How to be Financially Independent

Financial Independence is a subject that I came across recently and I have taken some time to understand what it really means and entails in the last one year. I have also read a few books relating to money management and discipline to further educate me on financial independence.

A study performed by the Royal Society of Art found out that seven out of ten workers in the United Kingdom are “chronically broke”. This is a very shocking statistics! However, if you don’t do your research, you will never know, basically because we are all so good at hiding our financial woes.

What Is Financial Independence?

Financial independence means reaching a level at which you have adequate time to be able to do things that make you happy and whilst doing these things you do not have to worry about money. To put this in simpler words, you are financially independent when you have enough money to finance the same lifestyle you have currently without a regular job.

In the culture I grew up in, the money subject is an uncomfortable one which a lot of people try to avoid.

When the subject of money comes up in a conversation, many people end up quoting verses and give various reasons as to why money doesn’t really matter to them. The most popular is a verse from the bible which states that “… money is the root of all evils”. This is the bible being quoted wrongly.

I have to say I am not yet financially independent as at the time of writing this but I am actively working towards being financially independent.

Here is a question to ask yourself, “If I do not go to the job I currently do for six months or one year, will I be able to pay for my mortgage or rent, utility bills, clothing, car finance, fuel, insurance, entertainment, fend for myself and my family, as well as put food on the table?”

If your answer is no then you are not financially independent.

Some people mistake earning a high salary for financial independence. The fact is it does not matter how much you are earning, if you are not financially literate you will struggle to achieve financial independence. It is not about how much money you earn but how much money you can keep. How much of that money you can make work for you.

You can ask how I know earning a high salary does not equate to financial independence. Well, a lot of people earn a high salary but at the same time, they have a lot of outgoings, for example, mortgage, luxurious cars on a high repayment plan, expensive holidays and especially tax!. Although they are on high salary but the rate at which the money is spent on bills will always leave them waiting for the next paycheck in order to go through the same cycle ‘over and over’ again.

A good example is the case of celebrities who are creative and earn a lot of money from their talent exploit, a lot of them end up going bankrupt quickly because they do not have financial advisers who suggest to them how to manage their money and still live a fancy lifestyle. A lot of them even lack money management skills.

The question I asked myself when I started my journey towards becoming financially independent last year was; “How can I gain financial independence as quickly as possible?”

In order to achieve anything in life, it is important to have a number of set goals with actionable plans to make them a reality.

Greg Reid once said “A dream written down with a date becomes a goal. A goal broken down into steps becomes a plan. A plan backed by action makes your dreams come true.” This is a very powerful quote which I have started applying in my daily life.

There is no point in having a goal without a plan in place to help you achieve it. Do not be like a sluggard that says “one day I will be rich, one day I will lose weight”. If it is not backed by an actionable plan it ends up as a mere dream.

Steps to Financial Independence

Here is a list of steps I think can guide a person to financial independence:

1. Know where your money is going.

Call this budgeting or any financial term you want to use. The truth remains that if you do not know where your hard-earned money is going you can never achieve financial independence. A lot of people are scared of looking at their bank statement or even reluctant to open any money related letter that comes in the post, it is better to face your fear and deal with any financial issues before they get out of hand. That said, I do not study my bank account with hawkeyed vision but I most definitely know where my money goes when I get paid.

It is not the responsibility of the bank to check your bank statement for errors that might have come from the wrong deduction in bills or some subscription you thought you cancelled but the subscription fee is still being deducted from your bank account each month. That is your job. You should stay on top of and up to date with your finances.

2. Spend less than you earn.

An old adage says “cut your coat according to your size”, in actual fact that is wrong. I will say cut your coat according to your cloth. You cannot cut your coat according to the cloth you do not have, so it makes more logical sense to cut your coat according to the cloth you have not your size.

This quote really comes into play here. Spending less than you earn is not rocket science. For example, your current monthly income is £1000; if you do not have any other means to earn more, then you need to spend less than the £1000 you get paid each month.

Save up for things you want instead of buying it on credit card. Do not do an impulse buy and before you buy anything, shop around for discount, you might perhaps be able to get it cheaper somewhere else. If you do not have a lot of money and you are too busy shopping around, I do not think you can achieve financial independence. Whatever you cannot afford please do not buy.

If you are already struggling with your personal finances, do you really need that sky or satellite subscription? You can easily watch Freeview TV or instead spend your time educating yourself on things that will help your personal development and even your finances.

Do you need that gym membership? Go for a run instead, it is cheaper and you will get to enjoy the free natural air.

A lot of people go into debt chasing want when they already have what they need. Here is another statistic for you to ponder upon: ‘The number of motor finance agreements for new and used cars had grown from around 1.2 million in 2008 to around 2.3 million in 2017’

Is it really necessary to drive the latest car? I still drive a very old car and as long as it can take me from A to B without breaking down all the time, I do not really care what it looks like. A lot of people get into debt showing off and impressing their family and friends.

3. Increase your income

It was not until I celebrated my big ‘Four 0’ that I realized that I could increase my income outside my normal day job.

Do not get me wrong, you can still increase your income in your normal job. Maybe this is a topic for another day but the following are my tips to increase your income;

• Negotiate for a pay rise from your employer.
• Improve your skills or add more skills to your skillset and look for another job.
• Change career.
• Start a business, this one is my favourite and this is what I am doing at the moment.

4. Saving And Investment.

I will write in detail about this another time but this is the real deal if you want to actually be financially independent.

One of my earlier points stated the need to spend less than you earn if your expenses are less than your income, what do you do with the leftover? The answer is simple, you save and invest what you have leftover.

A study commissioned by Skipton Building Society shows that a quarter of the British population has no savings. The sky-high monthly outgoings and attempts to clear the substantial debt before putting money away regularly emerged as the main reasons.

Saving is one part of the equation and investment is the other part. It depends on what you are saving for but it is important to put some money away to look after those unfortunate life occurrences.

I remember an incident that happened a few years ago, a strong wind took off some of the ridge tiles on the roof of our house, and the cost to fix it based on insurance valuation was around £304. But unfortunately, our excess was £300; this means the insurance company was only going to pay us £4. Would it have been worth it to claim from the insurance company? We decided not to claim and pay for the repair ourselves. This is a simple example of life’s unfortunate occurrences.

If your goal is to be financially independent, you need to learn about investing. Investment simply means that you put your money where it can work for you even while you are sleeping.

There are lots of passive investments which means you don’t have to do much, the common example is stock and shares, property could be passive as well if you have a management company looking after it for you.

An investment could be risky and it usually depends on your risk tolerance. It is always better to seek the advice of experts before you carry out any investment. In investment, there is no guarantee that your money will grow. Investment is still a better way to grow your money than savings if it is done the right way and for a sustained period of time.

Financial institutions are not really going to help you grow your money in a savings account. Do not get me wrong on this; you need to put some money where you can reach it when life’s unfortunate situations happen. And the rest need to be invested in shares, bonds etc.

Savings account could pay you interest of around 2.5% annually while investment in stock and shares historically could return up to 7% and even better, a property could earn you up to 12% annually.

I hope you have been able to find value in this post. If you like this post, please click on the like button and also share it with your friends and family.