This post originally appeared on Arrest Your Debt and has been republished with permission.
Are you tired of living paycheck to paycheck or relying on others to live a comfortable lifestyle?
With a plan and determination, you can become independently wealthy and live life on your terms. Most people aspire to achieve financial independence, but sometimes, it seems more like a dream than a possibility. In reality, the independently wealthy lifestyle is achievable for teachers just as it is for entrepreneurs.
In this article, you will learn 11 ways you could handle your money and create wealth–on your terms.
- Be Financially Disciplined
- Create a Monthly Budget
- Have an Emergency Fund
- Make Savings a Priority
- Avoid Debts
- Calculate Your Net Worth
- Invest Your Money
- Learn New Skills or Hone Your Current Skills
- Increase Your Cash Flow
- Invest in Your Family and a Home
- Set Goals
What Does It Mean to Be Independently Wealthy?
Being independently wealthy means you have enough money you never have to work again to pay for your expenses, or need monetary support from others.
Independent wealth is different from financial independence. Financially independent people do not rely on other people to pay their bills–they have a steady income from employment, business, or passive income streams.
When you’re independently wealthy, you not only pay your bills without help, but you also do not need to work to earn any additional income.
How much money do you need to be independently wealthy? This number is different for everyone and is entirely dependent on your dreams and aspirations in life. It could mean you have millions of dollars earning interest, or a few hundred thousand. It depends on the lifestyle you prefer.
What Do Most People Perceive Independent Wealth to Be?
Are you independently wealthy because you drive a Ferrari? Most people view independent wealth as unachievable because they have misconceptions about what it is. When you think about someone who has achieved it, do you see someone who:
- Has a few sports cars in their garage?
- Lives in a high-end neighborhood in a massive house?
- Makes millions of dollars every year from their business?
- Wears high-end fashion clothes?
While some wealthy individuals live in the manners described above, you may be surprised to learn that most independently wealthy people like to blend in. To achieve a high level of wealth, most people avoid lavish lifestyles and:
- Live in a nice but not extravagant neighborhood
- Drive an ordinary car
- Dress in an ordinary manner
- Work a regular job – but work harder than everyone else
- Have the money discipline to build wealth over time
Most independently wealthy people live average lives. They take a vacation once in a while, enjoy a drink at the local tavern, and do everything else most people do (except living beyond their means).
Do You Need Millions to Be Independently Wealthy?
The bottom line is you need enough money to be financially free without ever going to work. This doesn’t mean you have to stop going to work, but being financially free gives you this option. The amount you need depends on your preferred lifestyle.
If you have enough money to meet your expenses without having to work for a monthly income, you may be close. To continue living without relying on having to earn money, you must create passive income.
For instance, if you make $5,000 every month from your investments (passive income) and your monthly budget is $3,500, you have already created independent wealth. This means that you can live indefinitely without ever going to work as long as you do not increase your monthly expenditure.
If you spend $3,500 every month, you will need $42,000 every year for your budget. Most financial experts agree you need at least 25 times your annual expenses to be labeled “independently wealthy”–that is: $42,000 x 25, which is $1.05 million.
You also need to account for twice your discretionary spending, which might be up to $60,000 every year. This means that you need:
1,050,000 + (60,000 x 25) = $2,550,000
You need to save up to $2.55 million or have passive income that gives up to $102,000 every year. Only then are you considered “independently wealthy.”
How Do You Know You Have Independent Wealth?
Building independent wealth requires discipline and diligence. The concept of delayed gratification, where you enjoy less today to enjoy more tomorrow, has to be applied here. When you get there, you will know if:
- You don’t have to think of your financial situation before making a decision
- You can live below your means and feel content
- You have enough passive income to fund your lifestyle
- You’re worth more than 20 times your annual income
- You can choose not to work and still support your lifestyle
The above are not the only indicators that you’re independently wealthy. But they will help you realize your financial position.
11 Tips to Become Independently Wealthy
Unless you win the lottery or are given a large inheritance, it takes time to create wealth. If you decide you want to be independently wealthy in the future, it may take you many years to achieve it. However, with discipline, you can do it.
Below are 11 simple wealth-building concepts to help you get where you want to be.
1. Be Financially Disciplined
Financial discipline helps you take control of the money you earn. If you never control how you spend your money, you will never have enough to be financially free.
Below are a few pointers to develop your financial discipline.
