One of the biggest themes that I write about here on The Simple Dollar is the concept of financial independence. I define financial independence as being the state in which you can live off of your passive income, usually in the form of investments that pay out over time such as dividend-generating stocks.
As with most things in life, financial independence isn’t a cut-and-dried line. There’s a lot of grey in that idea.
For example, as your savings grow, you become less and less dependent on your job. The possibility of taking a lower-paying job that’s more fulfilling and/or less stressful grows and grows. You’re less likely to have debt weighing you down and it’s likely that your monthly cash flow – your income minus your expenses – is nice and big. That’s not financial independence, but it does have some degree of financial independence in there.
Now, let’s turn that upside down. The more financially independent you are, the less financially dependent you are. Financial dependence simply means that you’re dependent on sources of income, most specifically your job, but often other sources as well (such as gifts from parents).
The less financially dependent on others that you are, the greater your flexibility when it comes to life choices and the easier the final sprint becomes to full financial independence.
Here are eight key strategies for reducing financial dependence in your life – dependence on your employer, on banks, and on family members.
Improve Your Resume
For most of us, our primary source of income is through our primary job. The best tool you have to reduce your financial dependence on that single employer is to improve your resume, making yourself more valuable in the workplace (which means it’s easier to ask for raises and promotions) and at the same time making yourself more attractive to other employers who might hire you away or pick you up should your organization fall into hard times. Here are four tactics for doing just that.
Focus on project-oriented work in your workplace. Completed projects are great items to stick on a resume as they demonstrate your ability to take ahold of a large task and bring it to completion. Big projects can be intimidating and sometimes even overwhelming, but completing them is a powerful demonstration of your skills.
Take any and all opportunities to speak publicly. Speaking in a public venue is an incredible way to get your name and face and ideas out there and to quickly build a lot of connections with a lot of people. It also takes guts to do it. Whenever you have the opportunity to stand up in front of a group and speak, whether it’s eight people in a corner office or five thousand people at a giant meeting, take it.
Take any and all opportunities to show leadership. Whenever you have the chance to step up to the plate, do so, even if it means stepping around the person nominally in charge. If a project is sinking, come up with a plan to fix it. If direction is needed, provide it by suggesting a method to make things work. A person who can step up and do these things when needed is a real leader and quickly becomes invaluable in the workplace.
Improve your education, whether through certifications, additional degrees, or even just supplementary coursework. Many jobs use degrees and certifications as a “first pass” for deciding who might be eligible for that position. Regardless of how qualified you might be for a job, it’s often degrees and certifications that companies use as a quick check to see if they’ll even look at you. Thus, if you want to improve your options, get educated.
Build More Streams of Income
Another way to decrease your financial independence on your current job is to come up with more ways to earn income outside of your job. There are a lot of ways of doing just that, but they all require some devotion of your spare time. Here are four such strategies.
Consider a part-time job. A part-time job is perhaps the easiest and most direct way to build a new stream of income. It quickly and immediately provides additional income, which can be enough to transform a paycheck-to-paycheck situation into one where you’re building some breathing room in a fairly short amount of time.
Consider freelancing in your spare time. If you’re in a project-based career, there are likely opportunities for freelance work utilizing your skill set. Start poking around for situations where you can use your skills on independent projects. One good place to start is Upwork.com.
Create things that can generate a steady (if small) stream of revenue with little further work. There are many ways to do this on the Internet. Start your own Youtube channel on whatever interests you. Start a blog. Write books for the Kindle store. Create a website that sells your own ebooks. These things require significant upfront work, but create a long tail of earnings.
Invest your money in ways that offer a real return. Once you reach a point where you’ve eliminated debts and your income drastically exceeds your spending, start investing your money in income-generating investments such as stocks or rental properties. These investments will start churning out cash on their own, which you can reinvest to accelerate your progress.
Minimize Your Living Expenses
One of the most powerful elements of financial dependence is the perceived “need” for a high income. That “need” causes people to continue to feel dependent on their job, creating a “golden handcuffs” scenario where you’re tied to and dependent on your workplace. Besides the obvious strategy of not allowing your spending to inflate with an increase in your income, here are four more tactics for keeping your costs down.
