In the interview I did with Adam Murray in episode 20, he spoke about how he reduced his expenses in a significant way when he worked through his employment transition and gap year. And you might recall, he found living on less made him more happy, not less.
Another key element in your financial independence plan is to have a financial buffer, an emergency fund, to get you through the unexpected. Perhaps you already have this, but if not, you want to build this up. Everyone’s needs are different, but you’re likely to need $2,000 to $10,000 in there to make you secure. This assumes you’ve got appropriate insurances in place.
Once you have that emergency fund in place, savings can go towards investment. We’re not going to get into potential investment strategies in this episode, but the key point here is that the goal is to build up some investments, so that in future they can generate passive income for you, to help cover your expenses. It might be rental property, shares, or if you’re real risk averse, term deposits. But the key is that whether it’s rent, dividends, or interest, they will all throw off income for you to use, without you having to lift a finger.
Envisage that you determine that you need $40,000 per year to cover expenses. If you could build up an investment that was capable of throwing off half that each year, then you only need to work in some form of paid employment to earn the other half - $20,000. You might be able to do that working a few days per week, or doing jobs in the gig economy. The key is, you’ve gained choice. You’ve gained financial autonomy at that point.
Expenses are one thing but income is the other side of the ledger. Your income earning capacity is crucial to achieving financial independence. In the previous example, where you needed to earn $20,000 to achieve your goal, if you are a well-qualified GP, you could probably earn that working once a fortnight. Whereas if you are in a low skilled job, you may need to work 3 days per week to get the same result.
So nurture your professional skills and invest in yourself. This will help you enormously in attaining financial independence.
Whilst thinking about income, is there anything else that you could do to boost your income? Push hard for a raise. A side hustle perhaps. Or chasing a job at a competitor that might pay more.
We’ve spoken about side hustles quite a bit in previous episodes (21 and 22 especially). This could potentially be a great path towards financial independence. You are generating income doing something you’re passionate about. And you can put in as much time and effort as works for you.
What other things might form part of your plan to reach financial independence? Avoiding credit card and other non-productive debt is likely to be wise. I’m not someone who believes credit cards are always evil. For those who can manage them, the consumer protection and rewards benefits they offer can be really valuable. But if you don’t pay them off each month, the interest you will pay will very quickly outweigh any of the other benefits. So think about whether your credit card is working for you, or whether you need a change of approach on that front.
Similarly, loans for holidays, furniture, and the like are likely to be costly, and drive you away from reaching financial independence. If you have these already, then an early focus of your plan might be to clear these debts.
How else could you trim your expenses to make your financial independence goal more attainable? Usually it’s about simplifying your life. Maybe changing some habits. Could you become a better cook so you eat out less? Would a housemate be a possibility? On a larger scale, could you downsize or make a tree change? Perhaps this would reduce your rent or mortgage. If you’ve got an inner city home with a mortgage, perhaps a move out of town might leave you with a debt free home even, which would make the achievement of financial independence for you that much more reachable. Episode 6 – Nish’s success story had an example along these lines.
It feels a bit harsh to say, but do you need new friends? If you surround yourself with people who spend money like it's water, it's going to be very tough to rein in your own spending and gain the flexibility and independence that you are trying to achieve. The type of car you feel the need to own is often a function of the social network that you're in. Our friendships and social networks are of course a foundation of our happiness, so I don’t raise this lightly. But it is certainly worth reflecting on whether you have certain friendships that are detrimental to you achieving your goals and dreams.
Well, I hope that’s given you a kicking off point on your goal to attaining financial independence. Determine your why, consciously own the goal and commit to it, and develop a plan to get you there over time.
Of course if you want help in developing your plan to achieve financial independence - that’s what I do every day for people. So visit the Work With Me page on the financialautonomy.com.au web site to learn how we can work together.
Attaining financial independence doesn’t need to be hard. But you need to take action. Hopefully today’s episode has started you on that journey.
Don’t forget to grab the free toolkit for this episode. We’ve got the Budget Tool in there to help you get across your cash flow, the Dream Planner template, 9 tips to combat procrastination, and a piece on how to use the SMART goals methodology.
Important Information:
This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.