Avoid Spending More Than You Earn
If you spend a dollar more than you earn every month, you’ll have to survive by managing increasing debt. This also means that you will live paycheck to paycheck, and you may never make any progress in building wealth. The first rule in building wealth is to spend less than you earn.
You can do that by creating a budget every month.
2. Create a Monthly Budget
Your finances and future spending plan will make more sense when you write out a budget every month. Instead of spending money and wondering where it went each month, complete a budget to tell your money where to go.
A budget is not a tool for people living a frugal lifestyle. Even millionaires complete monthly budgets, and it might be one of the principles that drove them to their millionaire status.
3. Have an Emergency Fund
An emergency fund covers you if your car breaks down, you lose your job, or you have any other financial emergency. Instead of taking a loan to cover the unplanned expense, you’ll have enough money in your emergency fund to pay cash for the fix. This way, you won’t delay your plan by putting more debt on a credit card or taking out an expensive payday loan.
Using credit cards or a loan to pay for emergencies is not always the best idea. You may not have paid the previous debt in full before the next emergency hits. Again, you’ll have to pay interest and fees that dent your wealth.
How do you develop the financial discipline to budget and spend within your means?
Financial discipline is a decision. It takes effort and will not always be easy, but you will do it if you have the determination. Keep your eyes on the goal, and you will have the motivation to do it.
4. Make Savings a Priority
If you pay bills first, you will always find it challenging to save. If you save, then proceed to pay bills (pay yourself first). Then you establish a saving culture to help you later in life. You need to have a long-term goal focused on increasing your savings.
Every month, you need to save at least 15 percent of your earnings. When you receive your paycheck, you should automatically save 15 percent before planning out your monthly expenses.
Your savings should go into an account that gives you interest every year. An employer-sponsored retirement plan is usually your best option before a Roth IRA or other retirement investment plan. With time, the savings will earn you passive income, which will contribute to your independent wealth.
5. Avoid Debts
While some debts, such as a small business loan, can help you start a business and build wealth, bad debts will cripple your dreams to become independently wealthy. Consumer debts, such as credit card debt, have high interest and will keep you from growing your wealth. Credit cards, payday loans, long-term loans, and mortgages all have one thing in common–interest. By the time you repay your loan, you’ll have paid the lender a lot of your hard-earned money.
Debt creates dependency.
Debt has a way of creating a snowball that continues to get bigger and bigger. To free yourself from the downward spiral of debt, you need to stop adding to your existing debt.
If you have consumer debt, come up with a plan to pay it off fast. If you’re currently debt-free, do everything in your power to stay this way.
The easiest way to avoid debts is to live within your means by spending less than you make each month. For most people, when their income increases, they increase their lifestyle and spending, also known as lifestyle creep.
If they can’t sustain the new lifestyle, they apply for a new loan. However, if you increase your income, the first step should be to increase savings and investments.
You can have a celebration or two for your hard work, but don’t reward yourself by increasing your debt.
6. Calculate Your Net Worth
Today, your net worth might be a negative number. However, that number should motivate you to grow your wealth. The misconception with most people is that calculating net worth is only for rich people.
Calculating your net worth allows you to understand your current financial position. In turn, this helps you to make better financial decisions with a clear picture of where you are to where you want to go. You will see your wealth grow from a negative number to a higher number as you grow your investments and pay off your debts.
Your net worth might be negative for many years, especially if you have a mortgage on your house. However, with hard work and determination, you can move your net worth number higher and faster than you may realize.
Simple Steps to Calculate Your Net Worth
Your net worth is the difference between what you own and what you owe.
Debts fall into categories such as:
- Car loans
- Credit card bills
- Loans from banks, friends, home equity, among others
- Any other money owed to lenders
Subtract all the above debts from your assets.
Assets fall into categories such as:
- Investments in real estate, 401k, and IRA, among others
- The value of your vehicles
- Cash in the bank and other accounts
- Jewelry and antiques you own
- The value of your home
You can also use online calculators to estimate your net worth. Keep in mind, you don’t need a set net worth number to be considered independently wealthy. Your net worth is not a measure of your independent wealth.
Net worth alone may show your total assets but doesn’t calculate your passive income. You achieve independent wealth when you have enough passive income to support your lifestyle indefinitely.
7. Invest Your Money
If you earn minimum wage and do not invest, it will take you decades to build wealth–if at all. Minimizing your risk will help you build wealth faster. The risk here doesn’t mean you go for pyramid schemes and avenues that promise millions overnight.
