From a young age, Joe Dominguez knew he wanted to become financially independent one day, so he wouldn’t ever have to worry about money. As a first-generation American growing up in Harlem, while crime, poverty, and gangs were increasingly plaguing the neighborhood, Dominguez worked to help support his family throughout his childhood.
In early adulthood, Dominguez started working on Wall Street. But he wanted more time to focus on the things he felt were truly important in life—family, faith, and community. Though Dominguez had a substantial salary that could have provided a luxurious lifestyle, instead of spending the money, he saved and invested a large majority of his earnings.
Just before his 31st birthday, Dominguez declared financial independence. He quit his job with $100,000 in savings (roughly $787,000 today). He was able to live off interest indefinitely, never having to work for an employer again.
Dominguez spent the rest of his life helping others. As a speaker and writer, he taught people how to work toward financial freedom, so they could also spend time on the things they valued the most.
Anyone can apply the same principles that Dominguez followed to their own life. Once you know what those principles are, you can set yourself on the path toward total financial freedom. In this article, you’ll learn how to become financially independent through the following strategies:
- Setting goals
- Creating a budget
- Eliminating debt
- Living below your means
- Building your savings and investments
- Boosting your income
- Staying informed
What Does It Mean to Be Financially Independent?
Financial independence is when an individual has enough wealth to support themself indefinitely without relying on wages from employment or help from others. Financially independent individuals often live off passive income generated through various investments. It’s important to remember financial independence is more than a retirement plan. It’s a mindset that allows you to live freely without worrying about how you’ll earn money.
How to Achieve Financial Independence
1. Create Financial Goals
They failed not because they lacked intelligence or courage, but because they did not organize their energies around a goal.Elbert Hubbard
To achieve financial freedom, you must have a vision for your future. You won’t build your dream life without intentional decision-making, driven by clear goals. Set goals that align with your vision, and let those goals guide your decisions.
Set SMART Goals
Use the SMART goals framework to craft goals that guide you. Smart goals are specific, measurable, achievable, relevant, and time-bound. Here’s what a SMART goal should look like:
- Specific: Specificity gives you a clear mental image of where you want to be in the future. For example, choose an exact dollar amount you want to have before quitting your job. Rather than setting a goal to “save up enough money to not work again,” determine what “enough money” really means.
Example: I want $2 million in investments.
- Measurable: A goal should be measurable so you can evaluate whether you’re on track to achieve it. Often, financial goals are easily measurable as long as you can do a little math. Each month, calculate if you’re on track to reach your goal.
Example: I’m on track if I’m adding $2,500 per month to my investments and achieving a 6% return.
- Attainable: Set yourself up for success by making sure your goals are attainable. For example, if your goal requires you to invest $9,000 each month, but your monthly income is only $8,000, your goal isn’t attainable.
Example: I make $8,000 per month, which leaves me sufficient funds to invest $2,500.
- Realistic: The goals you set should never rely on things you can’t control. If your action plan includes winning the lottery or receiving a surprise inheritance, there won’t be much you can do to get yourself back on track if those things don’t happen.
Example: I’ll use money from my salary to achieve my goal.
- Time-bound: Deadlines motivate action, so every goal needs a timeframe. Are you aiming to achieve financial independence in the next 10 years? 20? 30? Your timeframe will shape your actions.
Example: I want to reach my goal within 20 years.
Review Your Goals Often
Once you’ve created your goals, it’s critical to reflect on them often. Here are two strategies for reflecting on your goals:
- Create a Vision Board: A vision board is a visual representation of your dreams. You can place images of the things you’d like to do with your life once you’ve achieved financial freedom. Include quotes that remind you of why you set these goals in the first place. Anything that motivates and inspires you should go on your vision board. Then, place your vision board somewhere you’ll see it often.
- Schedule Time for Check-Ins: Some people like to check in daily, weekly, or monthly to review whether they’re on track for their goals. For long-term goals, like achieving financial independence, weekly check-ins are often the most effective, so you can evaluate your weekly spending and savings habits.
2. Build a Budget
A budget is telling your money where to go instead of wondering where it went.Dave Ramsey
Becoming financially free requires building awareness of your income and spending and being more intentional about how you allocate your money. Follow these steps to build a budget:
1. Calculate Monthly Income
This should be simple to calculate if you have one source of income. If you have multiple sources, be sure to include them all. If your income varies each month, take the average of three months.
2. List All Expenses
Start by listing the cost of your needs, such as housing, utilities, food, transportation, healthcare, childcare, loan payments, and any other expenses that are absolutely necessary. Next, list all other regular expenses, including travel, entertainment, gifts, charitable donations, and anything else you regularly spend money on.
3. Evaluate Spending Habits
Once you’ve listed your expenses, evaluate whether or not you’re spending your money effectively and if your budget needs any changes. Ask yourself the following questions:
- Is your monthly income covering all your expenses?
- Which categories take up the largest portion of your income?
- Do your spending habits align with your values?
- Is there a spending category you could easily cut back on to contribute more to savings?
