Everyone dreams of financial independence, the ability to meet their financial needs without working or depending on others.
Being financially independent means your assets generate enough income to cover your expenses, allowing you to achieve your goals, whether that means early retirement, starting a new business, or pursuing a creative passion.
Some achieve financial independence through saving and investing, while others generate sustainable monthly income streams through a side hustle or real estate. But there is no right or wrong approach.
Here are the 7 steps to becoming financially independent in Canada.
1. Devise a plan
You need to know where you want to go and how you’re going to get there. Having a clear long-term goal with realistic milestones will help you make better choices along the way.
Talk to your partner, family, or friends about what you want to achieve in life. Consider what you need and want, and estimate the cost of achieving your goals.
If you’re unsure where to start, seek out the advice of a financial advisor. A certified financial planner can help assess your current finances and provide guidance on how to best achieve your financial independence goals.
Fee-only financial planners are not influenced by how they are paid, making them a reliable second opinion on important financial decisions or when working on a retirement plan.
2. Reduce your debt
Focus on paying off debts with high-interest rates, such as loans and credit card balances.
Whether that means seeking debt relief, earning extra income through a side hustle, or reducing expenses, paying off debt should be your top priority.
Paying your bills on time can help you build good credit, which can improve the interest rate on a mortgage or car loan.
If you already have a good credit score, debt consolidation can help you get out of debt faster by reducing your monthly payments and interest rate.
3. Set a budget and save
One of the biggest roadblocks to financial independence is uncontrolled spending. It seems like there are always unexpected expenses popping up, and it can be hard to stick to a budget.
Saving money is the most critical step to becoming financially independent. It’s a good idea to move a percentage of your income to your savings before you pay your bills. This forces you to save money elsewhere and makes it easier to reach your goals faster.
If you want to become financially independent, you need to be mindful of every dollar you spend. Track your expenses to give an overall snapshot of how you spend your money and identify areas where you may be able to cut back.
There are several ways to track spending. Use a budgeting app that connects to your bank account, like Mint and You Need A Budget, or simply record your transactions on paper.
Whichever method you choose, tracking your expenses is key to managing your finances better.
4. Reduce your expenses
It’s no secret that living expenses can quickly add up. Between rent, utilities, transportation costs, and everyday necessities, it can be difficult to make ends meet.
However, there are many ways to reduce your expenses and ease the financial burden. Here are some examples:
- Negotiate rent or find a roommate.
- Find the lowest mortgage interest rate.
- Cancel subscriptions you don’t need.
- Unplug unused appliances and use smart power bars.
- Reduce your hot water usage.
- Have a no-spend day.
- Get rid of cable TV and use streaming services instead.
- Eat out less and opt for home-cooked meals and easy recipes.
- Use bulk and dollar stores.
- Use discounts, coupons and rewards programs.
- Switch to a no-fee bank account.
By making small changes to your spending habits, you can dramatically reduce your monthly spending.
5. Consider the FIRE method
The FIRE (Financial Independence, Retire Early) concept is popular among people who want to achieve financial independence as early as possible. The basic premise is to save a large percentage of your income so that you can eventually live off of your investments.
There are many approaches to FIRE, but the common focus is to pay down debt aggressively, live frugally, save money and invest. Some take a more aggressive approach, using methods like house hacking and side hustling to accelerate their savings rate.
The goal is to live off your savings and investments. To get a rough idea of how much money you will need, multiply your annual expenses by 25.
6. Increase your income
Think about ways to supplement your income with investments or other forms of passive income.
Investing your money wisely through tax-advantaged savings accounts, like RRSPs and TFSAs, can help you grow your savings quickly.
You can invest in various income-generating assets, including rental property, stocks and bonds, and mutual funds.
Each has its benefits and risks, so it’s essential to do your research before making any decisions. With some planning and effort, you can soon be on your way to financial freedom.
Think about ways to increase your monthly income. Can you advance at your current job, or do you need to look for a new one? Don’t be afraid to ask for a raise or attempt to negotiate better terms.
7. Create an emergency fund
Having an emergency fund of at least three months of living expenses ensures you have money to pay for unexpected expenses that may arise, such as a loss of income, home repairs, car maintenance or any other unplanned expenditures.
You can become financially independent by making smart choices with your money, reducing your outgoings and building passive income streams.
Financial independence means having the freedom to do what you want. You can decide whether to continue working, retire, or pursue your dreams. Financial independence is not the goal but merely the means to an end.
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