The Key to Financial Independence

The Key to Financial Independence

The pursuit of financial independence, which is defined as having sufficient wealth to live on without full dependence on a form of employment, has become a financial goal for many people — including ourselves. We prefer to spend more time doing what we enjoy, rather than in an office from 9-5. There are many ways to achieve financial independence; but I think the most important step is to build a detailed family budget. This budget needs to show all your income and expenses so you can tell exactly how and where the cash is coming from and where it is going.

If this sounds like you’re running the family’s finances like a company, you’re right! You wouldn’t run your company on a loss, and your family budget shouldn’t suffer either. Every company needs to have a profit and loss statement, usually referred to as an income statement. Start with building a monthly income statement by listing out how much money you get from each source. If you have a day job, that’s probably the main source of your monthly cash inflow. Be sure to list out any interest or dividends from your investment accounts. And if you generate income from rental properties, you are already ahead of the curve!

Your next step is listing out all your monthly expenses. For most folks the mortgage or rent will probably be the biggest expenses. Don’t forget about the property tax on your home.  Always identify extraordinary items, like the cost to fix a flat tire, wedding gift for a friend, or that root canal you just got. These out-of-pocket items somehow always occur, but the nature of them may vary from month to month.


Know Where the Money is Going

Here is where the fun begins! Frequently, people with existing budgets complain to me that they don’t understand why they always feel like they don’t have any money left over after the month’s expenses are paid. Isn’t there some type of rule to follow so they can save more?

In our family, we are not fans of these so-called “rules of thumb”. I’ve seen articles promoting the 50/20/30 rule or some variation of that. This rule means that you should allocate 50% of your income to essentials such as housing, groceries, utilities, transportation; 20% goes to savings; while 30% is reserved for lifestyle choices including entertainment, shopping, personal care, etc.

The fact is everyone’s situation is different; where you live is a big determining factor on how much you spend on anything. Also, I think you have to focus on things that are most important to you and gives you a sense of happiness. You need to be well-informed and educated to make your own decisions and not blindly use “rules” that may not even be applicable to your life. Unfortunately, you can’t just use a template or some universal formula and think it will help you get there quicker. There is no shortcut to reaching financial independence. And there is certainly no shortcut to learning and applying all the financial knowledge required to achieve your goals.


Where Do You See Yourself in 5 or 10 Years?

Yes, this is a question a company might ask you at an interview but more importantly, this is the question you should ask yourself when it comes to where you see your family’s finances in the future. Similar to running a company, you need to build projections of your income statement. These projections are realistic financial goals you hope to achieve. I recommend having both short-term and long-term targets. Accurately tracking changes in your financial health and goal setting is vital for anyone trying to reach financial independence.

Short-term goals may be 6 months or 12 months projections. To save money, where can you cut back on your expenses? Do you really need both cable TV as well as streaming video services? If you must eat out 2-3 times a week, how about trying less costly restaurants? When is the last time you called your cell phone company? You may be surprised at the deals you’ll get if you ask about switching to a more cost effective plan that may better fit your needs. By the way, does anybody still subscribe to magazines? Maybe it’s time to cancel that subscription!

Long-term goals, on the other hand, may be looking at things 3 to 5 years out. What type of raises do you expect at your current job, or better yet, can you switch jobs to get a boost in salary? Do you have plans to tackle a side gig which will supplement your income? Having both a short-term and long-term budget puts in place deadlines to reach those goals.


What Gets Measured Gets Improved

The key reason we build a detailed budget is so that we can improve our financial situation. You need to have very specific goals. You need to analyze the sources of inflow and outflow of your cash and implement changes to increase what will actually stay in your pockets.

It’s easy to keep pushing these things off until the next year, but just think of the money you could have saved. You can’t save what you spend! Stick to your financial goals and know how to get there. Visit your financial budget every month to see how things are tracking. As long as you have a firm hold on your finances, financial independence is closer than you think!