Use smart strategies for buying food. My family sticks to the routine of creating a meal plan based on the weekly grocery store flyer, making a grocery list based on that meal plan, and doing our grocery shopping based on that list. Doing this ensures that we buy lots of sale items, eat meals incorporating those items, and have a list to focus on while in the store.
Make your living quarters more energy efficient. Simple tactics, like keeping the coils on your refrigerator clean, using energy efficient lighting, air sealing your home, and keeping your furnace and air conditioning filter up to date can go a long way toward keeping your energy bill low.
Try out lots of low-cost hobbies instead of expensive ones and see what clicks. Experiment with hobbies until you find a set of things that interest you that do not require a lot of expense. Over the last several years, I’ve added geocaching and participating in several community groups to my already existing hobby of reading books. None of these hobbies cost me much of anything.
Stop worrying about what other people think. A shocking number of the purchases we make are all about impressing other people. Don’t waste your time with it. Thanks to the spotlight effect, they’re thinking about you less than you suspect that they are, so don’t sweat it, especially when it costs you your hard-earned money.
Make Flexible and/or Cost-Effective Housing Choices
Housing is one of the biggest leeches of our money. It can also be very inflexible, especially when you’re dealing with a mortgage. Instead, become less financially dependent on your home with these smart tactics.
Strongly consider renting. Many people reflexively argue on behalf of home ownership without considering the full picture. Renting comes without homeowners insurance, property taxes, and many other such expenses. Renting also gives you the flexibility to move easily, especially in a month-by-month arrangement. Homeownership, especially when tied to a mortgage, is not only often more expensive (in terms of the money that you get no return on, such as mortgage interest and the other expenses described above), but is much less flexible in terms of moving away than renting.
If you’re buying a house, buy one smaller than what you think you need. A bigger house often just means more space to store stuff. Get a smaller home that just takes care of you. You don’t need to have enough stuff to fill an entire house of any significant size – if you have that much stuff, it’s likely that you don’t have nearly enough time to actually enjoy all of it.
Live in a location that makes it easy to live without an additional car. Live near access to mass transit if you live in a city and, ideally, fairly near an inexpensive source for groceries and household supplies. If you have those things, you have little need for the ongoing expense of owning a car – the cost of the car itself, maintenance, fuel, insurance, registration, and so on.
Don’t be afraid to have roommates or rent out extra rooms. If you do find yourself with extra space in your home, don’t be afraid to share that space and reduce the financial burden on yourself. A roommate can save you an incredible amount of money, even over a short period of time, by halving the cost of your rent and utilities.
Avoid Credit Card and Other Consumer Debt
Consumer debt means that you’ve borrowed money at a high interest rate. Usually, that money was borrowed to buy an item that you don’t really need. It’s not an equation worth having in your life. Here are four tactics for smart use of credit when you’re reducing financial dependence.
Avoid using a credit card if you can’t pay off the balance in full every single month. A credit card can be a useful tool that provides consumer protections and great bonus rewards, but all that is quickly eclipsed if you can’t pay off your balance each month. The interest will eat you alive. Avoid credit cards if you can’t pay them off each time a bill arrives.
Never buy anything non-essential unless you have the cash in hand to pay for it. You can use a credit card to facilitate the purchase, but then you use that cash in hand to immediately pay off the credit card. Doing this gives you the consumer protections of the credit card while avoiding interest payments.
Use your extra money to reduce and eliminate all debt, starting with high interest debt. If you’re carrying any debt at all – especially any debt with a high interest rate, which would be anything over about 7% or so – your main focus with your money should be to eliminate that debt. Eliminating debt not only stops interest payments to the bank (which is just lost money for you), but also removes a monthly bill, which helps with your monthly cash flow (the difference between the money you earn and your monthly bills).
If you’re actively repaying your debt, use zero-interest balance transfers simply to reduce the overall interest you have to pay. Zero-interest balance transfers are tools that credit card companies use to entice new customers or, occasionally, to retain old ones. If you’re actively engaged in rapidly eliminating your debt, you should strongly consider these kinds of balance transfers as they immediately reduce the amount of interest you’re paying in the short term, allowing you to put more money towards paying off balances and less money toward covering interest payments.
Maintain a Healthy Cash Emergency Fund
An emergency fund is one of your most important financial tools, especially as you just begin to reduce your financial dependence on others. A poorly-timed emergency can undo all of your independence quickly. Here are four tactics to keep such problems at bay.
