When you think about your long-term goals, how many of them revolve around your finances? If you’re like most Americans, at least a few of them do. According to one resolutions survey by Go Banking Rates, almost 25% of respondents said their top financial goal was to “save more, spend less” in the new year. And if you hope to reach a goal of becoming financially independent at any point in your life, that’s exactly what you’ll need to do.
Financial independence can mean a lot of different things, especially depending upon your stage of life. Ultimately, it means having the ability to retire and live on savings you’ve accumulated over a lifetime of work and putting your earnings aside. But in the near term, it might look like being able to pay bills on time and get away from a paycheck-to-paycheck lifestyle.
“It can mean being able to move out of parent’s house as an adult,” Greg McBride, chief financial analyst for Bankrate, told The Cheat Sheet. “It can mean being comfortable enough that you’re able to sleep at night and not worry about your finances. It can be feeling as if you’re on track for retirement savings. It can mean being debt free.”
Whatever that looks like for you, there’s never been a better year to get started on that goal. Financial independence can take some work, but it’s rewarding. With a little effort, you’ll have the ability to make financial decisions that put you ahead of the game, not struggling to keep afloat.
Roadblocks to financial independence
Those goals might be nice and all, but chances are you’d already be well on your way to your savings goals if you didn’t have a few hurdles in your way.
One of the biggest hindrances to achieving financial independence is carrying a large amount of debt, McBride said. You might feel that you can’t get ahead while you’re still facing a mountain of IOUs, but it’s possible to work on both at the same time. In fact, McBride suggests you should be. “Funnel as much as you can toward debt repayment without sacrificing savings,” he said. “It’s not a matter or either/or. Tackle both at the same time.”
To do this, McBride suggests setting up a direct deposit account just for funds you can use for repaying your debt. That way, you can make payments as much as possible while you have another account for your savings.
This can be an especially large problem if you’re facing a number of credit card bills, said WalletHub analyst Jill Gonzalez in an interview with The Cheat Sheet. With many families racking up thousands in debt, “Clearly we’ve kind of forgotten where we’ve come from in terms of the Great Recession,” she said. However, working to pay down those debts — and making extra payments above the minimum balance due — will start to get you moving in the right direction.
Another hindrance McBride and Gonzalez both agreed on was a lack of savings in general. If you don’t have any money tucked away for emergencies, it’s going to make it tough when an unplanned expense inevitably arises. “When you’re starting off, you’re not going to have an emergency fund,” Gonzalez said. “But that is certainly something you’re going to want to start building up as soon as possible.”
Want a concrete plan for starting to become financially independent this year? Take a look at these seven basics.
1. Know how much you spend
If you don’t know how much money comes and goes in your bank account each month, and for what purpose, it’s time to take a closer look at your monthly statement. Being naive about your spending might seem better than the alternative of feeling temporarily guilty about those spending sprees, but it won’t help you build up your rock-bottom balance.
Gonzalez suggests gathering those statements, along with any bills and receipts you have from the previous few months. Start to build a picture of what your spending looks like. Make a list of your spending into major categories like housing, food, health care, entertainment, and whatever else you might spend your money on.
2. Make a reasonable budget
When you’re trying to save more money, “budget” can seem worse than any other b-word out there. But it’s really, truly the only concrete way you’ll start to see real progress in your savings. While a budget might seem constraining at first, in reality it’s helping you know exactly how much you can spend freely each month in a certain category.
If you’re not sure where to start, Gonzalez suggests taking that list of your spending, and ranking them according to importance. (Hint: Rent, groceries, and insurance payments should go toward the top, while your bi-weekly manicure or tech spending might need to fall toward the bottom.) Then, take a look at your income and decide how much you can actually afford. If you’re trying to save money, those amounts should get tallied in toward the top.
At this point, start crossing off the items that fell toward the bottom of your list. You might need to forgo those things, at least temporarily, or find a way to put savings aside to enjoy them less frequently.
3. Start saving money intentionally
When you determine how much money you can actually afford to save, the next step is to figure out how exactly you’re going to do that. My husband and I keep a tally on an Excel spreadsheet, showing how much of our balance is earmarked toward certain savings goals. If it’s too tempting to have savings within reach, set up a separate savings account and have funds from your paycheck go there first. “Get your saving accomplished before you even roll out of bed on payday morning,” McBride suggests.
