; if you have $4000 worth of monthly expenses then your emergency fund should be $12,000-$24,000 in total .

This is a lot of money and to be honest this is one of the toughest things to be able to maintain but the point of this fund is that if you ever lose your job you don’t have to lose your future too ! 

After becoming experts in budgeting , there were a couple of tips and tricks we started to use the emergency fund for, but that’s also going to be mentioned in later articles let’s stick to the basics for now

Step 3: Get Free money from your job

The company matching For all those who have a job that provides 401(K)’s that is the best way to get free money. Most companies offer 401(k)’s, and also offer company matching i.e for every dollar you invest in your 401(k);  your company matches the exact dollar amount up to a certain percentage . 

That’s free money ! 

This is the most important and simple way to start building your retirement fund, and it is literally free money that is given to you just for doing the work that you’re already doing.  

Best of all; you still haven’t put much of your paycheck into investing this way it is just going mainly into your emergency fund all the while you are getting free money into your retirement fund ! 

Can be also mixed i.e 100% matching for the first 3% and 50% matching for the next 3%. I know that’s a lot of math , but I’ll simplify it for you; this means that for every 6% of your paycheck that you invest,  your company will match 4.5% . In essence you invested 6% but you got 10.5% in return .

If you just do these two steps you will actually be better than the majority of the population ! 

Step 4: Pay off your Debts ASAP

I’ll cut you some slack, but only after you’ve done the two initial steps. But , let’s focus on that debt . Having debt with high interest payments is like trying to walk up Mount Everest with a boulder on your back ! 

The weight of those debts will always be cutting into your profits no matter what you do, so after the emergency fund, and free money from your employer, did is to focus on paying down those higher interest debts.

How high is high interest? Well personally anything over 5% would be considered high interest but more realistically if you have credit card debt it could be as high as 26% ! Student loans are considered part of this equation too . 

Generally , you have two methods of paying off Debt : Snowball Or Avalanche .

Snowball  ; you pay the lowest amount of debt first , this way you build confidence in yourself and generate a feeling of accomplishment that allows you to tackle the more higher debts. 

Avalanche ;  You pay the Highest Interest debt first even if it is a big amount, and then the next highest, and so forth . This not only gives you that same feeling of accomplishment ; but also it will help speed up your next debt payment much faster because you are not burdened with high interest as much as before . 

Whichever you decide on First , always pay the minimum payments on the one Debt you aren’t focusing on . You don’t want to destroy your credit score after you’ve put so much effort into clearing your debt .

Do not forget to still maintain your emergency fund and 401(k) matching . If you have already achieved a decent Emergency Fund you could use the rest to help pay off more debt . 

Step 5: Open a tax advantaged account

Saved the Best for Last; open a Roth IRA . Like everything in life you need to scale it up if you ever want to do better . 

We mentioned earlier  ; building up the emergency fund to 3-6 months worth . We Also Mentioned the company matching and the debt payments . These all still Stand .

This is one of the Best types of investment accounts as it’s a Double “tax advantaged” Account . You invest in this account after you get your paycheck , in other words , after you already paid taxes . But , It grows tax free ! and when you’re at retirement age you can withdraw from this account without paying any taxes on the Gains it made ! Hence the “Double Tax advantaged “ Designation . 

But wait there’s more ! You can also withdraw your original investment anytime from a Roth account without paying additional taxes or penalties for doing it early . This is extremely helpful if you find yourself needing to use the principle for an emergency, and you have access to these funds immediately . In Essence , A backup Emergency Fund that grows until you need it one day . 

I would not recommend you use it ever though unless absolutely necessary because it is truly a remarkable investment account for its ability to grow completely tax free ! No wonder it’s capped at 6000$ in the year 2019 . Too good to be true .

Final Thoughts 

If you have followed through all this so far , Congratulations ! If you stopped reading this blog and just left at this point and followed these step by step instructions ; we’ll have done our duty and put you on the path to success . 

Many people do not do these basic steps , and while it definitely is not enough , it does put you in the right path and mindset to prioritize what your spending is , how to make sure your not caught off guard by having an emergency fund back up plan , and free money by employee matching . 

Also , how to pay off your debt and prioritize which financial obligations are more damaging to your financial well being . And if push comes to shove , you bring in the Big gun Roth IRA and destroy your problems . Then Rinse , repeat, and scale up . 

To reiterate this is just the basic 5 steps ; and we have so much more to talk about so if you feel like learning more ; feel free to read more of our Blog posts. Thank you for reading and making this all worthwhile .

Happy Investing !