If you decide to invest your money, here are a few pointers to get you started:
- Learn as much as you can about the investment you are about to make. You will know you are good to go if you can explain it to other people and both of you understand the concept.
- If the investment involves even a slim chance that you might lose all your money, avoid it.
- Avoid putting more than 10 percent of your savings in a risky investment avenue.
- Avoid investing in trends and fads that may excite you for a while and then burn you. Instead, go for long-term investments such as index funds.
Income from investments is one of the best ways to compound wealth by using your money to make more money. This creates a cycle of wealth that can build upon itself over and over again.
Where Should You Invest Your Money?
Investing is not as exciting or scary as it sounds. If you do it right, investing is a very dull venture until your wealth starts to compound at impressive rates. The best way to invest is with a “set it and forget it” long-term investing strategy. This involves investing a little each month in an investment vehicle designed to make you wealthy – over time.
Stocks And Mutual Funds
Investing in stocks and mutual funds is a great way to build your wealth. These two options are simple and relatively less risky. Your 401k and IRA will help you set up an investment portfolio that will help you become independently wealthy.
However, even if stocks and mutual funds are a great investment option, you still need to understand how investing works. If you are well-educated, you will minimize your chances of losing money, and instead, you will make more in the long run.
Robinhood is an investment platform that will give you free stocks when you sign up.
Stash investing will give you $5 just for signing up. This investment platform invests all your spare change for you by rounding up purchases.
If you start an account with M1 Finance with a minimum of $1,000, they will add an extra $30 to your account.
Right now if you sign up for the Webull investment platform, they will add two free stocks to your account!
Real estate pays when you focus on long-term investments. You can buy property, hold it for a few years, and sell when the value appreciates. This is a slow-paced investment strategy, but it gives you great returns. Again, the income is passive if you can find renters to pay the mortgage each month if it is not your primary residence.
You can choose one of the various methods to invest in real estate but always go with the less risky approach. As you buy and hold to sell later, you can get an investment property where you collect rent every month.
Rental properties can create an impressive stream of income that can compensate for an increased cost of living or other expenses in your life. Rental income, if high enough, can replace your current income with having to get a side hustle for additional money.
8. Learn New Skills or Hone Your Current Skills
Investing in yourself is one of the best ways to build financial wealth. Hone your career skills or invest in learning new skills to stay ahead of the learning curve. You can also learn more about finances and how to manage your money.
With additional knowledge, you will increase your chances for career advancement, which will allow you to invest more as you make more money. You will also have access to opportunities that others do not.
Knowledge helps you create more wealth. Educational topics to help you build wealth include:
- Investing basics and the stock market
- The basics of economies
- Compound interest and how it works
- Why you should avoid debts
- Personal finance concepts
- The relation between time and money
- Personal finance concepts such as budgeting and getting out of debt
- Reading financial statements
You can also learn an entirely new skill such as art and crafts, music, photo and video editing, writing, web design, or any other high-income skill that can increase your salary.
9. Increase Your Cash Flow
The easiest way to increase your income is to get a side hustle. You can learn a few skills and apply them to a side job. These side gigs will help you raise extra money to add to your savings account.
Popular side hustles to make more money:
Popular freelancing jobs include:
- Data entry
- Web design
- Product marketing
- Any other passion you can monetize
Fiverr is a great website to make money using your talents with digital media.
If you are skilled and land a good client, you could earn enough to sustain your monthly budget. You can then save 100 percent of your primary income. There are several ways to attract clients. You can search on online job boards, or you can create a blog from where you offer your services.
If you’re good at what you do, you can have a side gig as a consultant. People will come for your advice, and you charge them accordingly.
Besides taking a side gig, you can increase your income through:
Asking for a Raise
Your current career can help you earn more every year. How would it feel to move from making $70,000 a year to earning $120,000 a year? It would boost your income and your dreams of becoming independently wealthy. However, you have to put in the effort to show your superiors you bring enough value to your employer to deserve a raise.
Before you ask for more money, you need to ensure you are a top performer. If you haven’t been on the list of top performers in your company, start working towards it. You can liaise with other top performers or with your supervisor. Your supervisor can help you identify key performance indicators for your position.
If you can achieve at least three trackable indicators within a few months, you can position yourself for a substantial promotion.
Find a New Company to Work for
Not all companies will appreciate your value. Not too long ago, people worked for the same company for more than thirty years with the promise of a pension. However, pensions are almost extinct as the vast majority of companies offer employees a 401k.
