Wednesday, September 22, 2010

6 Tips To Financial Independence

We all have dreams and resolutions, earn our first million dollars, lose weight, exercise more, quit smoking, etc.

How about becoming debt free for a change? The average American has about $9000 of credit card debt and as a nation, consumer debt is approaching $2 trillion.

You can change your life by aspiring to financial independence, instead of living paycheck to paycheck and getting further into debt each month.

Take a long look at how you're spending your time and money, and determine your financial priorities. Here are 6 easy tips to help you become financially independent:

1. Make a Commitment

Be responsible for your own actions as nobody will look out for your financial future. The best option is independence. Try to save up enough in your retirement account to last till the end of your life.

2. Prioritize Needs vs Wants

We want a lot of things but income is limited. By prioritizing wants and needs, you can create a monthly budget and save for the most important "wants" on your list, after meeting your needs.

Evaluate your wants to see what value they bring to you. You may be surprised that a lot of wants are useless!

3. Pay Yourself First, Then Forget About It

Before you pay a single monthly bill, including your mortgage, high interest rate student loans, rent or insurance, pay yourself first, meaning your saving account. A simple rule of thumb is to have at least 10% of your gross income saved and invested for the long term.

Resist spending any of your savings. Time is your greatest asset, so the sooner you start saving and the longer you keep your savings in place, the more financially secure you'll be in retirement.

4. Practice Responsible Credit Card Use

Credit cards provide the convenience of not carrying cash in your wallet but the spending power comes from your future income. To become a responsible user, change your mindset.

Don't go for instant gratification by paying much more later. Start paying out of your pocket with cash or at least pay down the outstanding amount diligently so that you are not a lifelong prisoner of credit card debts.

5. Prepare for a Financial Emergency

Personal, property or business risks are inevitable. Thus, emergency fund is a good idea so that you don't turn to predatory schemes for help.

First, assess your current insurance coverage. Is it enough to cover your assets while allowing you to pay higher deductibles? Next, build an emergency reserve fund based on three to six months of living expenses. The reserve fund should remain readily available, safe and income-producing.

6. Get Your Money's Worth

Try keeping a record of every purchase for a month by listing exactly the item and the cost. At the end of the month, review the list and ask yourself whether you are getting your money's worth.

If you are not satisfied, then reassess the things bought. Your goal is to continuously refine the way you spend money until you are completely comfortable with your habits.

You cannot accomplish your goal of achieving financial independence by wishing. It takes being committed and acting on your desire. So start today!