4. Make Changes
Ideally, a budget should reflect your values. The categories that take up the largest portion of your budget should be the things that are most important to you. While early in a career, many people spend the largest portion of their budget on basic necessities like housing and food. This reflects that taking care of their well-being is a top priority.
Beyond the necessities, many people choose to spend money on things that matter to them. If you spent a lot on gifts last month, maybe you value gifts as a way to connect with your loved ones. If so, there’s nothing wrong with allocating money for that expense in your budget.
On the other hand, if you notice you spend a lot on a category that is not important to you, limit how much you’ll spend in that area next month and stick with it.
The most important part of a budget is ensuring your income covers your expenses. If not, you’ll need to find ways to cut back on spending. Look at any areas of spending that can be reduced or eliminated.
5. Budget for Savings
Hopefully, you’re already making enough to cover all your expenses. But to reach financial freedom, you also need enough money to contribute to savings and investments.
If you’re not contributing a sufficient amount to savings currently, look for areas you can reduce your spending to put it toward savings instead. Set up automatic savings, to make sure this is a priority. Most banks allow you to send automatic payments to your bank account each month.
6. Continue Tracking Income and Spending
Budgeting is a long-term strategy. Each month, look at your income and expenses to evaluate whether you’re still making more than you spend, spending money on the things that matter to you, and contributing a sufficient amount to savings.
3. Eliminate Debt
If you’re out of debt, when you’re being responsible with your money, what happens? You feel powerful! And other people can feel that you’re powerful.Suze orman
77 percent of Americans have some type of debt. Some debts are beneficial, like student loans or mortgages because they help you build wealth, but to achieve total financial freedom, you want as few financial obligations as possible. That’s why it’s important to work on paying off debt. Here’s how to get out of debt:
Strategies for Debt Repayment
- Budget For Debt Repayment: If you read the previous section, you’re probably already an expert with budgeting. If you have large debts, an important part of budgeting is allocating a large portion of your resources to paying down those debts.
- Prioritize Which Debts to Pay: Paying down debt can feel daunting, but if you take it one small step at a time, it becomes much more manageable. So, where should you start? Experts recommend choosing one of two strategies for selecting which debts to prioritize and pay off.
- Snowball Method: The first debt elimination strategy is called the snowball method. If you choose this method to pay down your debts, you’ll start by paying off your smallest debt as quickly as possible. You’ll continue making your minimum monthly payments on all debts, but any money left over should be put toward paying off the smallest amount of debt. You’ll move to the next smallest debt when you’ve paid off the first debt. With one debt out of the way, you should have additional money to put toward the next debt. Each time you pay off a debt, the money you’ve freed up will make it easier to pay down the next one.
- Avalanche Method: The avalanche method prioritizes paying down debts with the highest interest rates rather than prioritizing debts based on the amount owed. You’ll begin by putting as much money as possible toward the debt with the highest interest rate while continuing to make minimum required payments on all other debts. After your first debt is paid off, you’ll focus on the debt with the next highest interest rate. The avalanche method allows you to save money because you will not have to pay as much in interest.
Debt Reorganization Methods
In many cases, debt reorganization can help you pay down your debt more quickly. The following strategies are the two most common methods of debt reorganization.
- Debt Consolidation: The process of debt consolidation involves taking out one large loan to pay off multiple smaller loans. Once your debt is consolidated, you’ll have just one payment and one lender to work with. Debt consolidation is often used when someone has multiple loans with high-interest rates. If you qualify for a low-interest rate on a debt consolidation loan, this strategy allows you to decrease the amount of interest you’re paying to lenders.
- Refinance a Mortgage: Because mortgage debt often has a low-interest rate and a high principal, it is usually one of the last debts people pay off. However, your mortgage can be a part of your debt reorganization strategy. The housing market has been on an upward trend in most areas of the country, which means if you’ve owned your home for a few years, the amount of equity you have has likely increased.
- A cash-out refinance allows you to tap into that equity to get the capital you need to pay off other debts. Your monthly mortgage payments will rise after a cash-out refinance, but you may be able to get a lower interest rate than the rate you pay for credit card debt, personal loans, certain car loans, and some types of student loans. Speak with a mortgage lender to determine the interest rate you qualify for and how much cash you’d receive in a cash-out refinance. A lender can tell you what your rate will be based on your credit score.
- You may also consider refinancing your home to eliminate private mortgage insurance (PMI). If you bought your home with less than a 20% down payment, you likely pay PMI as part of your monthly payment.
- If you now have more than 20% equity in your home, you can refinance to lower your monthly payments by hundreds of dollars. While considering refinancing to eliminate PMI from your mortgage payments, be sure to consider what your new interest rate will be. If your interest rate rises significantly, refinancing may not be worth it.