Don’t use a credit card as your “emergency fund.” Many people fall into this temptation. Don’t. Many of the worst emergencies can undo your access to credit cards. What do you do if your wallet is stolen? What if you hit your credit limit? What if identity theft strikes? Those are painful situations where a real emergency fund can make the difference and a credit card is useless.
Have at least $1,000 saved up. I consider $1,000 to be a minimum emergency fund. If you don’t have that much, make it your primary goal to build that kind of fund. $1,000 will get you out of most major day-to-day emergencies that you’ll face.
If you have no high interest debt, try to save up a month’s worth of family living expenses for each dependent you have. This type of emergency fund is what you’ll need for major crises like job loss or severe illnesses. Having this kind of emergency fund enables you to simply coast through enormous problems without relying on credit and digging yourself a giant hole for the future.
Keep that money accessible in a savings account, as the goal here isn’t to earn a big return but to have it as liquid as possible. An emergency fund is where a savings account shines. The two things you want most in an emergency fund – security and liquidity – are the two things that a savings account succeeds at. You don’t need to worry about a big return on this money as it’s not meant to be an investment. It’s meant as a safety net.
Use Windfalls Smartly
When a windfall arrives on the lap of many people, they get excited and spend it in a foolish manner. Whenever you get a significant windfall, whether it be a bonus, an inheritance, or something else altogether, I recommend that you step back and take a breather. Then, try these four tactics on for size.
Think long-term about every windfall you get. A windfall can be fun in the short term, but it can genuinely change your life if you think about that windfall in the long term. What can you do with this money to improve your life over the long haul? Don’t worry about having fun today with it. Instead, look at how it can reduce stress and maximize freedom every single day for the rest of your life.
Make eliminating debt the number one priority. If you have debt – especially high interest debt – your windfall should be used to knock that debt down. Eliminating debt reduces stress and also reduces your required monthly bills, giving you more financial breathing room. (This does of course assume that you have a small emergency fund in place – if not, that comes first.)
If you have no high-interest debt, use the money to save for big expenses coming down the road. Eventually, you may need a new car. You may have a big tax bill coming down the road. Maybe you’re going to have an insurance payment or need a down payment on a house. Your windfall can provide those things.
If you have no big expenses on the horizon, use it to boost retirement savings. Remember, the end goal of reducing your financial dependence on others is to reach full financial independence. Retirement savings are a tool to get you there, as they provide you with tax benefits once you step away from day-to-day work and “retire.”
Develop Personal Happiness That Doesn’t Rely on Spending Money
Many people have a tight association between their personal happiness and the act of spending money. They tend to view pleasure as being something that requires money to be spent, when that’s usually far from the case. Here are four tactics to break that money-devouring linkage.
Eliminate (or minimize) any hobbies or activities that revolve around spending money, such as shopping. If you have any hobbies or regular activities that require a constant influx of money to participate – recreational shopping, for one, or golfing – drop those activities from your life. They serve as nothing but a money drain and are particularly wasteful when you consider the enormous range of other things that you could be doing with your money and time.
Identify things you enjoy that don’t involve spending money and do those things. As I mentioned above, try lots of different activities and see what clicks, then focus on doing those things. Don’t get caught up in obtaining “stuff” to support those hobbies; most of the time, that’s just a distraction from the joy of actually participating.
Engage your friends in those activities, communicate clearly, and try other things if they’re not on board. Having common activities with friends is a great way to socialize, and if the activity is a free (or very inexpensive) thing, it’s a great way to keep both you and your friends’ money where it belongs.
Look for community opportunities. Many community groups are essentially free to participate in and offer great ways to have fun for free and meet like-minded people. Start by checking out Meetup for such events, but also visit the website for your community, the parks and rec department for your community, and your community library. You’ll find more opportunities than you know what to do with.
The less financial dependence you have on others, the less stress you feel in your day to day life and the greater your sense of control over your situation. You no longer feel as though your life is out of control and you’re just along for the ride.
The less financial dependence you have on others, the fewer “rules” you have in terms of the life you choose to live and the directions you choose to take. You’re now in the driver’s seat when it comes to your career and your life.
Sound good? Get started. The recipe for the change you want is sitting right here. The question is, will you take action?