Being Financially Independent
Being financially independent means having sufficient income, savings, or investments to live comfortably for life and meet all of one's obligations without relying on a paycheck. That is the ultimate goal of a long-term financial plan.
“If you don’t decide what your priorities are in life,
everyone else will decide for you.” — Christy Wright
How much money you will need to be financially independent will depend on your personal expenses. It costs less to be financially independent, for example, in a small town than it would in New York City due to the differences in cost of living. If you have debts, such as student loans, you will also need to earn enough to cover your payments.
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The process of improving your financial situation requires time and effort. However, there are a few essential steps you may take to get started:
1. Set financial goals so you know what you want to achieve
2. Spend less than you earn
3. Create a budget to track your spending
4. Avoid unnecessary debt
5. Improve your credit score
6. Track your net worth
7. Work on changing your financial mindset
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You'll soon be in good financial shape if you:
1. Have an emergency fund
2. Have little to no high-interest debt
3. Can pay your bills and still have money left over to fund your goals
4. Have a budget and sticking to it.
Rarely stress about money
6. Feel confident and in control of your finances
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You gain from having a large time horizon for retiring when you're in your 20s. As a result, you can allocate a larger portion of your portfolio to riskier, more aggressive investments because you'll have more time to recover from downturns along the road. Your assets may consist of a larger percentage of stocks and riskier funds.
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Setting aside three to six months' worth of income as an emergency fund in addition to 15% of your monthly income for retirement. Both of these are good goals to work toward in your 20s.
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It's generally recommended that you have an amount equal to one year of your salary saved in a retirement fund by age 30. This provides a good starting point for building your net worth over the following decades.
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Two factors to consider are your time horizon and risk tolerance. The time horizon is the amount of time you plan to save to achieve your financial goals, whether short or long-term. Risk tolerance is how much risk you're willing to take when investing to achieve a higher rate of return.
A credit card with a balance transfer option and low or no interest for a predetermined period of time are options you can consider. That can help you reduce your payments to a bearable amount, but it only functions if you refrain from taking on additional debt.