Being financially independent is the status you earn when you have sufficient income to cover your living expenses as long as you live without being employed or dependent on others. A financially independent individual lives on the income generated through investments. This income earned without having to work is called passive income.
This article is for people who are on a fast track to become financially independent. We’ll tell you ways to sock away enough money to be financially independent in just five years.
5 Steps to Financial Independence in 5 Years
Step 1. Examine Your Current Financial Standing in Detail
For you to reach financial independence in 5 years, you need to take time to examine your financial standing. Figure out exactly what you are earning and what you are spending. You need to spend less than you make. So, monitor and review your spending.
Step 2. Resolve to Get Rid of Debt
To achieve financial freedom in just 5 years, your next step should be getting rid of your debt. So, start paying off your car loans, credit card debt, etc. This will reduce your monthly expenses and free up money to save for your financial independence.
Step 3. Live Beneath Your Means and Save Regularly
Since getting financial independence in 5 years is no easy feat, you need to start cutting down your expenses so that you can save more money. Firstly, avoid impulsive shopping and subscriptions. Then work towards cutting down on major lifestyle expenses like groceries.
Step 4. Look for Ways to Increase Your Income
Cutting down your expenses isn’t enough to achieve financial freedom in an accelerated time frame. You need to look for ways to increase your income. Online chits with your friends or families is a good option to earn more. Other options include taking up a second job, side business, or you can even ask your current employer to raise your salary.
Step 5. Invest Strategically
Gaining financial independence in 5 years isn’t possible if you don’t invest the saved money strategically. Find the best long-term investment tools to generate massive passive income over the long run. Do your own research and come up with a strategy that works for your timeframe. If you need help, consult an experienced financial advisor.
Step 6. Consider Saving 80% of Your Income
Financial independence in 5 years or less can only be achieved when your savings rate is astronomically high (80%). As you get closer to the 5-year mark, you can gradually decrease your savings rate. Most households, especially lower-income families, may find it almost impossible to save as high as 80% of the income.
The above steps can help you achieve financial freedom in 5 years or less. But, the five-year financial independence plan pushes the boundaries of reality; so, keep your family’s and your well-being in mind before pressuring yourself to achieve financial freedom in a restricted time frame and avoid bad financial habits that can hurt you or your dependents. Remember:
You need to give time for your investments to grow and provide returns. So, invest in stocks or funds that you can buy and hold for at least 5 to 10 years.
You have a life to live. Fast-tracking to financial independence requires a frugal mindset. If you have dependents, their needs and not your savings should be a priority.
Aatish Khanna works with the Content Marketing team at Money Club – a digital chit fund platform that makes saving, borrowing, and investing your money more efficiently. He writes on topics to help his readers understand processes so they can make better financial decisions. He’s the go-to person that his family, friends, and colleagues turn to for all their money matters. He loves to play board games and aspires to one day build his one finance-related board game and app.