Few things may sound as appealing as the idea of becoming financially independent. Though financial independence can mean different things to different people, it typically refers to being able to live comfortably off one’s savings and investments with no debt whatsoever.
In some cases, it may also mean the ability to retire early, though financial independence doesn’t necessarily have to mean leaving a career you love. It’s about working because you want to, not because you have to.
Sound appealing? Achieving financial freedom could be easier than you think. The process of getting there often comes down to a relatively simple principle: Spending less and saving more.
Below, we take a look at what it means to become financially independent and explore some practical strategies for achieving it.
What Does Financial Independence Look Like?
While there is no set definition for financial independence, the term often means getting to a point where you don’t have to work to pay your living expenses. Usually, financial independence is achieved by relying on savings, investments, and other forms of passive income to pay the bills.
Though financial independence doesn’t have to mean leaving behind a job or career path, it can. In fact, the term is often used as a synonym for early retirement, and the two phrases are commonly strung together in the popular acronym FIRE, which stands for “financially independent, retire early.”
Benefits of Financial Independence
There are myriad benefits to becoming financially independent. One of the biggest perks is the ability to have choices. You can choose to keep working if you enjoy it, or you can kick back and relax. You can save money to pass on to future generations or you can splurge on a trip around the world.
Becoming financially independent can also enable you to enjoy work more. If you’re no longer doing it for the money, you can structure your job responsibilities so you’re only doing the things you want to do.
It can also benefit your mental and physical health. Having the ability to work less allows you to exercise more and get more sleep. Financial independence may also allow you to spend more time with a partner, kids, family, and friends. Having stronger relationships can lead to increased happiness in life.
How to Be Financially Independent
Becoming financially independent typically requires having a clear plan in place and being willing to roll up your sleeves and get to work. Here are some key steps that can help you get there.
Setting Realistic Goals
Being financially independent can look different for everyone, so a good place to start can be to define what being financially independent means to you. What do you visualize? Maybe you want to be debt-free by 40, or you’d like to retire at 50. Or, perhaps you’d love to relocate to some place warm and sunny in ten years.
As you develop your goals, you may want to give them a reality test by consulting with a financial advisor or chatting with a trusted financial mentor. You may find that you need to re-jigger your vision based on your financial situation and how much time you have to achieve your dream.
Once you’ve honed in on some specific, achievable long-term goals, you can begin to figure out what you’ll need to do to make them a reality — whether that’s cutting your spending, boosting your income, and/or saving and investing more than you currently are each month.
Understanding That Income Isn’t Everything
Many people have a tendency to fixate on how much money they are making. And while income is an important part of your financial big picture, it isn’t everything. Yes, it’s easier to amass assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make.
For example, if you are making a comfortable salary but haven’t gotten into the habit of saving and investing, then you may not be leveraging your income to its full potential. Becoming financially independent often requires an understanding that the amount of money you make is just one piece of the puzzle.
The path to financial independence may become a little less daunting once you realize that a high income alone is not necessarily going to lead to sustainable wealth. There are several other factors that play a role in how much you are able to grow your finances, such as how much interest your investments are making and the rate at which you are able to save.
More than a high salary, financial independence typically requires foresight, long-term thinking, and a holistic understanding of how your income overlaps with your expenses, lifestyle, and future goals.
Recommended: How Much of Your Paycheck Should You Save?
Building a Budget
No matter what your income level, one of the keys to getting ahead and achieving financial freedom is to spend less — and potentially a lot less — than you are earning. And, doing that typically requires coming up with a budget.
Budgeting is the process of measuring income, subtracting expenses, and deciding how to divert the difference toward reaching your goals. It’s often considered the essential first task in achieving financial independence.
You can set up a monthly budget by first assessing what you are currently earning (after taxes) each month. Next, you can tally up your actual spending by looking at the last three to 12 months of bank and credit card statements and recording your expenses on a spreadsheet.
