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What Does It Mean to Be Financially Independent?

In the world of finance, the phrase “financial independence” is tossed around frequently. The challenge is that this concept isn’t one-size-fits-all; it means different things to different people. For instance, for someone in their golden years, financial independence might signify the ability to retire comfortably without the burden of a 9-to-5 job. However, for hardworking adults, it often boils down to breaking free from the paycheck-to-paycheck grind.

This article addresses the latter – helping working-class adults build confidence and peace of mind, knowing they’re financially equipped to handle whatever comes their way. Explore the four components of modern financial independence and incorporate the following tips into your lifestyle.

1. Live Within Your Means
A lifestyle where your monthly income exceeds your expenses is paramount for financial independence. It’s impossible to get ahead and build your savings if your budget ends in the red each month. This status also means you’re not reliant on others, such as your parents, to help cover your bills.

The best way to ensure you’re not overspending is with an accurate budget. Yes, budgeting can often feel burdensome and restrictive. However, it’s necessary because it provides the foundation for the other three components of financial independence.

Tips to Build an Accurate Budget:

  • People tend to overestimate their incomes and underestimate expenses. Review several months of your financial and credit card statements to generate accurate figures for your budget. Itemize each cost and thoroughly review your paystubs.
  • Create categories for your expenses to simplify tracking and quickly identify areas where you can cut back. For example, housing, groceries, clothing, entertainment, transportation, and utilities could be the main categories within your budget.
  • Build an accurate monthly budget. Then, expand it to include the upcoming six or twelve months. This strategy helps to identify outlier expenses like birthdays, holidays, and vacations.
  • Schedule a time bi-weekly or monthly to balance your budget. If you get off track, learn from your mistakes and make any necessary adjustments.

2. Reduce Your Dependency on Credit Cards
Society today has conditioned consumers to feel credit card debt is not only okay but also the norm. However, it’s important to remember that credit cards are loans and generally have some of the highest interest rates around. Instead of relying on credit cards to make ends meet, you should use them primarily to help with cash flow and cover emergency expenses.

Reducing your reliance on credit cards is crucial to becoming financially independent. If you create and utilize an accurate monthly budget, keeping your credit card spending in check is much easier.

Tips to Reduce Credit Card Reliance:

  • Only spend up to 25% of your available credit card limit. For example, if your credit card limit is $4,000, your balance shouldn’t exceed $1,000.
  • If you find credit cards tempting, ask for a lower limit. By reducing how much you have available, you’ll be forced to spend less.
  • Always pay more than the minimum balance to help reduce your credit card debt quickly.
  • Consider consolidating high-interest credit card debt with a lower-rate debt consolidation loan or credit card balance transfer. You’ll instantly reduce your monthly interest expenses, and managing your outstanding debt is much easier.

3. Secure Your Savings
Breaking free from the paycheck-to-paycheck cycle depends on your ability to save money. With an accurate budget and minimal credit card debt, it’s much easier to prop up your savings.

When it comes to saving money, most people want to jump right into higher-earning investments, like the stock market. However, your money is at risk, and accessing the funds in an emergency may be harder.

Instead, focus on building your savings habits first. Practice putting money aside frequently – even small amounts – into an emergency fund. For example, you might transfer $20 or $50 into your savings account weekly. Your goal is to create a savings routine that eventually becomes second nature.

Tips to Build Your Savings:

  • Open a separate savings account with limited access (for example, no ATM card). You’ll be less likely to spend this money frivolously without the ability to pull from this account easily.
  • Put your savings on autopilot with payroll deductions or automatic transfers. Payroll deductions automatically transfer a specific amount of money into your savings on payday. Automatic transfers are similar; however, you choose the date for the transfer to take place.
  • Work with a financial advisor to create a savings plan. For many people, this tactic feels more official, and the savings process becomes easier to handle.
  • Incorporate share certificate accounts (commonly called certificates of deposit) into your savings plan. These accounts lock in your money for a designated period in exchange for higher returns. A crucial component of certificates is that they force you to save.

4. Maintain a Healthy Credit Score
The final component of becoming financially independent is having an exceptional credit score. At some point in your life, you’ll need to borrow money. It might be for a new car or your first home. Knowing that you’ll be able to receive the necessary financing provides peace of mind. However, that’s far from the only benefit.

An excellent credit score also reduces the amount of interest you’ll pay on loans, which circles back to the other components. Lower interest rates will affect your budget less and allow you to allocate more money into savings. It will also help keep credit card debt at bay.

Tips to Boost Your Credit Score:

  • Payment history plays the most significant role in calculating your credit score, so you never want to miss a loan payment. Schedule loan and credit card payments on your calendar to ensure you’re never late.
  • If you might be late on an upcoming loan payment, contact your lender before your due date. Lenders are understanding and will often work out a payment plan with you – helping you to get back on financial track and avoid negative marks on your credit report.
  • Reduce your outstanding credit card balances. Try to keep your credit card spending to less than 25% of your available limit. As a benchmark, individuals with exceptional credit scores typically spend less than 7% of their available credit limits.
  • Monitor your credit regularly. There are many free apps and websites that allow you to check your score. However, you’ll want to occasionally review your credit report in-depth to identify possible errors or fraud. You can obtain a free copy of your credit report from each of the three main credit bureaus (Experian, Equifax, and TransUnion) at www.AnnualCreditReport.com.

We’re Here to Help!
Achieving financial independence requires discipline and consistent effort. The four components all impact one another and stem from your ability to create and utilize an accurate budget.

If you have questions about budgeting, consolidating high-interest debt, or creating a savings plan, we’re ready to help. Please stop by the Credit Union or call 410-687-5240 to speak with a team member today.

Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.