Essentially, Gonzalez said, treat it like another bill you pay automatically every month. Even if it’s only $15 or $30 a month to start an emergency fund, it’s something. If you struggle with saving money, a realistic goal for 2017 might be to save one month’s worth of income for emergencies. WalletHub eventually recommends having an emergency fund that can cover between 12 and 18 months of lost income, she said, but that takes time for even the best savers to accumulate. Start with goals you know you can achieve, and go from there.
4. Recognize factors you can (and are willing) to change
Once you pare down your expenses — leaving room for a few splurges here and there — there’s only so much you can cross off before the expenses are somewhat out of your control.
At this point, recognize the other options you have, and evaluate if they make sense for your life. Where you live has a huge impact on your cost of living — not just the size of your home but also the city or region in general. Some states are much more affordable than others, for example. You might not be willing or able to relocate and find another job that presumably comes with a raise. But if you need to boost your income, or at least have your expenses come down, those are two of the ways that will make a significant difference.
If neither of those are an option but you’re still looking for ways to increase your margins and allow you to save more money, look for other ways to do so. Be strategic with your spending, allowing your credit card rewards to work for you. Gonzalez suggests taking the “island approach,” using certain credit cards for purchases where you get cash back, and using separate cards with low interest for debt repayment, and so on. Boost your income with side jobs, or sell off your extra clutter around the house for a few extra dollars.
5. Don’t make excuses
When it comes to your income, though, remember that making excuses about needing a higher paycheck to save just doesn’t hold true. According to McBride, one Bankrate survey found that a full quarter of households with just $30,000 to $50,000 of income are still able to save 10% or more of their income.
“Often times, [people] may defer things like saving with the idea that they’ll do that later when they have a higher income or when they get that debt paid off,” he said. “The problem is, they don’t get there. Or their lifestyle has increased. It’s a testament to the fact that financial independence is not a function of income.”
You might need to make a cut or two in your budget that’s painful at first, but if it’s not a dire necessity, you’ll find a way to move forward. Being rich or poor has very little to do with whether or not you have good financial habits, so cultivate them no matter how large your paycheck is.
6. Live at or below your means
Whoever the Joneses are, keeping up with them is one of your biggest threats to financial independence. If you feel the need to buy every new tech gadget while living in the nicest home on the block and having the convertible to boot, you’re likely going to struggle with your savings goals.
Time for the hard truth: “You’re not going to build wealth unless you have a demonstrated habit of saving consistently and living on less than you make,” McBride said.
That’s not to say you can’t buy a nice home or even get that convertible, if it’s a priority for you. But if you can’t make extravagant purchases while also setting aside money for the future every month, the fancy car might not end up doing you any favors.
Need some inspiration in this department? Some of the richest people in the world don’t flaunt their money, just because they can. Warren Buffett could afford a shiny Camaro if he really wanted one, but he prefers a Cadillac — in most cases driving the same one for the better part of a decade before purchasing another one. Other billionaires live in the same homes they bought decades ago, purchase used cars, and pack their own lunches for work.
7. Don’t count on windfalls — even from family
Yeah, yeah, we know not to count on that Powerball ticket or going all-in on a “hot” stock investment. But unfortunately, counting on an inheritance from loved ones can be as far-fetched as winning the lottery or finding a pot of gold at the end of a rainbow.
According to a report from Mass Mutual, 27% of working-age adults believe that an inheritance will fully fund their own retirement, and 66% think an inheritance will at least help with some of their retirement costs. In most cases, the reality could be a little less promising.
“I think 2016 has really showed us that nothing is set in stone; nothing is guaranteed,” Gonzalez said. Instead of relying on others when it comes to your finances, she added, “You want to have something to show for yourself.”
It’s not that older generations are stingy or lack generosity. But with health care costs growing and life expectancies rising, your parents or grandparents might simply need that money to care for themselves. “There’s no telling how much of that nest egg Mom or Dad may actually run through,” McBride said. “They may need it all.”
That aside of course, relying on someone else for your own retirement is the opposite of gaining financial independence. “It’s a huge mistake not to take control of your own financial destiny,” McBride added.