It is important to be financially independent or not need help from your parents or guardians to support yourself. The earlier you reach this stage, the more seamless your financial journey will be.
The younger you are, the more financial independence might appear intimidating or far out of reach, but by following the right strategies and steps, this goal can be achievable for anyone.
This article covers the 9 important steps toward becoming financially independent, starting with simple steps such as budgeting and working your way towards growing your income.
Key Takeaways
- Setting goals, creating a budget, and paying off loans as early as possible are the preliminary steps to financial independence.
- Apart from emergency funds, you should also save money allocated to making big purchases, travelling, and other life goals.
- Once you’ve minimized your expenses as much as possible, the last few steps of this process involve generating more income without succumbing to lifestyle inflation.
The Meaning of Financial Independence
The term “financial independence” doesn’t exactly have the same meaning for everyone.
Some view financial independence as financial freedom, where one doesn’t have to rely on income from a day job to sustain one’s living expenses.
However, for others, especially younger people, financial independence can literally simply mean no longer being financially dependent on one’s parents or guardians.
This article will focus more on the latter meaning, which is to help individuals reach financial stability that will keep them away from continuously financially relying on others.
How Much Do You Need To Become Financially Independent?
As everyone’s spending habits and financial situations are different, there’s no exact amount for how much everyone needs to have to be financially independent.
However, my rule of thumb is that you’d need to continuously sustain your monthly living expenses and still have enough money left to save to become financially independent.
For example, if you’re living in Toronto, where, on average, it costs approximately $1,550 per month (without rent) to sustain living expenses, and you’re renting a $1,500 apartment, you must have a way to generate at least $3,050 per month to become financially independent from your parents.
Some can achieve financial independence just by relying on their primary income, but many require additional income streams or substantial savings to truly achieve it.
How to Become Financially Independent From Your Parents
Let’s uncover the 9 simple yet effective steps to finally become financially independent from our parents.
1. Set Goals
The road to financial independence always starts with a clear goal. However, this step doesn’t always look the same for everyone.
Some set a goal of moving out from their family house before a certain age, while others only aim to sustain their living expenses (without including rent) by a specific year.
Regardless of your specific goal, try to set a goal that follows the SMART format. This is likely already familiar to you, but the abbreviations stand for Specific, Measurable, Achievable, Realistic, and Timely.
Once you have a clear goal that will also serve as your primary driving force to reach financial independence, you can proceed to the rest of the steps in this process.
2. Create a Budget
One of the easiest and most efficient ways to control your finances is to create a budget. In other words, predetermine where specific portions of your expected income will go per month and strictly adhere to it.
As long as you stick to exactly how much you’ve budgeted for your needs and wants, you should always have a surplus by the end of each month, which can then be allocated towards savings to help you achieve your goal.
3. Make a Plan To Pay Off Loans or Debt
The longer you delay paying off loans or debt, the more money you’ll accrue in interest rates, which is why it’s crucial to pay these debts off as soon as possible.
To make debt repayment manageable, consider using either of these two popular methods: debt snowball or debt avalanche.
Debt snowball involves paying off smaller debts first so you can achieve small wins that will encourage you to continue repaying debts.
On the other hand, debt avalanche prioritizes paying off debt with the highest interest rates, so you end up paying the least money possible in interest.
4. Build Your Credit Score
Your credit score has a significant impact on your financial life.
The higher it is, the easier and faster it’ll be to access benefits such as securing better interest deals, increased chances of renting properties, and favourable interest rates when you need to take out new loans or mortgages, all of which are beneficial in becoming financially independent.
In Canada, credit scores are generally considered “good” once they’re above 700. So, to grow this score, make sure to pay bills on time, keep your credit card balances as low as possible, and avoid applying for new credit unnecessarily.
5. Build an Emergency Fund
No matter how meticulously you manage all aspects of your life, sometimes, emergencies, such as getting laid off from work or unexpected car repairs, just have a way of creeping into your life.
If you want to maintain financial independence despite unexpected challenges, you should always continuously build your emergency fund.
Although it’s not a hard and fast rule, it’s highly recommended that you maintain an emergency fund that can shoulder 3 to 6 months’ worth of your living expenses or income.
For most, this financial cushion is enough not to make you dip further into debt when faced with unexpected financial setbacks.
6. Save As Much As Possible
Apart from emergency funds, there are also other goals, such as big purchases, dream vacations, and education expenses that require savings.
So, the more money you have saved, the better it’ll be in general for all aspects of your life.
The ideal starting point for saving money is often suggested to be around 20% of your monthly income, but the larger this percentage, the better it’ll be for your financial stability, so increase it whenever you have the chance.
If you’re finding it hard to save money by the end of each month, consider reducing your budget for your “wants” and finding cheaper alternatives to your “needs.”
Once you’ve explored all options to spend frugally, you’re ready to proceed to the next steps, which focus on increasing your income.
7. Start Investing
Keeping your savings in “high-interest accounts” can only help you grow your money to a very limited extent.
So, once you have some or enough money set aside for your emergency fund, savings, and other goals, start investing to earn money from your existing money faster.
Investing might sound like a complex journey, considering that there are literally countless ways to approach this endeavour, such as bonds, stocks, and ETFs. But the good news is there are also thousands of courses online that can help you invest safely.
If you want an extremely simple, step-by-step guide that’ll help you learn how to invest from start to finish with actual examples, check out my newly launched Investing Course for Beginners.
I consolidated the DIY investing strategies I use to grow my money and reduce my investment fees in the simplest ways possible. Mastering Canada’s financial markets took me over two decades, but you can use this course to acquire many of these skills within a week or two.
8. Find Ways To Create Passive Income
The income you can generate from your “active” day job or side hustles will always be limited by how long or often you work. So, the next big step to increasing your earnings would be to create passive income that’ll let you earn money even in your sleep.
Investing aside, there are still dozens of ways to generate passive income in Canada, including avenues such as blogging, starting an eCommerce store, or creating digital products.
Choose whichever option(s) suits your interests and skills best.
9. Live Below Your Means
Many people who increase their income simultaneously also increase their spending. However, succumbing to lifestyle inflation won’t bring you any closer to reaching financial independence.
Once you’ve set a budget with your existing earnings, immediately put any extra you earn every month into your savings, emergency funds, or investments to avoid temptation.
As much as possible, live below your means.
There’s no harm in celebrating small wins by treating yourself or your family, but this shouldn’t be an ongoing occasion that directly hinders your financial progress.
Related: Why Financial Literacy is An Important Life Skill
