Starting out on your own is both exciting and nerve-racking. There are a lot of things you’ll have to tackle, including how you want to handle your personal finances going forward. Whether you’ve had tons of preparation or not, I’m here to help you get started on the right track. If you’re afraid because you have no idea what you’re doing, don’t worry! You’re not alone, a lot of people have been in your shoes before. The good news is that it’s easier than ever before to have access to amazing financial education resources. Now, without further ado, let’s get into how to start your own financial independence journey.
Choose Your Priorities And Long-Term Goals
As I said in my personal finance checklist article, it’s hard to give advice on financial goals as those are incredibly personal matters by nature. If you’re struggling to set some basic financial goals, try asking yourself the following questions:
- Where do I want to be in 5 years and what do I want to be doing? 10 years?
- Overall, what kind of lifestyle do I want to live (frugal vs luxurious and expensive)?
- When it comes to personal finance, what are my biggest weaknesses? Strengths?
- If money weren’t an issue, what would I want to do every day?
- How important are things like home ownership to me?
- If I had $1000, what would be the best use for it – to get me closer to where I want to be?
To help yourself set good goals, remember the SMART system. A good goal should be Specific, Measurable, Attainable, Relevant, and Time-bound. In other words, just do your best to make your goals as detailed as possible and relevant to your overarching mission.
Create A Budget
Budgets are the backbone of a financially-savvy lifestyle. Not everyone uses them, because they find them to be too tedious, but you have tons of budgeting techniques at your disposal. If you need help and want a basic overview of how to start a budget, check out my guide. If you actually do want a more defined budget, to maximize your savings, check out my article on zero-based budgeting.
At the end of the day, personal finance is exactly that – personal. It’s important to keep your spending in check and monitor it to some extent. The precise methods are entirely up to you and whatever makes your life easier. However, the best solution for most people tends to be keeping it as simple as possible.
Start Building Credit
If you have no idea what a credit score is, or just need more details on how it is calculated, check out my breakdown of the topic here. If you don’t have a way to check your credit score, try using myFICO. To put it simply, your credit score is basically a snapshot of your finances from the perspective of lenders. The better your credit score, the easier your life can be. A low credit score can help you get great deals and interest rates. It’s crucial to have a general idea of what your current credit score is – and if you need to take any steps to start improving it.
For those of you just starting out, the biggest issue for your credit may be lack of history. If you’re new to managing your finances, I’d get a credit card to start building up a history. Be sure to pay it off monthly and never carry a balance. Credit card debt can have outrageously high interest rates!
Cut Expenses
We’ve already covered why you need a budget, so you should understand how important this can be. A few minor expenses may not add up to much. Keeping yourself from an occasional coffee or a streaming subscription may actually drive you crazy and do more harm than good. It is important to spend a little on yourself every now and then, after all. However, once you’ve made a budget, monitor it and see if you can find places where you can cut your expenses drastically.
Everyone’s spending is different, but the biggest places you can cut are usually related to housing, food (particularly eating out), and transportation. More often than not, people have a car or house they can’t afford, and many Americans eat out far more than is wise. Of course, it’s possible you’ve made the mistake of going overboard in all 3 categories, and aren’t cutting any corners. Either way, it’s always a good idea to keep an eye on your budget and know what you can cut if you must.
If you do actually have a lot of minor expenses that are adding up and taking their toll – cut them!
Eliminate Debt
Now, not all debt needs to be eliminated as soon as possible. For example, debt from a mortgage may not have high interest rates, so it shouldn’t be a high priority. Also, if you’re young it may be a good idea to go into debt for a good college degree. However, once you’re out of college, any debt you have with high interest rates definitely needs to go. This can range from credit cards to student loans. For me, if an interest rate is over 5%, it’s a top priority for me to get rid of that debt.
If you need help, I have a lot of information on two of the best methods for getting out of debt – the debt snowball and the debt avalanche. Like everything with personal finance, use what works best for you and your situation.
Get Better Insurance Rates
There are tons of different types of insurance you may need or want. Whether you need dental, vision, auto, medical, homeowners, life, or something else entirely, you need to stay on top of it. Figure out what you need and set up the appropriate accounts for you and your family (if you’ve started one yet). If you have more questions about tricks on getting the best deals for different types of insurance policies, check out my definitive guide on insurance.
Create An Emergency Fund
I hope this goes without saying, but to be secure in your financial situation you’ll want a good emergency fund. How much you may need to put in your emergency fund varies, but six months worth of expenses is a good starting point. If you work in a volatile industry, it may be better to save 12-18 months worth of expenses. It’s important to be honest with yourself and look at the facts of your current main source of income.
If you need more help on figuring out how much to save or how to start saving for it, check out my article on emergency funds. Of course, if you hate the fact that you don’t earn much money off of cash in your checking and savings accounts, check out Axos Bank. They have some of the best interest rates in the market right now, making them a great choice for an emergency fund.
Start Investing
The earlier you start investing, the more it’ll ramp up. You’ll find that the power of compound interest is astounding when it comes to building wealth. Find a good strategy and stick to it. If you’re just getting started, hit your employer’s 401k match and do your best to max out a Roth IRA.
If you want to be able to retire early, try to also invest outside of retirement accounts. Retirement accounts can be limited, to a certain extent, because you have to pay penalties if you withdrawal early. So, start investing in a standard account with the brokerage of your choosing to give you a little more flexibility in the future. If you’re looking for a brokerage, I highly recommend M1 Finance for its selection of index funds and ETFs as well as its ease of use. Another good pick is Vanguard.
Account For Taxes
Taxes can definitely be an absolute nightmare. For a lot of people, taxes are their single highest expense. While there is no way to get out of them – at least not legally or ethically – it’s important to face them head-on and do your best to mitigate the expenses. Make sure you use any tax deductions that are relevant to you, and see if there are opportunities available to lower your taxable income (like investing in a 401k).
If you need to, take the time to hire a professional who can help you cut back on taxes and get your finances in better order. Most people won’t need a service like that, but once your finances get complicated it may be mandatory. If you have a lot of different investments, or you run your own business, be sure to consider it.
Stay Consistent
Focus on strengthening every topic we covered. That will help you get your finances in order, plus you’ll start seeing rapid growth! If you start good financial habits and have the discipline to maintain them, you can achieve just about any goal you set your sights on.
Conclusion
Your journey to financial independence will be a long one, and there are sure to be some problems along the way. However, as long as you stay disciplined and focus on your long-term goals, you should do just fine. If you have any tips, or an experience to share, let us know in the comments!
For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
