Financial independence can mean different things to different people. For some, it’s freedom from debt. For others, it’s having enough money saved for emergencies or early retirement. Whatever your definition is, here are some good money habits that could help make financial independence a reality:
Get out of debt
In order to achieve financial freedom, you can’t be deep in debt. It may be difficult to get completely out of debt, but you can make concentrated efforts to improve your situation. The key is to look at your finances as a whole and identify what areas need the most attention.
It can help to look at habits of people with no debt, but it all comes down to what financial plan works for you. You could knock out smaller debts one-by-one before tackling larger debts, or try putting an equal amount of money towards each debt and wear them down at the same time. Either way, keep in mind that paying down your debt is only half the equation — you need to avoid adding new debt as well.
Spend less than you earn
This financial planning advice may sound simple, but it’s often easier said than done. Spending less money than you earn takes discipline and a full understanding of what you make and spend each month. If you need help managing your income and expenditures, a monthly budget could be the answer.
The first step is to find a budgeting style that works for you. People have different incomes and spending habits, so it’s important to understand your options and choose the best style for you. When you’re ready to get started, use these 5 tips to sticking to a budget to keep your spending in check.
Save money regardless of income
There are many ways to make your savings grow, even if you have a low income. A reverse budget, for example, is when you deposit money into your savings and retirement accounts before paying other monthly expenses. By satisfying these accounts first, you can pay your monthly bills with the peace of mind that your savings obligations have already been met.
If extra income is your only option, pick up a second job or a side hustle. There are also hobbies that can make you money, so try to use one of your talents to create additional revenue. This way, you can save more money and have a good time doing it.
Diversify your investments
Have you ever heard the phrase, “Don’t put all your eggs in one basket?” This life lesson applies to financial planning as well. If you invest in several different assets, and one loses money, the other investments in your portfolio can make up for the losses. You may not be able to predict turns in the market, but there may be ways to make them less impactful.
To learn more about common investment products, how the markets work and other useful information, read this introduction to investing.
Keep an emergency fund
Life is full of surprises. If you experience a sudden loss of income or a major unexpected expense, finding the money to fix the situation could add more stress. That’s when an emergency fund comes in.
Emergency funds are separate from your traditional savings accounts and should only be used when necessary. The purpose of this savings tip is to keep your main savings and retirement funds untouched no matter what. For more information, check out our blog on how to build an emergency fund.
Commit to your goals
Like many commitments in life, achieving financial independence may not be easy but it can be accomplished. If you stumble or get sidetracked, dust yourself off and recommit. Most of all, remember that financial independence is a journey, not a destination.
*This article has been updated from its original posting on July 6, 2016.