On a basic level, financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost.
Asking The Questions
If you are thinking about financial independence, you have asked certain questions and have come to certain realizations. When did you realize that you may have to work the rest of your life? When did you realize that there are families who could relax and not lift a finger and their wealth would continue to grow? Upon the realization of the first thought, you will almost certainly think of the second.
Was it in school? Were you visiting a friend? Did you overhear a conversation? Were you on vacation? Was it after viewing a facebook picture? Was it following the purchase of a big-ticket item (home or vehicle)? Were you checking your account balance, reviewing a bank statement, or looking at your paycheck? Were you paying a bill or a portion thereof? Was a purchase declined?
The Calculation
At one point or another, we all do the calculation. If my salary/yearly income after taxes is $X, and my expenses are $Y, $X-$Y = working forever.
At this point, one has a choice: (1) continue down the same path or (2) make a change. You are reading this because you want to/have made a change.
On a basic level, to change the above in your favor requires an increase in $X and/or a decrease in $Y. While this is a basic concept understood by all, the above is easier said than done.
Increasing Income
With regard to increasing $X, you may:
- Save
- Request a raise at work,
- Start your own business,
- Invest,
- Begin one or more side hustles,
- Go back to school, or
- Change jobs.
Decreasing Expenses
With regard to decreasing $Y, you may:
- Give up coffee and avocados (or whatever your daily morning pleasure may be),
- Downsize your life (reduce the size of your home, or vehicle)
- Bring your lunch to work,
- Cut back on purchases (shoe, clothing),
- Move closer to work,
- Change modes of transportation (buy a bicycle, take public transportation),
- Change living conditions (get a roommate, move in with mom),
- Paying down debt, or
- Decrease the number of vacations/ stay at an air bnb rather than at a five star hotel.
Taking action to improve your financial situation is harder said than done, especially if your financials are impacted by your education level, children, health or student loans. The combination of any two of these will significantly impact your saving rate, and thus your retirement plans. However, the fact that you are thinking about your financial future means that you are ahead of the crowd. Continue on your journey to financial independence by understanding and tracking your income and expenses.
Conclusion
Financial independence requires an understanding of your income and expenses. Without a full understanding of what you are taking home and what you are spending, you will remain financially lost. We will tackle paths to financial independence here at JoToFI.com. Journey to early retirement and financial independence.
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