How To Become Financially Independent

To tell the story of how to become financially independent, let’s start with a big-picture number, and it’s … well, big. As in, $17.8 trillion big. That was the total amount of household debt in the United States in the second quarter of 2024, according to the Federal Reserve Bank of New York.

Household debt isn’t the only thing standing between we collective Americans and financial independence, but $17.8 trillion should give you an indication of how far we are from it. How will we ever get out from under a number that oppressive?

It’s a good question, and it leads to more pertinent questions about a smaller-picture number, the number your household is contributing to that big-picture debt total. What’s your share of that $17.8 trillion deficit? How much do you owe? And how far are you, as one American, from financial independence?

Here’s a frame of reference: The average total debt balance in this country in 2023 was $104,215. Yes, we called it a “smaller-picture number,” and there’s a good chance it doesn’t feel at all little to you. Again, there are factors other than your personal consumer debt to consider, but even that $104,215 average might have you convinced that autonomy over your money is out of reach.

It isn’t. You can let your financial freedom ring regardless of how much you’re currently being oppressed by your bottom line.

There are important, and sometimes difficult steps to take, including reducing that debt amount. But with careful planning and discipline, you can break away from the yoke of money stress and begin to celebrate your personal fiscal independence day.

What Is Financial Independence?

Financial freedom means different things to different people. It might mean the life you want to live without the daily grind of a steady job. It might mean a retirement fund that guarantees your golden years will be as fulfilling as possible. It might mean the confidence that you’ll be able to handle whatever unexpected financial crises crop up. It might mean an escape from the spiral of debt that keeps you from making ends meet.

But there is a common denominator. In all those cases, financial freedom means an existence without the worries your money (or lack thereof) has been causing you. It means you can wake up every morning untroubled by today’s bills and unconcerned about tomorrow’s expenses. In that sense, financial independence is a state of mind as well as hale and hearty savings.

9 Steps to Financial Independence

For starters, your path to financial freedom probably will require some painful personal sacrifices. Unless you’re already living frugally, you’ll likely have to cut back on your non-essential spending and find a way to bump up your earnings. That means forgoing some of your guilty pleasures and redirecting some of your precious leisure time and energy to increasing your income.

But most of the steps to financial independence are less unpleasant than that. They call on you to be disciplined, organized, and educated about your finances, which anyone can do.

Let’s look at how to get out from under all those money problems.

1. Define Your Financial Goals

We told you earlier that financial independence means different things to different people. Your first step, then, is to decide what it means to you. Is it life without work? A robust retirement? The ability to travel? College education for the kids? Make a list of your financial goals, some timely little ones as well as the big-picture long-term objectives. When you know what your endgame is, you can plot the strategy to get there.

2. Track Your Spending

Spend the next month recording every penny that leaves your possession. Do it daily. Record every outlay, from the monthly rent to the morning donuts. Groceries. Gas. Movies. Beer. Insurance. Phone. If keeping a ledger by hand is too onerous, use a spending tracker app you can find online. After 30 days, you’ll know exactly where your money went. That’s your starting point for deciding how and where to cut back.

3. Create a Budget

You’re already halfway there because you’ve been tracking your spending. That’s the hard part of creating a budget. The other half is easier — detailing how much money you have coming in, including your take-home pay, social security, pensions, child support, dividend earnings, alimony, and any other wherewithal you take in over the course of the month. When you create a budget, you can see how poorly (or how well!) you’re doing at managing your money. A budget is the best way to spot inefficiencies in your spending habits and show how you can adjust going forward. As with tracking your spending, there are apps for budgeting.

4. Reduce Your Debt

You can’t just snap your fingers and magically make your debts vanish, but you can be sensible about how you attack the balances on your credit cards and loans. One way is the debt snowball method, in which you rank the amounts you owe from lowest to highest and work toward eliminating the smallest balance first by paying as much as you can on it every month (while continuing to pay the minimum on the other balances) When that one is paid off, move on to the next one. Another is the debt avalanche method, in which you rank your debts by the size of their interest rates and start by paying as much as you can on the one that carries the highest rate, working down your list that way. Or consider debt consolidation, which reduces the number of payments you make every month and lowers the interest you pay at the same time. However you do it, you’ll eventually see the bottom-line benefits.

