Financial independence is a goal many of us aspire to. It’s the freedom to live life on your own terms, free from the stress of paycheque-to-paycheque living. According to StatCan, 1 in 3 Canadians are living in households with financial difficulties. But imagine not having to worry about any kind of debt, and instead having savings that accrue interest each year, and an emergency fund for any unexpected expenses. But achieving financial independence takes careful planning, discipline, and a long-term mindset. If you’re wondering how to make this a reality, here are some practical steps to get you started on how to become financially independent.
What is financial independence?
Financial independence means having enough income or savings to cover your living expenses without relying on a traditional job or paycheque. It’s the freedom to make choices based on what you want to do, rather than what you need to do for financial reasons. This often involves eliminating debt, building savings, and creating passive income streams to ensure long-term financial security.
How to calculate how much money you need to be financially independent
The first task is to understand what being financially independent means for you. Does it mean having a couple of vacations a year? Does it mean having a cottage for the summer? You should consider the following:
- The kind of lifestyle you hope to have
- The compromises you’re willing to make
- The amount of savings you have
- Your plans for becoming financially independent
Once you’re clear on these answers, you’ll need to work out your living expenses, the total cost for you to live over a given period of time. To do so, you can create a simple budget: take your net income (post-charges and tax), subtract anything you save, and this will give you the amount you spend each year. In order to become financially independent, you need to find a means of replacing your income to cover your expenses.
How to become financially independent
It’s possible that you can become financially independent by being determined and laying out a plan for your financial circumstances. If, for instance, your aim is to become financially free at 45 and retire by 50, you need to work on a plan that you can ultimately stick to. Here are some of the tips we recommend you take in order to achieve financial independence:
Understand your current financial situation
The first step toward financial independence is knowing where you stand financially. This means understanding your income, expenses, debts, and savings. Create a detailed budget to track your spending habits. This will give you a clear picture of where your money is going and help you identify areas where you can cut back or make improvements.
Build an emergency fund
An emergency fund is essential for financial security. Unexpected expenses – such as car repairs, medical bills, or job loss – can quickly derail your finances. Aim to save three to six months’ worth of living expenses in a separate, easily accessible savings account. This will give you peace of mind and protect you from accumulating more debt when life throws you a curveball.
Pay off high-interest debt
Debt can be one of the biggest barriers to financial independence. High-interest debts, like credit card debt, can eat into your income, making it difficult to save and invest. Prioritize paying off these debts as quickly as possible using methods like the debt snowball (paying off the smallest debts first) or debt avalanche (tackling the highest-interest debts first). Once you’re free of high-interest debt, you’ll have more resources to put towards savings and investments.
Invest wisely
One of the keys to building long-term wealth and achieving financial independence is investing. Consider options like a tax-free savings account (TFSA), registered retirement savings plan (RRSP), or other investment accounts that offer tax benefits. If you’re new to investing, you may want to consult with a financial advisor to help you create a diversified investment portfolio that aligns with your financial goals and risk tolerance.
Create multiple streams of income
Relying solely on one source of income can limit your financial potential. Consider diversifying your income streams by starting a side hustle, investing in real estate, or creating passive income through dividends or interest from investments. This can provide a safety net if one source of income dries up and accelerate your journey to financial independence. To increase your income, you could also try asking for a raise at work, choosing to work overtime, or even renting out a room in your home.
Reduce your expenses
Look for ways you can reduce your spending throughout the month on any non-essential purchases. This could include cutting out takeouts, cancelling subscriptions, and opting for cheaper or free entertainment options like meeting friends at the park. Small adjustments can add up to have a significant impact on your ability to manage your finances.
Live below your means
A key principle of financial independence is living within, or better yet, below your means. This means resisting lifestyle inflation – the tendency to spend more as you earn more. By keeping your expenses lower than your income, you’ll be able to save and invest more over time. Practicing frugality doesn’t mean sacrificing all your comforts, but being intentional with your spending.
Stay consistent and patient
Achieving financial independence is a marathon, not a sprint. It requires consistent effort and patience. Automating your savings and investments can help ensure that you’re consistently putting money toward your financial goals. Also, stay informed about financial strategies and periodically review your financial plan to ensure you’re on track.
Seek professional help
If you find yourself struggling with debt, a lack of savings, or confusion about investing, don’t hesitate to seek help. At Spergel, we understand that achieving financial independence is a journey that requires support and guidance. Our Licensed Insolvency Trustees can help you navigate financial difficulties, including debt consolidation and consumer proposals, and offer strategies to get you back on the path to financial stability.
How to become financially independent: FAQs
Here are some of the most frequently asked questions we receive about becoming financially independent:
How do I become independent financial?
To become financially independent, start by understanding your current financial situation and creating a budget. Build an emergency fund, pay off high-interest debt, and invest in assets that grow over time, like stocks or retirement accounts. Focus on living below your means, saving consistently, and exploring ways to generate multiple income streams. Staying disciplined and patient with your financial goals is key to achieving independence.
What is the fastest way to become financially independent?
The fastest way to become financially independent is by aggressively reducing expenses, paying off high-interest debt, and maximizing savings. Increase your income through side hustles or investments, and prioritize building multiple income streams, such as passive income from dividends or rental properties. Living well below your means and investing strategically can accelerate the journey, but it requires discipline, focus, and often making sacrifices in the short term for long-term financial freedom.
How much do you have to make a year to be financially independent?
The amount you need to make each year to be financially independent varies based on your lifestyle, expenses, and location. A common rule of thumb is the 25x rule, where you aim to have savings or investments worth 25 times your annual expenses. For example, if your yearly expenses are $50,000, you’d need $1.25 million in savings or income-generating assets to achieve financial independence. Ultimately, it’s not just about how much you earn, but how much you save, invest, and manage your spending.
Becoming financially independent doesn’t happen overnight. It’s a gradual process that involves making smart decisions about your spending, saving, and investing. By following these steps and staying committed to your goals, you can build a secure financial future and live life on your terms. If you need assistance with debt relief or financial planning, Spergel is here to help. Contact us today to take the first step toward financial freedom.
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