To understand how to financially retire, you will need to understand the 7 levels to reach financial independence. These 7 stages will guide you and give you step-by-step moves to bring you towards financial independence. Take your time to plan out each and every step you will be taking.
7 Steps to Take
Financial independence is often perceived as a daunting and challenging goal, but in reality, it is not as difficult as it may seem. Achieving financial independence simply requires taking it step by step, focusing on specific actions and making gradual progress over time.
1) Knowing where your money is going
Begin by adding up your recent spending and calculating where all your money has gone. Sort them into three categories: necessities, wants, and savings. According to the 50-30-20 rule, if you want to achieve financial independence, you should start saving at least 20% of your income. Here is an app I would recommend downloading Money Manager. It allows you to track where all your money is coming and going by typing it all down into your smartphone.
Just by taking a few minutes each day to record how you spent your money, you can quickly and easily build a budget that helps you reach your financial goals. Once you get an understanding of where your money is going, write down the level of importance the expense is. If it’s not worth the money, try to reduce or not spend it.
2) Self-sufficiency, when you earn enough to cover your expenses on your own
Now that you have found a way to reduce expenses, we will look into making sure that you enough to cover all expenses. Write down any future expenses you may have to pass in the near and long term to prepare yourself for those upcoming expenses. Find a way to also make more money, there are many ways you can do that by working a side hustle or asking for a raise.
3) Breathing room, when you escape living paycheck to paycheck
Great, you finally have enough to save. This is not the time for you to start investing. Build an emergency fund so you have cash to fall back on in times of emergency. Your emergency fund should cover a minimum of 3-6 months of living expenses in a case you are fired or the company you work for goes under.
4) Stability, when you have six months of living expenses saved and bad debt, like credit card debt, repaid
Pay off all your bad debts (student loans, credit card debt). This debt is classified as bad debt because of its high interest rate (above 7%). A great way to pay off the debt fast is using the debt snowball method.
By using the Debt Snowball method —a form of the debt avalanche method of tackling debts—you can pay off those high-interest debts or smaller debts first quickly. This in turn will help increase your savings rate, making it easier to hit your financial goals. The first step to using the snowball method is to list your debts in order from smallest to largest.
By having great financial stability, it is time to start investing and building your wealth. Find out your FI (financial independence) number and invest your way toward that goal. The investing stage will take some time for you to build wealth as compounding requires time. Most people aiming to invest their money would start of with Index Fund Investing (S&P500) as this investment historically has given investors an annual compound interest of 10%. A great place to start investing is through a stockbroker app platform
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5) Flexibility when you have at least two years of living expenses invested
Stage 5 is to start learning and getting out of the comfort zone of normal investing. At this stage, take on some risk by venturing out learning multiple forms of income or other forms of investment. The average millionaire has at least 3 different sources of income. By diversifying your investment portfolio, you will lower the risk of volatility in one sector. Reaching your FI would be a lot easier when you have an income-generating asset (dividend, rental, option, royalty).
6) Financial Independence when you can live off the income generated by your investment forever so work becomes optional
This is when your investment grows above inflation and you are able to withdraw those gains without affecting your FI number! Now that you have reached your FI number, ease the break of working. Start using your time to do the things you truly enjoy. You have financial freedom!
7) Abundant wealth, when you have more money than you’ll ever need
When your money is growing faster than you can spend, learn to give back what you don’t need to society. You have to reach the infinite wealth that you are willing to spend.
Check Out Tony Robbins Approach to FIRE
Financial independence is not an insurmountable challenge but a goal that can be attained by taking it step by step.
By setting realistic goals, building good financial habits, educating yourself, emphasizing consistency, adapting to circumstances, and celebrating milestones, you can steadily progress toward financial independence and enjoy greater financial security and freedom in the long run.
Remember, every small step you take today brings you closer to a financially independent future.