5. Set Up Automatic Savings

It’s the best way to make sure you save money regularly. By automatically transferring some of your regular paycheck into a savings account, you won’t have to remember to do it manually. And because you won’t have immediate access to the amount you’ve automatically directed to savings, you’ll be less tempted to spend it at a restaurant, a movie, a boutique, or in some other non-essential way. Most savings accounts allow you to earn interest on money you put into them. You can maximize the interest rate on those deposits by directly transferring a portion of your earnings into a high-yield savings account or a brokerage account.

6. Start Investing

Investing is one of the best ways to make your money work for you. Yes, it can be risky, but patience and a diversified investment portfolio minimizes the danger and maximizes your steady progress toward your financial goals. Remember when we said the keys to becoming financially independent include becoming educated and organized about your money? An online brokerage account will help you with both. As you make regular contributions to it, your brokerage account will teach you how to be a smart investor and how to structure your portfolio to ratchet up your returns. For example, a brokerage account will help you diversify, which protects you from the high risk of a single stock investment that can come with a bigger payoff but also cause greater damage to your bottom line.

7. Live Below Your Means

This is a no-brainer step. It’s also one of the hardest steps if you’re accustomed to buying what you want when you want it. The goal is to make sure you’re making more money than you’re spending. When you do that, you’ll have a surplus every month that you can save in a way that moves you closer to your financial goals. That, after all, is why you created a budget back at Step No. 3. It’s your road map to living below your means.

8. Monitor Your Credit Score

Don’t take anything for granted, including the benefits of a good credit score. The three major credit bureaus (Equifax, Experian, and TransUnion) that compile information from lenders, creditors, and public records to create your credit score aren’t infallible. A 2024 study by USA Today said that 44% of the people who read their credit report, find errors. If the reporting agencies get something wrong or if you’ve been a victim of identity theft, your score can drop through no fault of your own. That can slow down your steady march to financial independence when you’re applying for a new credit card, mortgage, auto loan, or insurance and discover you can’t afford the borrowing rate. It’s easy to monitor your credit score. Your credit card companies, or other lenders, often include your credit score on their statements or make it available through your online account. Plus, each of the three bureaus must give you a free credit report every year. All you need to do is ask!

9. Increase Your Income

This is another big challenge. Chances are, you already think you work hard enough and don’t have the bandwidth for a part-time job or a side hustle. But finding ways to augment the income side of your monthly budget will move you toward financial independence in several meaningful ways. You’ll have more money to pay off debt. You’ll find it easier to live below your means. You’ll be able to make bigger contributions to your online brokerage account. So, ask for that raise. Look into side jobs. Start your own craft or service business out of your home in the evenings. Hold a garage or yard sale. It can be done. Commit to it!

Begin Your Journey to Financial Independence

There’s your road map: nine steps to financial freedom. Simple, right?

But it isn’t simple, of course. This route isn’t an as-the-crow-flies straight line. You’ll no doubt run into detours along the way. You’ll likely encounter unexpected expenses that throw your budget off kilter. Maybe some of your investments go belly-up. Could be your financial goals change as time goes by and you’ll have to adjust your strategy to meet them. Any number of things can slow your progress.

Don’t despair. When roadblocks get in the way, don’t be afraid to reach out for help. If you’re struggling financially, seek out credit counseling from a nonprofit credit counseling agency. During a session with a counselor, you’ll be provided with a personalized budget review, an analysis of your debt, and recommendations for an action plan. You’ll also be presented with debt relief alternatives to get you back on track.

Financial freedom might seem a long way off, but remember the two key essentials to making it happen: having a plan, and exercising discipline. If you keep them in mind, you won’t lose sight of your destination.

And when you reach it, feel free to throw yourself a parade. It’s your Independence Day, after all.