How to Become Financially Independent: Your Guide to Get There

If you're wondering how to become financially independent, take comfort in the fact that many others are facing the same challenges. According to a 2023 survey by Bankrate, 82% of U.S. adults experience financial stress. And women surpass men in this regard—with 56% of female respondents indicating that money has negatively impacted their mental health, compared to 47% of males.

Based on the data, it's safe to assume that financial independence is a dream for most americans. The mere idea of not having to worry about bills and inflation would lift a weight off the back of many working-class people. No wonder you're here, asking yourself, “How? How do I become financially independent?”

Truth to be told, it won't be easy—but with careful planning and strategy, you can reach a comfortable financial situation. To help you see the light at the end of the tunnel, we've laid out a four-step guide on how to be financially independent. 

What is financial independence?

The meaning of financial independence can vary from person to person. For some, it might mean not living paycheck to paycheck, while for others, it's about comfortably covering all expenses—both necessary and discretionary—without stress.

There's no definitive, formal definition for financial independence; it goes a little deeper than that. According to Certified Financial Education Instructor (CFEI) Amy Coroso, it could be described as “covering your current lifestyle without requiring income from a job.” 

That doesn't necessarily mean you'll stop working, but rather that you'll be motivated by reasons other than survival. “You may choose to work for your own enjoyment, to continue to supplement your income, for a cause that's important to you, or for social purposes,” Coroso says.

Financial freedom vs financial independence

While the terms financial independence and financial freedom are often used interchangeably, they actually carry different meanings. “Financial independence is covering your current lifestyle, financial freedom is generating enough passive income to cover the life you want,” Coroso says.

Of course, the specifics of what this life would look like also vary from person to person. “One may want a giant house on the beach, one may want a mobile home that they can take wherever they want,” she says.

Think about content creator Raven Elyse and singer Ariana Grande as examples. Raven is a financially independent woman, able to sustain her lifestyle as a stay-at-home mother and homeowner in Texas through her earnings as a creator. Ariana is financially free, having accumulated enough wealth to live her dream life without worrying about costs—as she sang on “7 rings”: “I want it, I got.”

How to become financially independent?

Achieving financial independence is a process that takes effort and dedication—especially for regular working-class people. Coroso developed a four-step process to guide her clients through it: 

• Developing a financial overview

• Building financial security

• Maximizing financial potential

• Securing financial future

Below, we'll break down each part of the process and offer tips you can apply to achieve your own financial goals.

1. Develop a financial overview

“This means becoming aware of, and shifting, your mindset around money; aligning your spending with your core values; understanding your financial picture—including net worth, credit score, and debt to income ratio—and creating a budget in alignment with your goals and values,” Coroso says. Here's how:

First, assess your financial situation

Do you have debts? If so, how much do you owe? What's your credit score? What's your income, and how much does it cost to maintain your current lifestyle? What's your net worth (your assets minus liabilities)? Take time to sit down and calmly analyze your finances.

Then, set realistic measurable goals

To reach financial independence, it's important to be specific and realistic about your goals. As they say, a dream without a plan is merely a wish. So, ask yourself where you want to be. Make sure your goals are both realistic and measurable. 

Let's say your dream is to retire; outline when and how much money you aim to save until there. “I want to retire in 2048 at age 55 with $1.300.000,00 in savings and investments” is more precise and achievable than saying “I want to become a millionaire and retire soon.”

Create a personal budget

If you don't already have one, now is the time to make a budget. Put simply, budgeting means assessing your after-tax income and spending habits to figure out ways to reduce monthly expenses and allocate the remaining amount toward your financial goals.

There are many different ways to create a budget, like the 50/30/20 rule, the zero-sum budget, and the envelope budget. If you have a partner and children, you might want to take a look at our guide on how to make a family budget. 

Regardless of the method you choose, the key to achieving financial independence is having control over your expenses, and that starts with creating a budget.

2. Build financial security

“This step includes managing and paying off high-interest debt, repairing credit, building an emergency fund, and enhancing financial literacy,” Coroso says. 

Create debt payments plan

Another crucial part of the journey to financial independence is getting rid of debt. It's recommended to include debt repayment in your budget, starting with a plan to pay off high-interest debt, such as credit cards—if you can, pay them off in full. 

Next, focus on lower-interest debts, such as mortgage student loans. These may not be a priority at first, but they still need to be paid off for the sake of your financial health. As your debt decreases, your spare money increases, making it possible to save more and invest. 

Repair your credit score

Most people don't realize it, but your credit score impacts more than just the interest rates you're offered when financing a house or car. It can also determine how much you pay for car and health insurance. 

The logic is simple: creditors believe that people who are reckless with money are likely to be reckless drivers or neglect their own health. That's why having good credit is important to avoid paying higher interest rates for those services. 

