Use this guide to kickstart your journey to build wealth and achieve financial independence.
Financial independence can be defined in a number of ways. However, when most think of financial independence, they dream of a time in their lives when they are generating enough income from their investments that they never have to work again. For some, this is far off into the distance, for others it's within close reach. Wherever you fall on the spectrum, here are 10 financial rules to follow if you want to achieve full financial independence someday:
1. Earn More Money Than You Spend
You obey this principle by always living on less than you make. Follow this simple rule no matter what your income, and everything else will fall into place. As your income goes up, so will the extra money for savings and investment. It may seem really difficult, especially if you live in the Sonoma area where the cost of living is high. But understand that you’re going to have to make some sacrifices and work hard if you want to achieve financial independence.
2. Make a Budget and Stick to It
You cannot live within or below your means without knowing what your expenses are and where you can start cutting. The path to that higher knowledge is a budget. There are dozens of budget samples online. Check out ours here. You can use this as a template and make one for yourself. You may learn some rather eye-opening facts about where your money is going. Follow that budget and see how spending discipline gives you an immediate leg up on financial independence.
3. Eliminate Unnecessary Living Expenses
Take a critical look at your budget. Make sure your shelter, food, water, utilities, and transportation are taken care of. Then analyze the extras: are you spending over $100 for cable TV, for example? Cut the cable and save an extra $1,200 a year. Look everywhere and be ruthless. Another place to look is your bank and credit card statements. There's a good chance you'll find you are paying for at least one old subscription that you totally forgot to cancel!
4. Get Into Daily Financial Awareness Habits That Result in Wealth Accumulation
If you habitually stop at Starbucks for a $5 latte before each workday, that’s $100 a month — another $1,200 a year. Make your own frothy caffeinated beverage from the mixes on sale at your grocery store instead. Another thing you can do is look for ways to save through coupons and sales. Did you know that 93% of millionaires use coupons while shopping?1 There’s a reason they got to where they are today, and little habits like this definitely played a part.
A few more helpful tips: Use shopping lists and stick to them. Identify what you need and what it’s going to cost before you leave the house. Then, only buy what you planned on buying. The small amount you save each month doing this can really add up over the years. Also, plan and save up for big expenses, instead of funding them before you can afford them. 85% of millionaires use a shopping list when buying groceries and 95% of them save up for big expenses.1
5. Concentrate on Doing Well at and Keeping Your Job
You cannot obey financial rule number one without the income from your present employment. There is a correlation between job satisfaction, promotion and ever-increasing earnings. If you are bored, unchallenged and unhappy with your work, you need to take steps to resolve the matter or you will be stuck in a financial rut. Your income is your number one tool for building wealth. Nurture it.
6. Avoid Money-Making Schemes and Scams
No matter what the slick infomercials and bombastic websites shout out, there is no shortcut to wealth. Anyone who advertises getting rich quickly through buying their plan or paying to attend their seminar is mainly only interested in making money from you. That meets their financial goals, but detracts from yours.
7. Pay off Your Debts
If you are bogged down in heavy debt and your monthly expenses are beginning to leapfrog your income, it’s time to make a change. Maybe it’s time to consolidate your debts. There are many pathways to debt consolidation. Check around on the web, there is help out there. Oftentimes, however, consolidating your debt reduces monthly payments, but stretches them out over a longer period of time. This is good for monthly cash flow, but not necessarily for your long-term financial health.
Instead, you may consider viciously attacking your debts one by one. Make minimum payments on everything, but focus on paying extra on one obligation at a time until it’s crossed off your list. Then move on to the next. Mathematically, it makes sense to start with your debts that have the highest interest rates. But if these are your biggest balances it can be overwhelming to start here. If this is the case, pay off your smallest balances first. This will give you a sense of accomplishment and get the ball rolling for you to keep paying down more and more debt!
8. Pay Your Monthly Credit Card Bill on Time
If you’re carrying a monthly balance on your credit card, you’re swimming upstream in your quest to get out of debt. It would be wise to consider using a bank debit card instead, or to get into the habit of paying off your credit card balance each month. Here’s an interesting fact: 73% of millionaires have never carried a credit card balance in their lives.1
9. Pay Down Your Mortgage
Your budget will likely show that your monthly mortgage payment (if you have one) is one of your biggest expenses. Paying off your mortgage early takes discipline and can eat into those excess funds you will begin accumulating through following steps one through eight. However, once your home is free and clear, you have the true wealth of the worth of your home’s market value. When the mortgage payments go away, you likewise have the extra income that becomes a powerful savings and investment resource for you to build some serious wealth.
10. Consistently Save and Invest
Start slow if you must, but save something each month and let the power of compound interest work for you. You’re in this for the long term and your goal is to be debt-free and to accumulate real wealth (i.e., to be financially independent). The savings and investment plan that is best for you depends on your age, situation and how much you need for a comfortable retirement. Look around and do some research. There are tons of resources out there to help. You can start by checking out our investing articles here.
Sources: 1 - Everyday Millionaires: Chris Hogan
Sonoma Wealth Advisors is a DBA of Fermata Advisors LLC, a registered investment adviser, and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. The information presented is for educational purposes and believed to be factual, but we do not guarantee its accuracy and it should not be regarded as a complete analysis. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice. An investment adviser representative should be consulted directly before implementing any investment strategy. Investments are subject to market risks and the potential loss of the entire principal amount invested. Past performance is no guarantee of future results.