Most people say they plan for retirement, but they are really planning for financial independence. The day you achieve financial independence is a great day – you have accumulated enough wealth to not have to work again, and will be able to retire whenever you choose. (We use the word “day” symbolically; as a practical matter, your financial independence is likely to arrive more gradually.)
How do you plan for financial independence? Here are seven simple steps to follow.
Set A Target Date and Plan Accordingly – Decide when you want to achieve financial independence, and use online calculators to help you run different scenarios based on that date. This will help you plan your savings and investment needs.
Spend Wisely – Being frugal is not being a cheapskate. Cheapskates will not pay for anything. Frugal people will pay for value. If it doesn’t bring you value – and that could be emotional enjoyment as well as financial value – don’t buy it. You will be surprised at how much you save with that attitude.
Save and Invest Early – It’s extremely important to start saving early, so you can enjoy the benefits of compound interest in savings accounts to build an emergency fund, and invest in higher growth vehicles as soon as your emergency fund is built. Saving 20% of gross income may not be practical for everyone, but it is an excellent target. Save whatever you can, as early as you can.
Minimize Your Debt – Debt is not all bad, but it must be managed. For example, mortgage debt is useful because it builds equity, as compared to rent payments with no extra value. Moreover, mortgage interest payments are tax-deductible. However, you should not buy more house than you need just because you can afford it. Also, add extra principal payments early in the mortgage – it can save staggering amounts of interest payments.
Credit cards are not necessarily harmful, especially those that offer benefits. The trick is to never charge more than you can pay off every month. If you never carry a balance, the interest rate does not matter.
In short, use debt sparingly and pay it off as soon as possible. If you want to reduce your interest payments and lower your debt, try the free Debt Optimizer by MoneyTips.