This type of independence varies from one person to another. Some people feel like when they no longer rely on other people for financial support, that makes them independent financially. On the other hand, there are those who define it as being free from debt. There are those who think that they can only have this status if they no longer need to work to finance their basic expenses.
The truth is, you can have your own unique definition of what it means to have financial independence. But for clarity’s sake, being financially independent means you no longer let your financial needs dictate how you will live your life. It no longer tells you that you need to work for a living. It will not force you to stay in a job that you do not like just because you need the salary to finance your lifestyle.
That seems like a great target, right? Who does not want to live that way?
As great as being financially independent can be, there is a lot of hard work involved to reach this particular financial state. It is not impossible, but it is not an easy journey as well.
Fortunately, our 2017 graduates have a higher chance of achieving this feat. A recent study reveals that the average starting pay of the newest batch of college graduates will be $49,785. This is 3% higher than last year and 14% higher a decade ago. The higher income means this batch will have more finances to work with. That should make it easier to achieve financial independence.
Steps towards being financially independent
Of course, it takes more than just a high income to be financially independent. You have to develop the right habits and mindset so you can make the right decisions about your personal finances.
It is a fact that Millennials have a different set of financial habits compared to the other generations. It is believed that this is caused by the choices and mistakes that their elders have made. They witness the impact of the 2008 recession and that made them conservative investors. This is not good because one of the ways that you can be independent financially is by making the right investment choices.
Fortunately, young minds and hearts can still change. Here are some of the steps that you need to follow if you want to be financially independent.
Define financial independence.
As mentioned, your definition might be different than the others. Do you want to completely stop working and just live off the returns of your investments? Or maybe you want to continue working but you wish to have the freedom to pursue a low-paying yet personally fulfilling career? Regardless of how you define it, this should be the first step because it will identify your goal.
Assess your current financial situation.
The next thing that you have to do is to take a look at your financial situation. Do you have student loans? Do you have savings or an emergency fund? If you are a new graduate, the chances are high that you have debt and your savings are low. Even if you have a lot of debt, do not be worried or intimidated. It is important that you have a clear picture of where you will start so you can make an effective plan to improve your financial position.
Have a financial plan.
We do not just mean a budget plan. You should also consider having a debt payment plan and a spending plan. If you can afford it, have an investment plan in place as well. In case all of these are intimidating, you can concentrate on a budget plan. Identify your expenses and the income that comes in each month. Prioritize the expenses that will take you closer to financial independence. Pay off your debt and increase your emergency fund. Set aside some money to invest. All of these should be included in the financial plan that you will create.
Take note that your financial plan should also take into consideration the milestones that you want to reach in your life – like getting married, having kids, buying a house, etc. While it is okay to be flexible, you want to minimize the need to deviate from your original plan.
Automate your savings.
Clearly, if you want to be financially independent, you have to save money. Now it is hard to do this because something usually happens that will make you spend your savings. This is why it is better for you to automate your savings. That way, it will be taken from your salary even before you see it. When you do not see it, you will not really miss it. That will lower the chances that you will spend it for something else.
Pay off your debts.
If you got out of college with debt, that is okay. You need to relax and focus because you have to get rid of this debt if you want to achieve financial independence. Especially if you have high-interest debts. Just come up with a debt relief plan that will help you pay off the debt completely. Of course, that does not mean you will no longer use credit. You still have to make sure your credit score is in good shape. You just have to make sure it will not accumulate to a point that it will threaten your financial growth.
Know your priorities.
Finally, it is important for you to know your priorities. Something will happen that can compromise your financial position. It can take you one step back from your journey towards financial independence. Make sure you stay focused on your goal. Expect that there will be setbacks. You will feel frustrated because of it. It might even make you lose hope. But do not let that happen. Focus on the target and you should be alright. It is okay to compromise – but only when it matters.
Why is financial independence important
You might be thinking that financial independence is so hard. Well, the truth is, it will take time. But once you have reached your goal, it will all be worth it.
There are specific reasons why this is an important financial position for you to achieve.
First of all, there is no such thing as job security. You saw what happened in 2008. Although there is an increase in the job security satisfaction of Americans, it is not absolute. You need to have a plan B. Being financially independent will give you financial security. You can continue to work but you are no longer stressed out by the idea that anytime, it can be taken from you. That is because you are no longer reliant on the monthly income that you are earning. It is a good bonus, but no longer necessary.
It feels really good to say that you have achieved financial independence. But there is a long road ahead of you if you want to make it that far. As a new graduate, you are in the best position to start working on it.