Debt is a fact of life for most Americans, but unsustainable debt remains a key impediment on the path to becoming financially independent. According to Debt.Org, Americans owed $980 billion in credit card debts as of 2016. The figure translates to about $8,400 for each household. The other colossal national debt portfolios reviewed by the Federal Reserve and the Economic Policy Institute during the same year include $8.5 trillion in mortgage payments, $1.35 trillion in student loans and $1.2 trillion in car loans. At the individual level, months and years of unpaid bills can lead to financial insecurity, bad credit and bankruptcy. You can get your debts under control by establishing a sound financial plan and working out ways to manage your finances more proactively. A sound debt strategy is usually low on short-term satisfaction and steady on long-term gains.
How to gain financial independence
Financial independence can only be achieved if you have sufficient savings to cover current spending and future expenses for the remainder of your lifetime. Indeed, the ultimate goal in personal finance is to have investments that supersede expenses. According to finance management resource Retireby40, you can achieve financial independence at any age using the following time-tested strategies:
1. Choosing a frugal lifestyle
You can easily achieve financial independence by controlling your expenses. The best place to start is analyzing your expenses to establish where the money goes each month. The scrutiny will help find areas to cut your spending while encouraging savings. Remember, spending should be curtailed even if the household income rises.
A percentage of the accrued savings can be funneled to investments that will grow your income and help you realize the dream of becoming financially independent. It is important to recognize that choosing a frugal lifestyle doesn’t in any way mean living cheaply or denying yourself a desirable life. Instead, frugality simply encourages more savings and wise investing.
2. Growing your earned income
Growing your income can go a long way to guarantee financial independence now and in the future. You can get a head start by choosing a rewarding career such as engineering, investment banking or healthcare. However, you have to contend with the lengthy education process, which can easily lead to high educational debt that takes many years to clear out.
3. Investing wisely
To invest your money wisely, you can start a business or choose high yield investment strategies like real estate and the stock market. Even with the promise of financial freedom, starting a business can be painstaking since the rewards don’t always come easy. It is instructive that 50% of all small businesses fail before reaching their 5th year due to limited capital, poor credit and excessive debt.
Common pitfalls of starting a business can be overcome by learning from successful entrepreneurs and setting your sights on open opportunities. Real estate is a lucrative industry that promises quick and steady returns provided proper research. A simple investment blueprint entails buying a starter home for rental purposes. After a while, you can add more properties to strengthen cash flow.
The next step is applying for a loan to expand your investment and grow the returns. You can build wealth by investing in the stock market even though it may take time to recoup your investments. The historical net stock market return stands at 7% when adjusted for inflation. A good investment strategy is choosing a 401K at an early age and investing come rain or shine.
4. Earning a pension
Although the opportunities for earning full pension are dwindling due to job security and other economic factors, there are a few jobs that you can work for 20 or more years and enjoy rewarding pension plans. The professions that promise financial independence include military personnel, firefighting, police service and other state and government jobs.
Using FIRE to get out of the debt trap
The dream of financial independence has given rise to the Financial Independence, Retire Early or FIRE movement. The crusade is premised on earning more and cutting costs. According to Stephen Chen, the Founder and CEO of New Retirement and Forbes magazine contributor, the traditional concept of retirement is geared towards achieving financial independence in the third life cycle.
This is the typical retirement age when the social security benefits are due. The FIRE movement in his assessment aims to assist people gain financial independence and control over scarce resources at the earliest opportunity in life. The communities are targeting financial independence in 10 to 15 years instead of the customary 40-year timeline.
A number of FIRE communities have been established throughout the US to drive this point home. The push is a wake-up call since it comes at a time when statistics show less than 1% of the population is retiring before age 50. The FIRE strategy of getting out of debt can be achieved through
1. Tracking all your expenses
Tracking expenses with the intention of enhancing incomes and cutting spending is at the core of all FIRE strategies. To get around it, you need to check your spending and make every effort to pay for everything within a month or on agreed timelines.
2. Cutting spending
There are a plethora of ideologies that go into cutting spending, among them is changing your mindset about spending. You need to work out ways to stay in control of your finances and avoid making unyielding comparisons. Always take time to scrutinize your spending and see how much you can save each month moving forward.
3. Becoming tax efficient
Taxes can make or break an investment strategy and personal finances. To get the most out of your game plan, you need to know how to maneuver your way around taxes. The key areas of focus include working on your savings and capturing the market returns more efficiently. A growing number of FIRE adherents are saving their money in qualified accounts and doing everything possible to reduce income taxes. One way to safeguard your future while guaranteeing high yields is putting your money into ROTH IRAs.
4. Finding your financial independence number
The success of FIRE relies on keeping expenses as low as possible. The most popular strategy is the conservative 4% rule. This is a safe withdrawal rate that can be deducted from your annual savings without impacting the principal amount. To make the strategy work for you, use a calculator to establish your annual expenses and multiply it by 25. The multiplying factor is adjustable since it is the number of years you aim to spend in retirement. A high after-tax income is critical to the success of the entire program.
5. Investing aggressively and efficiently
Sound investments and good returns on investments will bring you closer to your FIRE goals. For young people, there is always room to try out new things like investing and recovering from a down market. Regardless of your end game, you need to invest your money and seek valuable returns. For instance, you can pursue a passive investment strategy on a diversified portfolio with low fund expense ratio.
FIRE themes for non-frugal people
The founder of the College Investor and a millennial money expert Robert Farring opines that the underlying themes in all FIRE scenarios can be narrowed down to minimalism, extreme frugality and earning extra income. The tenets of minimalism are espoused by many FIRE advocates since it combines minimalist ideals with frugality. The belief can be taken a notch higher by choosing a minimalist lifestyle. Extreme frugality is essentially a “lean” FIRE movement.
The theme encourages extraordinary frugality and optimized spending. Members who observe these ideals will do everything possible to attain the goal of early retirement no matter the sacrifices they have to make. Lastly, the extra income theme is focused on the pursuit of side hustles and other strategies to earn extra income to meet set financial obligations. Though well-meaning, making certain assumptions regarding FIRE can prove costly. Robert warns against the following:
• Underestimating your expenses and investment performance
• Making plans based on the current tax climate instead of taking a broad-minded analysis
• Over-dependence on government supported subsidies
If you have mounting debts, you can have them consolidated into one, low monthly payment. Debt consolidation providers like Mountain Ridge Associates can help you overcome the debt burden and ease you into a productive and secure lifestyle. You also get valuable advice and access to a team of experienced debt managers with a track record of transforming lives and business fortunes.