Five steps towards financial independence

Financial independence is a state to which many people aspire. It is not always easy to achieve, but that does not mean that it is impossible. We have focused on five steps that can help bring anyone closer to their desired financial independence.

Learn for free at the eToro Academy

What is financial independence?

A popular definition of financial independence is the ability to have enough income to live the lifestyle of your choice, without having to rely on others. That means having sufficient funds without necessarily having to work for a living. Achieving financial independence is a goal set by many people, for several reasons, and which may vary from person to person.

Many strive for financial independence because their profession does not offer job security. In the rapidly changing world in which we live, especially at a time when a global pandemic is hanging over our heads, that is true for many professions. Achieving financial independence means not having to be dependent on a job to live the life of one’s choice, but it also means having the ability to structure one’s schedule in  the best possible way.

Now that we have settled on what financial independence is and why it is important, let’s take a look at the five steps that can help you towards your goal of financial independence.

Step 1: The more you know

Your first step towards financial independence should be financial literacy. This means having the ability to understand financial terms and employ financial skills. This includes such basics as, for example, budgeting and investing. Since you need to understand finance in order to successfully navigate it, the more literate you are, the better decisions you can make based on your knowledge and skills.

Widen your horizons at the eToro Academy

Step 2: Make plans and stick to them

You can start by tracking your spending, and you might be surprised to learn how much you spend on non-essentials. But even if you are not, tracking expenses will help you budget properly. Budgeting is an essential skill for anyone who is trying to achieve financial independence, and quite frankly, it is an essential skill for anyone to have.

Once your expenses are tracked, you can start budgeting. Although it might be obvious that you need to spend less than you earn, it is also important to be able to project what your expenses will be. Being on top of your future expenses will help you understand how much you can spend, and more importantly, how much you can save.

Step 3: Save now, enjoy later

Saving for your retirement, as well as for rainy days, can bring you another step closer to financial independence. Small amounts of money saved earlier in life can make an impact on your funds in the future, but it is never too late to start saving. Having a savings account or making regular contributions to a retirement plan are both great ways to take care of your future self.

Step 4: Invest wisely

Before you start investing, you should make sure you have startup capital, which you can afford to lose. Investing means taking calculated risks, and it is important to remember that there are no guarantees in investing. However, investing your money is an essential step towards financial independence, as it has the potential to provide you with valuable gains in return.

Step 5: Diversify your portfolio to minimise risks

There is no blueprint for successful investing, but keeping a diverse portfolio is a good way to manage risks and reduce volatility. It is important to remember, though, that no matter how diverse your portfolio is, risk can never be entirely eliminated. The key is to find the right balance between risk and return, and diversification helps with that.

Learn to invest at the eToro Academy

When it comes to financial independence, having access to information to help you make informed decisions can make a big difference. Places like the eToro Academy can be a great resource for you to learn about different investment opportunities, explore guides to help you get started and gain regular insights into the latest market updates.