Today, I have a guest post.
Reaching financial independence is an important step for those entering adulthood. Whether you’re striking out on your own for the first time or just want to manage your money better, learning how to become financially independent is critical. Below, we’ll dive into ways that will set you on the right path toward financial independence.
Avoid Debt Where You Can
Some debt is unavoidable. Unless you live in an area with tons of public transportation, there’s a good chance that you’ll need to buy and finance a car. And if you’re planning on going to college, you might need to take out a student loan. With that said, there are plenty of temptations to overspend and pile up debt. If you get a credit card, make sure you can pay off the entire balance each month. If you don’t pay off the balance in full, interest payments start to accumulate and can make it hard for you to extricate yourself from debt.
Don’t Compare Yourself To Others
In the age of social media, it’s very tempting to try and keep up with the Joneses and compare yourself to your peers. However, it’s always a bad idea to base your idea of success based on what your friends have. Instead, try to reorient your perspective so you’re focused on your own path. Consuming material things and buying luxury items might bring you temporary happiness, but long-term financial success and stability depend on your ability to be prudent with your money. That’s not to say you can’t splurge, just think wisely before spending.
Learn More About Taxes
Nobody looks forward to doing their taxes, but that doesn’t mean you shouldn’t know how to do them. Set aside time in your schedule to do your taxes and keep all your tax information organized during the year. You can also consider using accounting software to keep better track of your tax information, such as your income and expenses.
Spend Less Than What You Earn
This is the basic rule of managing your personal finances. It’s important to ensure that you take the time to track your income and expenses. Why? Because this helps you become more mindful about what money is going in and what is going out.
Prioritize Saving When Possible
Before you pay bills or do anything else, prioritize your savings. One way to accomplish this is by putting away money into your employer-sponsored 401k. The contribution is deducted right out of your paycheck so you won’t even notice that it’s gone. And, this method forces you to live on a smaller income and budget.
Start Investing as Early as Possible
Whether you start and contribute to a retirement account or buy mutual funds, there are plenty of ways to get started with investing. Just make sure you do your research and know what you’re getting yourself into. When you’re younger, riskier stocks might pay off in the long run (but they might not). Consider a more balanced risk strategy that takes into account your long-term financial goals.
Regardless of what investment strategy you decide on, make sure you start investing as early as possible. Why? Because when you start earlier, you can take advantage of the magic that is compounding interest. Compounding interest on your investments is a great way to build your wealth.
Build-in Flexibility into Your Money Management
You might find that some years are more financially difficult than others. Make sure you account for these tougher years by adjusting your spending and saving accordingly. For example, if you suddenly lose your job, you don’t want to wait until your savings have dried up before you adjust your spending.
Create Emergency Savings
On the topic of savings, it’s critical to make sure you have extra money in your accounts to deal with emergencies. Nobody can predict the future, after all. You might have a medical emergency that requires expensive treatment or medical procedures. Or, you may need to help out a family member going through a rough spot. Regardless of what the circumstances are, it’s important to be prepared with emergency savings.
Use Apps and Tech to Keep You Accountable
Although it’s true you can keep track of your spending and saving the old-fashioned way, there is a huge range of apps and technology that can help keep you accountable. Certain personal finance apps like Mint or You Need a Budget are also helpful because they remind you of upcoming bills, ongoing subscriptions, and other financial alerts. Many apps also give you access to your credit score so you can continuously monitor your credit health. Speaking of which…
Improve and Maintain Your Credit
Your credit score is a number that represents what lenders and financial institutions refer to as your “creditworthiness.” Your creditworthiness tells banks if you’re likely to pay back a loan as a borrower. Your score is an amalgamation of your payment history, debts, length of credit history, how much credit you use, and the number of account inquiries.
If you have a poor credit score, you might not think it’s a big deal, but it can actually impact several areas of your life. For example, if you’re trying to apply for an apartment, a poor credit score can disqualify you from being able to rent. Or, if you want to buy a house, many lenders require a minimum credit score to be approved for a home loan. A low credit score can even impact your job prospects.
So, to ensure your credit score is strong, make sure you pay your bills on time and don’t use too much of your available credit. Responsible spending and payment behavior will eventually lead to a better credit score.
Takeaways: Saving for Financial Independence
Money management can feel intimidating if you’re new to it. However, it’s easier than you think. It takes practice, but over time, you can learn to manage your money and grow it. Being financially independent is a great, achievable goal. So, what are you waiting for? Write down your money goals and an action plan for getting there.
Are you trying to reach financial independence?
Samantha Rupp holds a Bachelor of Science in Business Administration. She is the managing editor for 365 Business Tips as well as runs a personal blog, Mixed Bits Media. She lives in San Diego, California, and enjoys spending time on the beach, reading up on current industry trends, and traveling.