If you feel that the company you work for doesn’t properly compensate you for the work you do, switch companies. When you have options, it is even easier to negotiate for a raise in your current company. If another company has an open position, interview and maintain contacts with the human resource personnel there even if you do not intend to switch companies.
If you don’t earn what you feel you’re worth, a career switch may be the next best option. While change can be scary, often, we won’t achieve what we are truly capable of unless we take a few calculated risks. Getting out of our comfort zones and embracing change can pay dividends.
Think about your skills and passions and where you can apply them to get the best returns.
Start a Business
A business can supplement your side gig and your investments. There are so many small businesses you can start in your local area or online. Start small and grow the business gradually. If you are already in debt, the business can help you pay it off.
No one business fits all areas–check out what people in your neighborhood need and supply it to them. The first rule of business is that it should solve people’s problems. If people in your neighborhood struggle with recycling plastics, you can start a recycling business in that area.
10. Invest in Your Family and a Home
Would you rather rent or buy a home? This is a debate that sparks different views, and there are good cases for both renting or owning a home.
However, homeownership is one of the most reliable investments you can make. Not only can it help you increase your net worth, but it can also provide financial security and safety for an unstable future economic time. If you are old and unhealthy with no one to take care of you, you can sell your home and get enough money to fund a nursing home.
While a home mortgage may initially push your net to the negative, the long-term advantage of a paid-off home will help you quickly increase wealth because a home appreciates. Even if you never sell it, you can leave it to your children as an inheritance. It can be a great starting point for your children to build their own wealth.
You also need to invest in your marriage and your children. For starters, a divorce will set you back many years. Not only that, if you work towards becoming independently wealthy with your spouse’s cooperation, you will get there faster than on your own. When you invest in your children and their education, they’ll be given the tools to become financially independent and leave you to work on your financial goals.
11. Set Goals
Becoming independently wealthy requires you to set goals and be consistent. Having a vague idea running in your head will never work. The vision might never materialize if you don’t put it down on paper.
Be specific on what you need to achieve and how you want to do it. Set dates and deadlines and then take action. Being committed to the process of building wealth helps you stay on track and be consistent.
A specific goal should be like getting out of debt in five years by taking a side hustle to increase your monthly debt payments. From there, you can work on the details of the side hustle.
Why Focus on Building Independent Wealth?
Becoming independently wealthy has a host of benefits, including:
Freedom to Focus on Your Passions
Once you have enough money or passive income to live infinitely without the need to go back to work, you will have the time to focus on what makes you happy. You will have the ability to do things you love and not things you have to do.
For instance, you can grow organic vegetables in your kitchen garden for a healthier life because you have the time.
Make Long-Term Decisions
The freedom that comes with being independently wealthy allows you to make decisions that will benefit you in the future. You will cease making decisions for immediate survival. This can even help you create more wealth as you will find a way to avoid debt.
Change How You Relate to Money
If you have enough passive income to live a good life, you will see money only as a tool to live the life you desire and to help others. The money will not control you or define who you are. You may also learn how wasteful it is to worry about impressing others by wearing expensive items or driving expensive vehicles.
Have Peace, Beat Stress
If you are debt-free and have enough passive income, you will feel more at peace. You will be less stressed by your financial position. When you do owe anyone else money, you can control your money and fund the passions and charities that you believe in.
You Can Focus on Your Health
Financial freedom gives you back time. You will have enough time to exercise and make healthy meals and focus on getting enough rest each night rather than cutting it short to go to your second job. By focusing on your health and relationships without the stress of debt, you can focus your time and energy on things that really matter.
True wealth involves more than money–it involves a healthy body, mind, and relationships.
Sacrifices to Become Independently Wealthy
Building wealth is a journey that involves sacrifice. Some of the things you may have to give up include:
- Eating out as you plan on saving and paying off debts
- Idle time as you may have to take a side gig
- Luxuries such as new cars
- You may have to give up cable TV
Simply, you should cut your monthly living expenses and work more hours to increase your income. You may not enjoy a vacation for a few years, but you will have many more years after that. If you are married, you have to engage your spouse in the journey so the two of you can reach your goals faster.
It’s now up to you!
- Have you set your goals already?
- How many years will it take you to become independently wealthy?
- What will you have to do to get there?
- Do you have a savings account?
- What investments have you made, and which others do you plan to have?
Start today. One foot in front of the other is the first step to any journey. Even a marathon starts with small steps.