Ideally everybody should get closer to financial independence with every year that passes. Here’s how you can tell if you made progress on this goal in 2019.
Most of us work for wages and need money from a job to pay for necessities such as food and shelter. However, we can’t work forever, so eventually we need to become financially independent.
Financial independence means you have enough money from investments and savings to cover your living expenses so you no longer need to work. While financial independence is necessary to retire and can enable retirement, it doesn’t have to. Many people who are financially independent choose to keep working, especially if they reach independence while they are still young.
Becoming financially independent takes time and requires making responsible choices. It’s something most of us will work towards during our whole life, although those who save aggressively may reach this milestone much earlier. And ideally it’s something that you’ll make progress towards each year.
So did you get closer to financial independence in 2019? Here’s how to tell.
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Measuring your progress towards financial independence
There are two ways to get closer to financial independence: cut expenses or increase assets.
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You can figure out how much you need in order to be financially independent by adding up all the expenses you need to pay. This is the amount you’ll need to bring in without a salary. This could be rental income from properties you own, or interest from savings accounts, or money from investment returns.
If your goal is to become financially independent, the next step is to figure how much passive income all of these assets produce. You’ve achieved financial independence when your assets will consistently produce enough income to cover your expenses for the rest of your life.
You can see if you made progress towards this goal by looking at what you did with your money over the year and seeing how it affected your efforts. If you paid down debt, didn’t take on any new obligations, and invested money in a retirement account or taxable brokerage account, then you got closer to financial independence.
You can easily measure how well you did at increasing assets and decreasing obligations by calculating your net worth and tracking it over time.
Your net worth is the value of everything you own minus your liabilities. You can calculate it by adding up the value of assets such as real estate, investment accounts, and personal property and then subtracting all of your debts. If you own a house and other property worth $200,000, have $50,000 in an investment account, and owe a total of $195,000, then your net worth would be $55,000. The higher your net worth, the closer you are to financial independence.
If you haven’t ever calculated your net worth in the past, calculating it now will give you a good baseline so you can monitor changes and see your progress in future years.
How can you get closer to financial independence in 2020?
If you didn’t make great strides towards financial independence in 2019, you can do better in 2020. You’ll want to set some clear financial goals for yourself. For example, you could:
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- Aim to become free of credit card debt by the end of the year.
- Establish a plan to pay off your personal loan, auto loan, or mortgage ahead of schedule.
- Set investment goals for yourself and automate transfers of funds into an investment account. While you can put money into a tax-advantaged retirement account, such as a 401(k) or IRA, many of these accounts limit your ability to withdraw funds until later in life. So you may want some money in a taxable account too if you hope to become financially independent before traditional retirement age.
- Invest in other assets that will produce income, such as buying a rental property.
- Take steps to increase your current income so you have more money to put towards your goals.
If you’re proactive in making investments and reducing liabilities, you’ll end the year a whole lot closer to financial freedom.
Becoming financially independent is an important goal
No one can work forever, so becoming financially independent eventually is essential. Ideally, you’ll work towards financial independence every year and achieve this goal as soon as possible. That way, you’ll be able to work because you want to, not because you have to. Financial independence means you’ll have a lot more freedom to do things you’re passionate about instead of just working because you need a paycheck.
View more information: https://www.fool.com/the-ascent/buying-stocks/articles/did-you-get-closer-financial-independence-2019/