7 tips to help reach financial independence

How people define financial independence varies. For some, it's about feeling in control of finances with money set aside for the future. For others, it might mean having enough money to live comfortably without needing to work.

There are different benefits to being financially independent, including preparing for retirement, reducing stress, or having the freedom to travel and take on new hobbies. This article offers seven tips for financial independence.

1. Assess current financial standing

The first step to financial independence is to look at current finances. Here are some ways to get started with financial independence planning:

• Assess income and expenses to get a detailed picture of current finances.
• Subtract debts from assets (savings, property, etc.) to calculate net worth.
• Define what financial independence means to you and create goals using budgeting approaches like the SMART method — Specific, Measurable, Achievable, Relevant, and Timely.
• Create a timeline for each goal. Consider age, income, job prospects, and how long it might take to achieve financial independence.
• Decide what bank accounts and apps will help with managing money.
• Be flexible — set a framework to reach those goals but with room for adjustments when needed.

With a better understanding of current finances, it's possible to see the path toward becoming financially independent.

2. Create a budget and stick to it

One of the foundations of the journey to financial independence is creating a budget and sticking to it. Look for areas where spending can be cut to help achieve the SMART goals laid out during planning. The 50/30/20 rule is one approach.

Ho to use the 50/30/20 rule

The 50/30/20 rule can provide a good framework for those who are new to budgeting for financial independence. With this plan, 50% of income goes to needs (rent, utilities, food), 30% goes to wants (entertainment, socializing, vacations), and 20% goes to savings (emergency fund, retirement, other savings).

Personal budgeting doesn't always have to follow this format. It's a good idea to do some research and consider various options. The main takeaway is to find a manageable budget for your situation and stay with it.

3. Reduce spending and increase savings

Saving is just as important as reducing spending. Cutting back on expenses leaves more money to help increase savings for the future.

It's these savings that can help enable financial independence. This starts with identifying areas to cut back on spending. These can include:

• Canceling unused subscriptions
• Dining out less often
• Switching utility providers
• Making coffee and other treats at home
• Batch cooking
• Buying used and secondhand items

Visibility into spending is crucial. Without a view of regular and one-off expenses, it's difficult to pinpoint where overspending may be happening. Using an expense tracking tool (even a notebook and pen) can help with staying on top of both income and expenses.

Having an idea of where to cut spending makes it easier to create a savings plan. It can be helpful to start with making automatic transfers into a dedicated savings account — perhaps based on the 50/30/20 rule.

Having an account that makes it simple to see how the savings are growing can help with motivation. PayPal Savings is one easy option where everything can be managed through an app.

4. Manage debts efficiently

As well as focusing on ways to increase savings, financial independence is also about managing debt wisely. Debt-free living not only gives more freedom when it comes to spending — it can also bring peace of mind.

Paying down debt through normal monthly payments across all outstanding bills is one option, but it's not the only one. The debt avalanche method, for example, involves setting everything to the minimum payment and using what's left over to pay off the debt with the highest interest. A different approach — the debt snowball method — focuses on paying off the smallest debt first.

An important key to financial independence is paying off debt efficiently. It's worth putting thought into this as there are additional options for debt repayment and consolidation that could help reduce monthly payments.

5. Build your credit

Good credit can help on the journey toward financial independence. For example, a good credit history can help when renting or buying a property, potentially unlock favorable rates, and make it possible to get a credit card.

Common ways to build credit include:

• Getting a credit card to use for daily spending but paying off the full balance every month
• Keeping credit utilization low
• Making regular payments on existing bills
• Monitoring credit history

Many credit cards provide enhanced purchase protection and cash back while helping establish a credit history. PayPal's credit services can help, too, as having a line of credit that's regularly paid off demonstrates creditworthiness.

6. Increase your income

It's easier to pay off debt and boost savings with an increase in income. In many cases, this might involve asking for a raise. However, there are other ways to generate additional income, including:

• Acquiring new skills that could lead to new opportunities
• Going for that promotion
• Looking for a better-paid job
• Starting a side hustle

Any increase in income can influence financial goals. Generating passive income is another option. This might come from selling a digital product, renting out a property, or collecting returns on an investment.

7. Seek professional financial advice

While there might be costs associated with this, a financial adviser can make recommendations on how to make progress to reaching financial independence.

What do financial advisers do?

Different advisers provide different services. Some of the guidance they may give could include how to:

• Invest for retirement
• Maximize savings rates
• Pay off debt efficiently
• Create a personal budget
• Be more tax efficient

This might be a good choice for people who are well on their way to financial independence and looking to take things to the next level with investments and retirement planning.

Making smart choices for a financially independent future

Financial independence can empower people to become more self-reliant, often without needing to bring in a paycheck each month. This can help reduce stress, make planning for the future more exciting, and open new opportunities.

Part of the journey to becoming financially independent is making smart choices regarding earning, spending, and saving.

For those ready to take the steps to achieve financial independence, PayPal can put you on the path to start saving.