Financial independence means different things to each person. According to a 2013 Capital One 360 survey, 44 percent of American adults believe that financial independence is having no debt. 26 percent say it’s having an emergency fund. And 10 percent think that financial independence is being able retire early.
Financial independence is the point in my life when I have enough assets to support a comfortable lifestyle. Then, having a regular job will no longer be necessary.
What about the rest? What would you consider financial independence to be? Here are five things that can hold you back from achieving financial independence.
1. Financial goals that are unclear
You’re unlikely to achieve financial independence if you don’t plan for it. It’s impossible to predict the future, so deciding when you want to be financially independent is a good first step.
Want to retire early before 65? You want to travel with your spouse when you retire early? It’s crucial to begin saving as soon as possible to achieve these goals.
2. Savings not enough
You should know how much money you have saved and how much more you need to in order to reach your financial goals, such as retiring when you want. A calculator such as Networthify allows you to experiment with different scenarios for saving money and can make realistic projections regarding retirement.
Automating the process of saving money is another way to simplify it. Set up an automatic transfer every week or month from your checking to your savings account. This will relieve you of the additional task. It doesn’t matter if you only put $5 aside each week. You can start to build your nest egg with that amount.
3. Consumer debt is not paid off
Compound interest can work against you if you carry a monthly credit card balance, finance cars or pay only the minimum amount on student loans. Anyone who is serious about financial independence should make it a priority to create an aggressive plan for paying off debts quickly. Your money will be working for your creditors and not you.
You can use the Debt Snowball Method or the Debt Avalanche Method to manage your credit card debt. You pay off the card that has the lowest balance first and work your way up until you reach the card with a large balance. Debt Avalanche Method: This method is similar to Debt Snowball, except that you pay more than your monthly minimum for the card which has the highest interest rates first. Then, you work towards the card which has the lowest interest rates. The Debt Avalanche Method is similar, but you would pay more than the minimum monthly payment on the card with highest interest rate first and work towards paying off the card with lowest interest rate.
4. Lifestyle creep:
You do not have to be rich just because you earn a lot of money. As you progress in your career, there will always be a temptation to upgrade your lifestyle and match your income. You work hard so why not treat yourself to the latest gadgets?
If you live modestly and continue to save, you will be able to put away more money for retirement or travel with each pay increase. If you can resist the temptation to upgrade to a newer car, home and electronics that match your income, financial freedom is just around your corner.
5. FOMO is driving you to do things
FOMO is the modern equivalent of keeping up with your Joneses. You can now access the social media platforms of the Joneses, where they share all sorts of exciting adventures. Social media can be a wonderful tool to stay in touch with friends, but it also makes you want spend your money on extravagant vacations, clothes and spa treatments. Refrain from giving in to the urge. Block the Joneses if necessary. (See also Is FOMO Ruining Your Finances).
