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Tips for Becoming Financially Independent

December 12, 2019 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Tips for Becoming Financially Independent

There are few things that sound more appealing than the idea of achieving financial independence. Even if you are happy with the career you’re in, the idea of being financially independent can feel liberating and bring to mind a sense of financial freedom that so many people long for.

Though the term is pretty broad, becoming financially independent typically means getting to a point in your life where you no longer have to rely on external sources of income. In some cases, this may also mean the ability to retire early, though financial independence doesn’t necessarily have to mean leaving a career you love.

Does the idea of no longer having to rely on work in order to live the life you want to sound like a goal you’d like to start working towards? Below, we take a look at what financial independence can look like and explore some practical strategies for those wanting to start putting together a plan to become financially independent.

We should note that this isn’t so much a “how to” guide as it is tips that we’ve uncovered from a variety of sources. No one strategy is going to be right for everyone, and none of this should be considered financial advice—you’ll want to talk to your financial advisor or accountant for in-depth questions about financial independence.

What Does Financial Independence Look Like?

Financial independence generally means you are able to live off of your savings and investments without having to work for a living—unless you want to.

More broadly, financially independent people no longer have to worry about being able to make their rent or mortgage payments; they know that all of their bases are covered.

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.”

Though financial independence can go hand-in-hand with early retirement, there is no singular way to be financially independent.

To some, the phrase brings to mind a beachfront house with a yacht. To others, it simply means being able to cover all of their expenses and live a comfortable, debt-free life without worrying or needing to work.

Usually, financial independence is achieved by relying on savings, investments, and other forms of passive income to pay the bills. And, though it may sound daunting, with proper planning and preparation, it may be more attainable than you think.

Getting Clear On Your Goals

Being financially independent can look different for everyone, so one of the first things you may want to do is get some clarity on what you would like your personal goals and future plans to look like.

Your goals may depend on your age and where you currently are in life. After all, charting a path to financial independence may look very different to a 22-year old recent college graduate than it does to a 45-year-old. Getting clear about where you are currently and where you would like to go can be a good place to start.

Once you’ve considered your vision for the future, you may begin to figure out what you’ll need to do in order to get there—whether that’s investment practices or developing strategies for keeping your finances organized based on your specific lifestyle and goals.

Developing tailored goals could also mean consulting with a financial advisor or chatting with a trusted financial mentor about how to optimize your financial life.

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.

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 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 requires foresight, long-term thinking, and a holistic understanding of how your income overlaps with your expenses, lifestyle, and future goals.

Building a Budget You Can Stick To

If you’ve ever felt unclear about where your money is going, or can’t wrap your head around how you keep maxing out your credit card, then trying out a budget may be a good way to begin taking steps towards becoming financially independent.

Budgeting can feel tedious, but getting a handle on your current expenses and spending habits is a great way to start getting closer to achieving financial independence. The idea of creating and sticking to a budget isn’t appealing to everyone, but it can be a first step that helps you get a little bit closer to a financially secure future.

There is no one way to budget, so finding a system that works for you can be a good place to start. From there, understanding how much money you are making vs. how much money you are currently spending, saving, and investing can help you start to assess which habits you might need to tweak.

With budgeting often comes transparency, which can be an important tool in helping to identify unnecessary expenses you might be able to cut out. Once you’ve done so, consider putting the difference towards your long-term goals instead.

Establishing A Safety Net

Achieving financial independence also means thinking about financial security. Today, only 40% of Americans would pay an unexpected $1,000 expense, such as a car repair or emergency room visit, from savings. More than a third say they would need to borrow money from friends, family, or a credit card in order to pay for an emergency.

Emergency funds and safety nets can play an important role in getting closer to achieving financial independence. Having a dedicated savings account that can help you weather a health emergency or another large, unforeseen expense means you may not have to 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.

If not, you may want to start thinking about putting money into a reserve specifically for these types of emergencies. By putting yourself in a position to handle whatever life throws at you, you may be better able to weather unexpected expenses without having to dip into your other savings and investment accounts.

Prioritizing Paying Off Your Debt

Though it may seem obvious, taking care of your debt is an important step to achieving financial independence. Today, debt can take many forms—whether it’s student loan debt, a home mortgage, a car note, or credit card debt.

If you currently have debt, consider incorporating a debt pay-off 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.

Creating a debt reduction plan can be a crucial step in moving forward in your financial life. Once you have removed the burden of debt from your life, you can free up your money and start to do more with it.

Being A Smart And Savvy Investor

Not all investment accounts are created equal, so it’s important to do your homework. Depending on the type of investments you are thinking of making, there will be different management and investment fees involved.

If you are considering getting help from an investment professional, consider whether or not they charge advisory fees and how these costs may impact your potential earnings.

Familiarizing yourself with how different investment strategies work can be a great way to get a head start on your path to financial independence. Consider taking stock of different account types, fees, and penalties, as well as how accessible your funds will be.

Learn about and identify your risk tolerance and understand that no investment is ever risk-free since all markets have their inevitable ups and downs.

By familiarizing yourself with markets, hidden fees, and getting to know your own personal risk tolerance, you can choose the strategies that best align with your financial goals. Educating yourself may mean you’ll be in a better position to invest in assets with sustainable growth and good returns on investment.

Taking steps to become a smart, frugal investor is one step you can take on your journey to financial independence. The world of investment can be confusing, but it also has the potential to be lucrative.

Taking the time to educate yourself and become the smartest investor you can be may help you to make smarter investment decisions that line up with your long-term objectives.

Asking For Help

Though it’s a good idea to develop a clear understanding of your financial goals and how to begin reaching them, there’s nothing wrong with asking for help along the way.

Working with a financial advisor can be helpful in demystifying financial best practices and making sure that you are staying on track.

Whether it’s getting an automated advisor to help you with strategic investment decisions, or thinking about investment management, having access to good financial advice and support can help you ensure you stay on top of things, no matter what your goals are or how they evolve along the way.

If you are planning to build a financially independent future with a significant other, it may be worthwhile to think about checking in about how you’re working together to support one another through this process. Being open and transparent with your partner or spouse about shared financial goals can be a crucial step to ensuring you both reach them.

Being Honest And Transparent With Yourself

Building wealth for the long-haul can sometimes feel like a daunting endeavor. Life has its ups and downs, so it can be helpful to consider strategies that can help you stay motivated and on track, regardless of what life brings.

Setting a goal of financial independence doesn’t mean you won’t have setbacks along the way. Even after creating a great budget, finessing your investment portfolios, and paying off your debt, life may still bring financial challenges your way.

Achieving financial independence is sometimes a long journey, and it’s important to make sure that you are being open with yourself about where you are at any given time.

Though it can be tempting to set your goals and then forget about them, developing a habit of checking in with yourself can be a great way to make sure you’re staying nimble and regularly reassessing—and readjusting—your strategies and goals as you move forward.

Putting Your Plans Into Action

The path to financial independence can be long and winding, but once you’ve set your goals, it’s important to put a plan in motion—and stick with it.

Paying off debt, becoming a savvy investor, and creating a budget that fits your lifestyle can all be great ways to begin building a strong financial foundation, but they don’t necessarily guarantee success—especially if you aren’t committed to checking in with yourself and practicing self-discipline.

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.

Financial independence may take time to achieve, but keeping yourself motivated and staying aware of where you are at financially could make all the difference in how long it ultimately takes you to reach your goals.

With a SoFi Money® cash management account you can track your spending in the app and stay on top of your goals. In addition, there is no minimum balance required and no account fees.

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