Many people aspire to be financially independent, which likely means they get to live well and buy the things they desire in life without relying on others. Many see this as a distant goal, possibly something they might achieve closer to retirement. But, what if you could make a 5-year plan to achieve this goal sooner? It might take some sacrifice and extreme actions on your part, but it is likely feasible.
So, are you ready to learn how to become financially independent in 5 years? Here’s how to make it happen.
What Is Financial Independence?
Simply put, financial independence is having enough assets or income to cover your basic living expenses for the rest of your life without having to work or rely on others. It may also refer to pursuing your passion or achieving what you truly desire. Financial independence sometimes implies surviving solely on money earned from investments rather than through employment.
Nonetheless, each person will have a unique definition of financial independence. For example, you may think of it as having the freedom to go wherever you choose after retirement. For others, it entails simply working when they wish to. Whatever success means to you, it will only come about if you make a concerted effort and stick to a strategic plan.
Your Step-by-Step Plan to Financial Independence
Here’s how to become financially independent in 5 years:
1. Set Goals
Everything starts with thinking long and hard about how you define financial independence. A goal is essential, but your plans must be grounded in reality. When visualizing your dreams, try to see how much you can save and earn within five years at the same time. The more specific your goals, the better your chances of a good outcome because it’s easier to paint a realistic picture of your options.
2. Examine Finances
Before working towards your objective, assess your financial situation today and determine where you stand. If you realize that you’re spending more than you make, perhaps it is time to start tracking your expenses and check where you can reduce your spending. It’s also a good idea to make a budget to control your cash flow and make it easier to build your savings.
3. Improve Your Savings Rate
Your savings rate is the percentage of money you deduct from your disposable income and put into your retirement fund or nest egg. In most cases, it’s recommended that you keep between 10 to 20 percent of your income. However, you may be wondering how to become financially independent in 5 years with only this amount of savings. Realistically speaking, it’s indeed difficult to achieve this unless you save about 50 to 80 percent of your income. While saving money is hard, especially on a low income, it’s certainly not impossible.
4. Pay Off Debt
Aim to repay your debt to maintain your savings and investments. If you can, pay off the full balance of credit cards monthly to avoid interest and improve your credit score. The sooner you repay your obligations, the earlier you can reduce monthly expenses and put funds into your savings. Although taking out loans is a way to make extra money, make sure to improve your financial literacy before doing so.
5. Focus Spending on Essentials
Maintaining a frugal lifestyle can be challenging, but it’s one of the fastest ways to reach financial independence within your desired time frame. Of course, it’s fine to start small then work your way towards cutting back on bigger expenses. For instance, you can begin with controlling impulsive spending, then later move on toward reducing household costs.
6. Increase Earnings
It’s hard to imagine how you can become financially independent in 5 years if you believe saving, investing, and working nine to five aren’t enough. In this case, you should consider adding another income stream. Indeed, about one in three Americans today have a side hustle to help attain their financial goals. You can supplement your current income with a side business and become financially free faster.
As long as you’ve already done the other items on this list, you can proceed to consider alternative investments like index funds and real estate investment. A word of caution though, high returns come with high risks. Therefore, you may want to consult a financial advisor to learn more about investing strategically and generating passive income.
Some Final Words
Figuring out how to become financially independent in 5 years may not be as straightforward as you think. However, with the help of the above tips and the right mindset, determination, discipline, and sacrifice, you’ll be setting yourself on the right financial track in no time at all.