If you stopped working today, how long would you be able to maintain your current lifestyle?
If you’re anything like the average American, then probably not even a month. According to a 2015 Nielsen study, 25 percent of Americans earning over $150,000, 33% of households earning between $50,000 and $100,000 and 50% of those earning below $50,000, are living paycheck to paycheck.
If you’re living paycheck to paycheck, then going without one single paycheck means you’ll be completely dependent on debt to pay your living expenses. Debt dependence is, most definitely, a financial emergency.
So, in essence, most of America is just one missed paycheck away from experiencing complete financial disaster.
The Big Three Personal Financial Scenarios
Dependence on a job to pay your bills is not an ideal scenario. You are forced to spend much of your life giving your time away to your employer in exchange for money. You don’t get to choose how you spend the bulk of your day. You don’t get the option of sleeping in late or taking a two hour lunch with a friend. Your employer owns your time – you don’t.
Dependence on debt to pay your bills is a complete nightmare scenario. With debt, you’re forced to go to work each day for your creditors. You don’t even get to benefit from the significant time you give away to your employer.
With each passing month, you fall further and further away from achieving any level of financial security. If you ever do wish to retire, semi-retire, start a business, or simply take a break, then debt should be the one thing you despise more than any other thing.
The best scenario is one in which you’re financially independent. You get to control how you spend your days. You control in what activities you invest your time and energy.
What is Financial Independence?
Financial independence has been defined in many different ways by many different people. However, most of these definitions can be summarized as follows: financial independence means that you own assets which provide you an income sufficient to pay your monthly fixed living expenses; therefore, you don’t need to earn an income by working for an employer.
For example, if you own a portfolio of stocks that provides a dividend every quarter, and that dividend is enough money to pay your living expenses, then you are financially independent. As long as the assets keep generating enough income, you are free to use your time however you see fit.
That is financial independence, and it is good! So, how do you get there?
Creating Your Own Financial Independence Plan
Step One: Discovering Your Starting Position
You’ll never get where you want to go if you don’t understand where you are currently. The first action to take to create your financial independence plan is to gain a thorough understanding of how much income you’re receiving and how exactly that income is being spent. You also need to understand what assets you own and what debts you owe.
Personally, I rely on a couple of important apps to help me stay on top of my personal finances. Personal Capital is free financial tracking tool which allows users to link their existing bank accounts and track spending, net worth, portfolio performance, and retirement savings.
You can categorize your transactions to track your different budget spending categories on a daily basis. This allows you to really learn where your money is going each month.
Second, I monitor my credit scores through Credit Karma. Credit Karma is a free app which tracks your Equifax and Transunion credit reports, and provides credit scores based on information from contained within these credit reports.
Every seven days, Credit Karma provides updated credit scores which reflect any changes which may occur within your Equifax or Transunion credit reports. I track all of this from an app on my phone.
Step Two: Emergency Savings Fund
Building a small emergency savings fund is the key foundational element for building a solid financial independence plan after you’ve completed Step One. Having emergency cash available for the inevitable financial crunch when it arrives will allow you to avoid leaning on credit cards to help make ends meet.
When in the past, you may have relied on credit cards to float you through financial crises, now you will rely on your emergency fund in such situations.
Most financial experts recommend setting aside an emergency savings fund containing anywhere from three months to one year worth of your living expenses. I certainly agree, but not at the expense of moving forward with your financial independence plan.
For most, three months to one year worth of expenses is a huge sum of money, and putting off actions like debt payoff and asset investment in order to compile a huge emergency savings is counterproductive.
Initially, an emergency fund of $5,000 in readily accessible cash is sufficient. This amount is more than enough to cover most car insurance deductibles, necessary home repairs and medical insurance co-pays.
You’ll want to set aside this small emergency fund before you worry about paying off debt and creating additional income. This is the first action, and the most important action, you’ll take in executing your financial independence plan. Make this your sole focus until you have the emergency fund set aside.
Step Three: Eliminating the Unhelpful Spending to Create Excess Cash
Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” –Joe Biden
Now that you firmly understand where your money is going each month, you must analyze each and every category of spending to determine whether that category moves you closer, or further away, from achieving financial independence.
Whatever spending is occurring which is not necessary to your well-being, or which does not get you closer to achieving your goal of financial independence, must be eliminated.
For example, your water bill is necessary to your well-being, and thus cannot be eliminated – although it may be capable of reduction. Your cable television bill is not necessary spending, and does not get you closer to achieving financial independence. As a result, it has got to go.
If you’re serious about fighting for the freedom you desire, then you’ll have to sacrifice all expenditures for things that keep you further away from getting that freedom. So, go through your budget categories and assess what can be eliminated and what can be reduced.
Hopefully, you’ll discover that your monthly discretionary income is significantly higher and you have cash available to begin making progress toward financial freedom.
Step Four: Increase Your Income
Creating more monthly income for yourself will supercharge your efforts to reach your financial goals, and creating additional income these days is so easily accomplished that everyone should strive to do so.
When the excess cash from your spending reduction is combined with an increase in your monthly income, it’s like pouring gasoline on the financial independence fire. You have more cash available to pay off debt and buy assets. Thus, everyone should have a “side hustle.”
A “side hustle” is anything you do to create income outside of the earned income you receive from your job or business. Something more than what you are currently doing.
Because of the internet, there are literally thousands of ways to create additional income for yourself.
Some of these methods can be created instantly, such as taking on freelance writing gigs. Others take a little more time to develop, but the time and energy expended in creating new income sources is, without a debt, the best investment you can make.
For more information on creating a “side hustle,” please check out Nick Loper’s blog and podcast, “Side Hustle Nation.” Nick’s content is the only resource you need to find and execute an idea for creating a side-income source.
Step Five: Proper Utilization of Your Excess Cash
This is really where the fun begins. Now that you’ve created excess cash from cutting unnecessary expenditures and increasing your monthly income, you want to use the cash to move your closer to your goal of achieving financial independence.
You move closer by paying off your debt and investment time and money into asset creation. You cannot be financially independent with debt, so debt has to go.
Focus all your efforts initially on using your excess cash to eliminate all of your debt besides your mortgage. When only your mortgage remains, you’ll shift your focus on creating and investing in assets.
Assets provide the income for the financially independent, so you must begin accumulating assets. There really are two ways to accumulate assets; you buy them or your build them.
You’ve got to create the mindset that every dollar bill you have in your possession can be used to invest in an asset which will work for you in perpetuity.
Your time can be invested to create assets, such as writing books, building websites and starting small businesses. Once the amount of monthly income produced by the assets you own is equal to the amount of fixed monthly expenses, you’ve achieved financial independence.
There is nothing more valuable than your time, and everyone should strive to own their time. Financial freedom gives you the opportunity to maximize your life; to fill your days will the activities and the people you enjoy. Anyone, on any income, can plan for and achieve financial independence. So, get started now.
Image Credit: https://unsplash.com/@kylejglenn