I’m not a huge fan of financial benchmarks, but I do believe in the power of setting goals and making wise financial decisions. If you have clear financial goals and have been sticking with a budgeting style that works for you, you’re more likely to become financially independent sooner or later.
That said, we all may measure financial independence in different ways. While the definition may vary for you, consider these 6 signs that you’re financially independent or well on your way to independence.
1. You’re Not Burdened By Debt
If you’ve paid down your consumer debt, this is one amazing sign that you’ve become more financially independent. Debt is a burden that eats into your disposable income each month. Some types of debt, such as credit card debt, come with a high-interest rate which can easily drain your finances over time.
The best way to regain control over your finances is to pay down your debt – especially high-interest debt. Start by listing out all the debts you owe, including the interest rate and minimum monthly payment. Pick one or two accounts to prioritize so you can make additional payments each month. Then, continue knocking out your other debts until you’ve paid them all off.
Depending on your situation, it may take several months or years to pay off your debt, but you’ll experience relief and more financial freedom during the process as you make progress.
2. You Have Adequate Savings
One of the most noticeable signs that you’re financially independent is when you have enough savings to feel secure. It’s important to have an emergency fund that covers several months of expenses. Depending on your monthly costs and risk level, you want to aim for at least 6 months of core, necessity expenses.
This means if your core expenses are $3,500 per month, you may want to save at least $20,000 in your emergency fund to cover 6 months. I know this seems like a ton of money, but you can break the goal up into smaller chunks and milestones to meet over time.
The goal is to have a sizeable financial cushion to fall back on when life takes an unexpected turn. Also, to manage your finances in a way where you’re not living paycheck to paycheck.
3. You Are Meeting Your Investment Savings and Retirement Goals
If you’re already saving for retirement, this is an excellent sign that you’re on track to becoming financially independent. Investing early and often allows you to save and grow your money steadily over time. As your investments earn compound interest, you’ll be closer to retiring comfortably.
One tool I like to use to track retirement savings growth is a compound interest calculator by Investor.gov. In order to maximize your investment contributions though, you’ll need to plan out your monthly finances and budget for savings and retirement. That way, you already plan to allocate some money to your future goals.
You can also diversify your investments by contributing to a 401(k) and IRA account. Additionally, you may want to open a brokerage account or use a robo-advisor to invest in a wider range of stocks, bonds, ETFs, and mutual funds.
I don’t consider myself an expert on investing, but my favorite strategy is dollar-cost averaging. With dollar-cost averaging, you just contribute a fixed amount to your investment accounts each month regardless of what’s happening with the market. Even better if you can automate your contributions. This is one of the easiest most passive ways to build wealth and save for your future.
4. You Have Multiple Streams of Income
Another one of the most common signs that you’re financially independent is if you’re earning multiple streams of income. This may or may not include active income from a day job. If you have a passive-income business or own rental properties, this can be crucial in your ability to build wealth and gain financial independence.
Flexible work and passive income streams free up you’re time, so you’re no longer required to exchange time for money. That is freedom in itself. Building passive income streams requires a lot of time and money upfront, as well as ongoing work to manage and maintain your earnings. Realize that a semi-passive income is more realistic if it provides flexibility. You’ll also want to find work that genuinely interests you, so you enjoy the time that you do spend diversifying your income.
5. You Don’t Spend Unnecessarily
Unnecessary and frivolous spending can hold you back financially over time. When you’re trying to build wealth and become financially independent, it’s important to realize that it’s not about how much you make but what you do with it. I know many people believe they need a ton of money to be able to retire and reach financial independence.
However, I’ve heard stories of people who have retired with around $500,000 saved. That could work depending on your situation and your spending, of course. If you live in a low cost of living area, don’t have any kids to support, and your home is paid off, you may not need as much as you thought you did to get by.
This is why cutting unnecessary spending is so important. When you spend mindlessly, you just regret those purchases anyway. It’s much better to get clear on your values and cut out wasteful spending. That way, you can spend more money on saving and what’s more important to you.
6. You Aren’t Stressed About Money
This sign relies on several of the other signs mentioned above. If you have low or no debt, plenty of savings, investments lined up, and multiple streams of income, you’re probably not going to be stressed about money. You should have cash flow each month and savings to fall back on if an emergency arises. Plus, you’ll be growing your investments steadily over time.
Life is unexpected, so financial hardships can always occur at any time. However, you’ll have more peace 0f mind when you know you are financially stable and don’t have to stress over money.
Summary: Signs That You’re Financially Independent
Financial stability is important as it can help give you options, more freedom, and protection against the unknown. To become financially independent, realize that the process takes time and patience. Get clear on your goals and values. Then, take things one step at a time.
You can start tracking your net worth and review your finances each month to monitor your progress and stay motivated. Get your partner and family on board for support, and enjoy the journey of regaining control over your financial life.