Financial independence is a popular topic throughout the personal finance world. A person reaches financial independence when his or her passive income pays enough to take care of every dollar they’ll have to spend on regular expenses. Obviously, it takes some time to get to this point, but those who are able to set up some checkpoints along the way will be more likely to achieve the goal. Here are four milestones you’ll want to hit along the way to financial independence.
Set Financial Goals
The first step toward financial independence requires coming up with a set of goals. The specific number of goals is not important. However, according to Supermoney, you’ll want to set goals that are achievable. There should be small, incremental milestones along the way so that you can check your progress. The final goal should be the number you need to take care of your expenses. That’s the point at which you’ll achieve financial independence. Your list of financial goals will effectively be a road map that will lead you on your way.
Build an Emergency Fund
According to Securian Financial, your first goal should be setting up an emergency fund. A few thousand dollars can go a long way. If you have no emergency fund, any unexpected expense will seem like a catastrophe. On the other hand, if you have an emergency fund, you’ll be able to take care of all but the most catastrophic expenses without getting stressed.
The next step on the road to financial independence involves paying off your debts. According to City Creek, this means paying off consumer debt first (all non-tax deductible debt). This would include credit cards, student loans and car loans. A mortgage will come last in the list of debts you’ll want to pay off. Once you pay off your debts, you can start to invest more of your income. There’s a reason the second of the seven baby steps Dave Ramsey recommends is paying off all debts but the mortgage.
Start a Side Hustle
A step that can help you speed up your progress toward financial independence is starting a side hustle. If your primary job pays all of your bills, the income from a side hustle can go toward investments. Once your investments can pay your expenses through interest and dividends, you’ve reached the finish line. If you’re lucky, your side hustle could become your primary source of income.
Financial independence is a worthy goal. Reaching full financial independence means you can choose when to work and what you’ll work on. To reach it, you’ll need to build an emergency fund, pay off debt and invest every extra penny you can come up with.