5 Things You Can Do Today to Become Financially Independent

Financial independence is a goal everyone should strive for, no matter how much you love your current job or lifestyle. Becoming financially independent gives you options later in life—you can continue working if you want, but you don’t have to make decisions based on a job or paycheck. When you’re financially independent, you can travel more and spend more time with friends and family. It also gives you the option to pass on wealth to your kids and grandkids.

Everyone wants some level of financial freedom, but it’s hard to know how to get there. It's not an easy journey to reach financial independence, but the following five steps can set you on the right path.

#1 Create a Plan

Before you can become financially independent, you need to determine what that means to you. Saying you want to become financially independent is like saying you want to get healthy—it’s too vague and doesn’t provide any actionable steps to take to reach your goal.

The first step is determining how much money you need to meet your annual expenses. Once you’ve estimated your annual expenses, multiply that number by 25—this is how much you need to live off your investments in retirement. It's also known as the 4% rule.

Next, think about what age you’d like to reach financial independence. From there, you can work backward and determine how much you need to be saving each month. It’s a good idea to set some financial goalposts along the way to keep you on track.

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#2 Get Rid of Any Debt

The majority of Americans live with debt, and one study found that 46% of adults said that if they died today, their loved ones would inherit their debt. If you have any consumer debt, come up with a plan to pay it off.

Start by writing out exactly how much debt you have, the minimum monthly payments, and the current interest rate. Prioritize paying off high-interest credit card debt first, and then you can move on to things like auto loans and student loan debt. Your mortgage will likely be the last thing you pay off.

You can pay off debt using either the debt avalanche or debt snowball method. With the debt avalanche method, you pay off the debt with the highest interest rate first, regardless of the balance. The debt snowball method involves paying off the smallest balance first and working your way up to the largest debt.

#3 Live Below Your Means

Learning to live below your means (or living like a resident) is crucial if you want to reach financial independence, and this is the hardest piece of the puzzle for many people. If your spending is out of control, start by tracking your expenses and seeing where your money is going.

Look for areas where you can cut out any wasteful spending. Obviously, this is subjective, but if your goal is financial independence, you may not want to spend a lot on subscriptions and eating out at restaurants. You can also look for ways to save on necessary purchases, like groceries, housing, and transportation. For example, you could consider downsizing your home or using coupons to save on household items.

Then, you can come up with a realistic budget that allocates a certain percentage of your income toward spending and saving. The 50/30/20 rule is helpful for many people—this plan allocates 50% of your budget toward needs, 30% toward wants, and 20% toward savings.

#4 Max Out Your Retirement Savings

The next step is to max out any available tax-advantaged retirement accounts. Start with an employer-sponsored retirement account, like a 401(k) or 403(b) plan. The max contribution limit for 2024 is $23,000, and you can make a $7,500 catch-up contribution if you’re over age 50. Find out if your employer will match your contributions since this is basically free money added to your retirement savings.

If you don’t have access to a 401(k), you can open an individual retirement account (IRA). IRAs come with a $7,000 annual contribution limit, and catch-up contributions are limited to $1,000. If you earn too much to contribute to a Roth IRA, you can consider a Backdoor Roth.

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#5 Open a Brokerage Account

Once you’ve maxed out your retirement savings, it’s a good idea to open a brokerage account with a firm like Vanguard or Fidelity. You can diversify your investments by investing in things like stocks, bonds, ETFs, and mutual funds. And unlike a retirement account, there are no age restrictions or limits on how much you can invest each year.

The investment strategy you choose depends on how close to retirement you are. For example, if you’re in your 30s and don’t plan to retire until age 65, you can invest a higher percentage of your money in stocks. But if you plan to retire in the next 5-10 years, you’ll want to opt for more conservative investments, like money market funds, bonds, or even a high-interest savings account or CD. Regardless, learn about diversification and the important role it plays in managing your investment portfolio.

Start investing your money as soon as possible so you can take advantage of compound interest. And once you come up with a plan, it’s important to stick with it and not be swayed by the inevitable ups and downs in the market.

The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And if you're inspired to build a sturdy financial foundation, make sure to sign up for our WCI 101 email series.