What does financial independence mean?
How to Become Financially Independent: Five Easy-to-Implement Ideas for Young Startups
You were born around the year 2000, you finished college or high school, you got your first job (which comes with a lot of excitement, but also with many challenges) and you want to finally enjoy financial independence.
Well, your wish is absolutely valid and not at all impossible to achieve. But before we talk about money, let’s focus a little on you. Because a job is not only a source of income, it is also the environment in which you can build a career, in which you can develop your skills, in which you can prove your qualities as a leader or a team player and you can discover new talents. So, before you think about what salary to ask your employer, try an introspection exercise that might start with two questions: “Who am I?” and “What do I really want?”
It is not easy for anyone to answer these questions, but the more honest you are with yourself in this endeavor, the more you will realize the role of money in your life, how you relate to it and if it is a a means or an end. And as you advance in your career and your income increases, you’ll need to know how to manage your money. In other words, you will need financial education.
And financial education is not just a fad or a new fad, but a necessary tool for all of us. Many times, we hear around us: “And I don’t know what I’m going to pay my rent with this month!” or “I earn decently, but I have no idea where my money is going!”. In such situations, the real problem is not money, but the fact that we are not equipped with the knowledge necessary to ensure balance and financial independence.
If you are in one of the situations below, then you may be lacking in financial literacy:
- You can’t put money aside and you don’t even know where to start;
- Every end of the month is a difficult time from a financial point of view;
- You can’t get credits;
- You are afraid to make investments of any kind.
What does financial independence mean?
Although there is no fixed definition for financial independence (or autonomy), it assumes that:
- You do not depend on others to meet your financial needs;
- You don’t live with debts or borrowing from one month to another, from one salary to another;
- You have a certain financial security that allows you a certain lifestyle, and an unforeseen event (such as a medical intervention, a car breakdown, a home repair) does not destabilize you from a financial point of view;
- You are able to pay your bills monthly and pay your expenses in full;
- Have a savings fund (ideally it should be at least three salaries) to act as a “buffer” in case you lose your job.
5 steps to enjoy financial independence.
With a little discipline and careful planning, it is possible to achieve the much-desired financial independence. Here are five easy steps to help you:
1.Set your goals!
Because financial independence is different for each individual, start by defining what it means to you. Does it mean paying off your debts in full, no more credit cards, or having the freedom to resign even tomorrow if the values of the company you work for no longer align with yours?
Be specific about what you want, the amount of money you would need to achieve that goal, and the time frame it would take to save that amount. The more clearly your goals are formulated, the more likely you are to achieve them.
Set specific financial milestones at regular intervals between now and when you want to reach your goal, and give yourself a reasonable amount of time to achieve each milestone. Breaking down your long-term goal into small steps can help you measure your progress and make sure you’re on track.
2.Set a budget!
If you want to reach financial independence, it’s essential to set a budget that works for you. And when you do that, you need to assess your income, subtract your expenses from that amount, and choose how you use the difference to achieve your goals.
An often-circulated myth, especially among young people, is that you need a high salary or substantial income to be financially independent. In reality, financial independence is more about you, and the principle is very simple: you must spend less than you earn. And most importantly, you have to distinguish between the things you want and the things you need. For example, you need a mobile phone, but you want the latest model from the hottest brand.
In addition, analyze your expenses, identify the unnecessary ones and direct the money towards your long-term goals. Consider the 50/30/20 budget rule: 50% of income for needs, 30% for wants, and 20% for savings and debt repayment.
3.Develop a debt repayment strategy!
Whether you have accumulated credit card debt, personal loans, or a mortgage, it’s wise to prioritize debt reduction. First, try to pay off the loan with the highest interest rate, because that’s where the most money goes to you over time. If you have several credit cards, for example, you can choose to pay off the credits one by one. You can do this by paying more than the minimum on one card, and the minimum on the rest, until you eliminate the first credit card, then move on to the next.
Regardless of the strategy you choose, paying all installments on time should be your top priority. Your credit score can affect the interest rate you’re offered when you buy a car or refinance a home, and thus the amount you have to pay each month.
4.Create an emergency fund!
When you are young, it seems to you that you have all the time in the world, that old age is terribly far away, that you are safe from diseases and accidents, that “it can’t happen to you.” But it’s important to know how to avoid this trap, because life doesn’t always go as planned.
When your car won’t start, when you face unexpected health problems, or when a pipe breaks and your house floods, you don’t have to be caught off guard. An emergency fund can help you weather the storm by avoiding accumulating debt or withdrawing money from savings and investment accounts to cover emergency costs. Set aside three to six months worth of living expenses in an interest-bearing savings account that you can easily access when you need it.
5.Invest in your health!
Did you know that by taking care of your physical health, you can also positively influence your financial health? Unfortunately, the opposite is also true: poor physical health can negatively affect your financial goals. If you are sedentary, if you eat unhealthy, if you do not do your tests regularly, it is possible that your health will suffer, and this can translate into (more) low productivity at work, through expenses for treatment and additional investigations, not settled by insurance (if the diagnosis is complicated), through sick leave days. Poor health can force you to retire early, which translates into a greatly reduced monthly income.
But regular visits to the family doctor, the dentist, the ophthalmologist (if you work in front of a screen), the physiotherapist (if you have a sedentary job and work from the office), exercise, sleep and a balanced diet represent an essential investment in health your physical and financial health. Many medical problems can be prevented by a healthy lifestyle. And don’t forget: youth does not make you invincible to diseases, but taking care of yourself is an investment in your physical and financial health!