Thus, work on improving your credit score by paying bills on time, paying down credit card balances, and limiting applying for new credit cards. Then check your score regularly to ensure there are no inconsistencies tarnishing your name.

Build an emergency fund

If you faced an unforeseen emergency today, could you afford it without resorting to credit card debt? If you got laid off, could you support yourself until finding a new job? If you answered no to either of these questions, you need an emergency fund.

An emergency fund is your safety net for unexpected situations. Financial advisors recommend setting aside three to six months' worth of living expenses. For instance, if you spend $2,000 monthly on housing, food, utilities, and transportation, you should aim to have $6,000 to $12,000 in an emergency savings account. 

Ideally, your savings account should earn interest and be quickly accessible. Keep this in mind when choosing an institution and bank account type.

Enhance financial literacy

Financial literacy is crucial—especially for women—to build a better relationship with money and reach long-term financial goals. If you prefer digital learning, start by regularly reading reputable financial blogs and following finance educators on social media. If you prefer a more traditional approach, reading personal finance books may be the way to go. (Here's our selection of 10 must-reads for you!)

3. Maximize financial potential 

“This includes investing for the future, negotiating salary or finding a higher paying job and earning what you're worth, and exploring additional income streams if desired or necessary,” Coroso says.

Start investing your money

Saving and investing are key steps toward financial independence. After all, the goal is not depending on a paycheck anymore. Begin by saving for your retirement in a 401(k) or a traditional tax-advantaged IRA, whichever works best for you. 

Then, work on building an investment portfolio to generate passive income. For new investors, it's wise to start cautiously with conservative, low-risk investments and gradually expand. Online brokerage accounts, investment apps, and robo-advisors can make it easy for newbies to grasp the basics.

Another way to simplify saving and investing is to automate your savings. As soon as your paycheck hits your account, allocate a portion straight into an investment and/or savings account.

Negotiate a better salary

There's no way around it: earning more is essential for having a more financially comfortable life. So, go for a promotion or salary raise, or consider changing companies if it means securing a better compensation and a robust benefits package. In case you're self-employed or a business owner, look into ways to maximize your earnings and ensure you're paying yourself fairly. 

Create multiple streams of income

Many financially free people have multiple streams of income. Opening an online business or freelancing can help you achieve short-term financial goals, such as paying off debt and building an emergency fund. If you can maintain your side hustle for long enough, it can potentially maximize your annual income and grow your net worth. (Here are 10 ways to create multiple streams of income.)

Live below your means

The path to financial independence might come with some sacrifices—including learning how to live below your means. There's little point in working hard to grow your income if you spend it all on an expensive lifestyle. This doesn't mean you can't enjoy nice things or eat out occasionally; just avoid spending money on unnecessary and expensive items you don't really need to keep up with the Joneses.

4. Secure your financial future

“This includes planning for milestones such as buying a home or car, higher education, retirement, and estate planning; protecting yourself and your finances with insurance and protection against identity theft; and finally conducting regular financial reviews at least annually, and realigning goals as you go,” Coroso says.

Get a financial advisor

Once you accumulate enough wealth, think about hiring a financial advisor to help manage your assets and keep you on the right track. This professional can also assist with planning for big financial milestones, such as buying property, purchasing a new vehicle, and preparing for retirement.

Protect your assets

At this point in your journey to financial independence, you should start thinking about protecting yourself and your assets. This includes getting life insurance, property and vehicle insurance, and protection against identity theft. 

You should also start estate planning, which includes writing a will, naming an executor of your state, naming guardians for children or any dependents, and establishing insurance beneficiaries, among other things.

This might interest you: 9 Financial Tips Every Woman Should Know to Protect Themselves

Review your finances regularly

Needless to say, it's important to stay on top of your finances. Review your earnings periodically and realign your goals as you see fit. Keep up to date with the country' economic indicators, as they can directly or indirectly affect your life. For instance, inflation rates and economic fluctuations can impact the returns on your investments. 

Frequently asked questions

When can I say I am financially independent?

To know when you can say you're financially independent, apply the 4% rule. This popular method among finance experts involves saving 25 times the amount you plan to spend annually in retirement.

This amount needs to be invested in a 60/40 stocks and bonds portfolio. This is where the 4% comes in: you should be able to withdraw 4% of your investments annually without outliving your money.

How do I know if I am financially independent?

Simply put, if you can fund your current lifestyle without depending on a paycheck or external financial help (i.e. asking your parents for money), you can consider yourself financially independent.

What's the financial freedom definition?

Financial freedom means generating enough passive income to fund the life you want without worrying about money. A financially free person can stop working today without fearing debt or poverty.

A final word

Becoming financially independent is a long-term goal—it doesn't happen overnight, unless you win the lottery. For working-class people, achieving this milestone can be especially challenging, so don't be hard on yourself. Create a realistic plan based on your current situation, be disciplined with budgeting, and make improvements as you move forward.