5 Steps to financial independence
Ambition is great in many things, but setting your sights too high can backfire. To make big financial goals happen, it's important to take them one step at a time — and celebrate your achievements along the way. Like many goals, it requires a little bit of work, consistently, over time.
How long should this take? It differs for everyone. It will depend on factors such as your income, both now, and over time, your expenses, and your willingness to prioritize long-term plans on a long-term basis. Your goals and your plans are not like anyone else's so make your financial independence plan your own.
Create your emergency fund
Start by making sure you have some backup savings ready. If your car breaks suddenly, or you have some expensive health problems, it won't immediately wipe you out if you have an emergency fund to fall back on.
Consider your contributions to your savings just another monthly bill that you have to pay, so don't miss any payments to yourself. When an unexpected expense arises, it's going to feel good that you've been paying towards it to lessen the sting. You may hit your goal, need to use some of your savings, and then you will need to rebuild it again. That's okay. It's exactly how it should work.
Plus, don’t forget to reward yourself once in a while to celebrate little wins. Once you reach your goal, give yourself a little present. What's one thing you stopped letting yourself buy as you increased those savings? Was it a daily coffee or takeout for dinner? Reward your accomplishment (but nothing likely to threaten your monthly budget) just once to celebrate.
Bonus Kasasa Tip: There are tons of ways to save money. A lot of it's just a matter of getting into the right mindset. Once you start to approach every spending decision with savings in mind, you'll find the savings come easier.
Pay off your debt
There are two popular methods how you can tackle your debt: snowball and avalanche.
With the snowball method, start with the smallest debt you have to pay off and move up from there. By tackling the big feat of paying off your entire debt one loan at a time, you'll little by little work your way towards financial fitness.
You can also be more strategic and try the avalanche method, which focuses on the one debt that has the highest interest rate. Once it's paid, move on to the next highest interest rate debt.
It might be tempting to pay off your house, too. That's a good plan, but wait until you've begun your retirement savings to prioritize mortgage debt. If you get into a tight spot down the road, you will have protection from your home debts that you may not from other debts, so prioritize your mortgage last.
Bonus Kasasa Tip: Don't have debt? Lucky you! You can still benefit from this step. Act like you do have debt — pick a dollar goal and put a set amount towards your savings each month as though you're paying it off. Whether into your emergency fund, towards a down payment on a new vehicle, or even into your 401(k), it'll put you that much further ahead in the steps moving forward.
Save 3-6 months worth of living expenses
Once you've paid off your debts, saving will come much more easily. Build up that emergency fund to the point where if you lost your job, you'd have several months before you really felt the effect. Having this financial buffer will also give you more options if you choose to change jobs and want to take your time searching, or even take time off from your career to tackle other priorities, such as family or travel.
Bonus Kasasa Tip: Saving is made that much easier if you use a savings account with high-interest rates. The more you save, the more you earn to put towards next month's savings. There’s no reason not to take any shortcut you can.
Save for retirement now, not later
This is the step where you move from basic savings and debt relief into building wealth. Make use of pre-tax retirement plans, such as an employer-funded 401(k) or IRAs to make the most of your savings.
There are lots of opportunities to save, but to make the most of your investments, be sure to speak to a financial advisor at your local community bank or credit union. They may have additional insights to make your path to retirement more sound.
Once you've built this foundation, you can consider taking another look at paying down your mortgage. Again, speak to a financial advisor to be sure you are not missing out on tax implications of both your increased savings and your lower home loan interest.
Bonus Kasasa Tip: You're over halfway through your baby steps! While a comfortable retirement is a nice big reward incentive to look forward to, you can still give yourself a mini splurge for all that you’ve accomplished so far without getting off-track. Maybe a nice dinner out, a manicure, or a day-trip to a nearby tourist attraction?
Build wealth and give back
Now that you're at the point where you can really build wealth, think generously and pay it forward. Pick some causes that are meaningful to you and become a philanthropist. Also, be sure to share what you've learned along the way. Your knowledge and skill are worth passing along, too.