Seeing it all laid out in black and white can help you identify unnecessary expenses you might be able to cut out. You can then put the difference towards your long-term goals instead. One rule of thumb is to try to put 20 percent of your monthly take-home income into savings or investments. Working couples might try to bank a substantial part of one salary if possible.
Recommended: How Much Money Should I Save a Month?
Ready for a Better Banking Experience?
Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!
Establishing A Safety Net
Achieving financial independence also means thinking about financial security. Having a dedicated emergency fund that can help you weather a health emergency or another large, unforeseen expense means you may not have to run up credit card debt or dip into your investment or other savings account in order to cover these costs.
If you haven’t already started an emergency savings account, consider whether or not you would be able to afford a sudden car repair or if you could handle paying out of pocket for an unexpected dental procedure.
Experts often recommend having at least three- to six-months worth of living expenses set aside in an account that earns interest but can be easily accessed when you need it.
The more effective you are at dealing with financial emergencies, generally the faster your savings and investments can grow.
Putting a Debt Pay-Off Plan Into Action
Taking care of your debt is another important step to achieving financial independence. Today, debt can take many forms — whether it’s student loan debt, a home mortgage, a car loan, or credit card debt.
If you currently have debt, consider incorporating a debt reduction plan into the budget you create and calculate how you would need to tweak your current spending habits in order to prioritize becoming debt-free.
It can be wise to start with the debt that has the highest interest first, since borrowing from those creditors is costing you the most money.
If you have multiple credit card balances, you may want to target them one at a time. You can do this by paying more than the minimum each month on one balance (paying just the minimum on the others) until that balance is wiped out, then move on to the next.
Recommended: Three Ways to Help Pay Off Debt Faster
Being a Smart And Savvy Investor
Becoming a smart investor is another key step you can take on your journey to financial independence. The world of investment can be confusing and carries risk, but it also has the potential to be lucrative. Because you earn interest not only on your contributions, but also on accumulated interest, small amounts can grow over time.
You may want to first focus on tax-advantaged accounts. If you have an employer-sponsored plan, such as a 401(k), it can be a good idea to contribute some of each paycheck, especially if your employer offers to match your contributions. Depending on your situation, you may be able to open a traditional IRA, Roth IRA, or SEP IRA, as well.
If you have children, you may also want to start a 529 plan to help you invest for their college educations.
If you’re able to invest additional funds, you can choose a financial firm you want to work with and then open a standard brokerage account. From there, you can put your money in a mutual fund or an exchange-traded fund (which bundle different types of investments together), or, if you’re prepared to do a fair amount of research, pick and choose your own stocks and bonds.
If you’re new to investing, you may want to consider opening an investment account through a robo-advisor, an investment management service that uses computer algorithms to build and look after your investment portfolio, and typically charges relatively low fees.
Recommended: How Much Should You Have Saved for Retirement by 40?
Not everyone inherits a fortune or makes a huge salary. But even if you don’t have those advantages, it doesn’t mean you can’t achieve financial independence. Getting there, however, can take work and financial discipline.
Some steps that can help you get there include: creating a budget, trimming expenses, building an emergency fund, paying off debt, and setting up a smart saving and investing strategy that factors in your timeline and tolerance for risk.
Once you set up a plan to work towards financial independence, it can also be a good idea to check-in regularly on how well the plan is working, and to make adjustments when necessary.
Whether you decide to schedule quarterly meetings with a financial advisor, monthly money talks with your significant other, or use apps that help you track your expenses and investments, consider creating habits that help you stay on top of your goals.
With an online bank account from SoFi Checking and Savings®, you can track your weekly spending (and make sure you’re staying within your budget) right in the dashboard of the SoFi app. You can also use SoFi Checking and Savings’ “vaults” feature to separate your spending from your savings, while earning competitive interest on all your money.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi members with direct deposit can earn up to 1.25% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 0.70% APY on all account balances in their Checking and Savings accounts (including Vaults). Interest rates are variable and subject to change at any time. Rate of 1.25% APY is current as of 4/5/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.