4. Live Below Your Means
Maturity is the ability to reject good alternatives in order to pursue even better ones.Ray Dalio
As you advance in your career, it might be tempting to live a more luxurious lifestyle. Many people buy a bigger house, drive a nicer car, or go on more expensive vacations when they start making more money. But if you want to one day reach a point where you don’t have to rely on your employer for wages, it’s important to resist this urge. Instead, contribute more to your savings and investments rather than living a more expensive lifestyle. For example, plan a staycation, skip going out to eat, and look for discounts when you shop. Just because you can afford to spend more doesn’t mean you have to.
5. Build Your Savings and Investments
It is never too early to encourage long-term savings.Ron Lewis
When you budget, pay off your debt, and live below your means, you should be building capital to add to your savings and investments. Some people ask how much they need to save up before they can quit their job and live financially independent for the rest of their lives. Use the Multiply by 25 Rule as a starting point.
The Multiply by 25 Rule
In the early 90s, a financial analyst named William Bengen published research saying that financially independent individuals could safely withdraw 4% of their investments each year for 30 years without depleting their accounts.
Bengen’s research led to the development of the Multiply by 25 Rule which recommends calculating your annual expenses and multiplying them by 25 to determine how much money you need in savings and investments before quitting your job.
For example, if you feel comfortable living off of $50,000 per year, your calculation will look like this:
50,000 * 25 = 1,250,000
This tells you that you should be able to safely declare financial independence when you have investments worth $1.25 million.
Things To Be Aware of With the Multiply By 25 Rule
The Multiply By 25 Rule is based on the idea that a person will only need to live off their investments for 30 years. This works if you’re hoping to quit working at a traditional retirement age. If you’re hoping to achieve financial freedom in your 30s, 40s, or 50s, you’ll likely need more money in investments before you quit your job.
If you hope to quit working earlier than the traditional retirement age, you’ll likely want to multiply your annual expenses by at least 30 to find the amount you need.
It’s also important to note that the amount of money you need is an estimate. When the economy is strong, investment funds produce a high return, allowing you to stretch your savings further.
When inflation is high, you’ll need more money in investments to keep up. If you want to be sure you won’t have to return to work after declaring financial independence, add a little more to your savings than you think you’ll need to account for unexpected economic downturns or high inflation.
6. Boost Your Income
It is better to have a permanent income than to be fascinating.Oscar Wilde
You’ll reach financial independence more quickly and easily when you have a high income. You can use a few different strategies to boost your income and contribute more to savings and investments. Decide whether you want to increase your income through passive or active income or both.
Passive Income Sources
- Dividend Stocks: Stocks that provide a share of their earnings as a cash payment to shareholders are called dividend stocks. Most dividend stocks pay shareholders quarterly, although some pay monthly or annually. Investing in these stocks is a way to make more money without investing any additional time.
- Real Estate Investments: Real estate investing requires a large amount of capital upfront, but it can provide a reliable source of passive income to investors. When you purchase a rental property in an area with rents high enough to cover your mortgage payments, you’ll have consistent cash flow. Real estate is often considered a long-term investment, so the cash flow increases over time.
Many people choose to invest in real estate even when the initial cash flow is low because the price of rent increases over time. Investors expect to receive a higher amount of rental income down the road. The payoff of this strategy is often high and has allowed many investors to build large amounts of wealth. However, if you choose to pursue this strategy, remember there is risk involved.
Boosting Your Active Income
- Side Hustle: In 2021, one-third of Americans had a side hustle. If you have spare time on your hands, adding a second job is an excellent way to boost your income. Many people start their own small businesses on the side. Being an entrepreneur isn’t for everyone, though, and there are other side hustles to help you bring in more money. Rent out a spare bedroom on Airbnb, promote a brand through affiliate marketing, or offer consulting services. Any of these options can help you reach your goal of financial independence more quickly.
- Work With a Career Coach: One of the best ways to boost your income is to advance in your career. A career coach can help you position yourself in your career to get high-paying job opportunities, promotions, and raises.
7. Stay Informed
I am not a product of my circumstances. I am a product of my decisions.Stephen Covey
Building wealth to support yourself indefinitely takes skill, perseverance, and knowledge. To ensure you reach your goals, you have to make informed decisions. It’s important to stay up-to-date on the best practices in personal finance. Always be looking for more expert advice, mentors, and research to help you reach your goals.
Ray Kiyosaki, self-made millionaire and author of Rich Dad, Poor Dad, writes about how knowledge is power when it comes to personal finance. An extremely brief Rich Dad, Poor Dad summary is that wealth comes from increasing your financial intelligence. Look for opportunities to read resources like Kiyosaki’s book and the books of other financial experts.
Become Financially Free By Keeping Your Goal in Mind
Let your goal of financial freedom guide your decisions, and you’ll reach your target before you know it. Create a vision board, keep it visible, and reflect on your progress. More importantly, take time to think about what is motivating you to become financially independent. Why do you feel driven to reach this goal? How will it free up your time? In what ways can you create more impact in the world? Who can you help by becoming financially free?
Considering these things will help you stay intrinsically motivated and focused on setting yourself up for a purpose-driven future.
To learn more about finance, check out these articles:
What to Know When Buying Your First Investment Property