Financial independence is a long-term commitment that takes time to achieve. When I first started my own financial journey, it felt like a long way off and it is easy to get discouraged in those early stages.
But there are a few things that you can get ticked off early on. If you have resolved to get your personal finances in order in 2022, here is my list of goals that you can achieve in your very first year.
1. Clarify your ‘why’
A strong reason for financial independence will help you stay committed and keep your motivation going. Think about the fundamental reason you are working towards and try and make it as specific as possible. Do you want to work part-time so you can spend more time with family? Maybe ‘retire’ from a job you hate and pursue something more meaningful? Get peace of mind and become debt free? Retire early enough to be able to enjoy travelling?
I write my ‘why’ onto a Trello card, that I see every time I open up my task lists. It acts as a powerful reminder of what really matters to me, and what I’m giving up each time I choose to overspend on things I don’t value.
2. Talk to your partner about finances
If you share any element of your finances with another person, make the time to sit down and have a conversation about your financial goals and values. I don’t think these need to be 100% aligned, but it’s important to know whether or not you have the same view of money. There’s no point aggressively saving for an early retirement if your partner is running up credit card debt.
It doesn’t need to be boring either – it can be a chance to share some ‘what if money wasn’t an issue’ dreams. Maybe your partner harbors a desire to run their own farm? Or live on a yacht? Or start their own blacksmithing business?
3. Put together a budget
It’s the not so sexy reality of financial freedom, but it’s an absolute must if you want to get on top of your finances. There are many different approaches, but I use the zero dollar method for both planning and tracking my money, and the Colorful Budget app for tracking daily expenditure.
A budget helps you plan whether or not your savings goals are realistic, make decisions on which areas you want to reduce expenses, and over time will provide an actual view of where your money goes.
4. Calculate the pathway to your long term goals
Your budget is the micro-tracker that keeps you on target paycheck to paycheck, but how do you know how much you need to save each year in order to meet your overall goals? This is where you need to plan a pathway.
I do this using free online calculators. For debt, I use a simple mortgage calculator, and for shares I use a compound interest calculator. There are lots of free calculators available online, just hunt around until you find one that you like.
Having an idea of how long it will take you to reach a certain goal helps with decision making and allows you to test different scenarios. How many years will you knock off your working life if you increased your savings rate by 10%? What if you reduced your retirement income to a ‘lean FIRE’ amount? What will your mortgage repayments be if interest rates go up by 1%?
5. Consider talking to a financial advisor
Think about whether or not you should seek financial advice. Talking to a professional might help you save money if you can use tax incentives or tax breaks you are unaware of, particularly if your finances are a bit complex. Make sure you use someone that is certified, and weigh up whether or not it is worth the cost of the service.
6. Make sure you are getting the best deals for services
Go through all the things you pay for – subscriptions, mobile phone, internet, utilities, mortgage, insurance etc. and check that you are getting the best value for money. Companies often rely on customers renewing or staying with a service without shopping around, so take the time to check that there isn’t a better deal out there. You don’t necessarily need to change provider either – sometimes just making a call and asking them if they can match an offer works.
7. Experiment with cutting things out
Plan a year of experiments to cut out a different expenditure each month and see how much you actually need it. I’ve used this technique to gradually whittle away at things that I previously considered high value, or even necessary, or found cheaper alternatives.
I’ve replaced salon haircuts with at-home trims, changed my daily barista coffee for a good quality instant and almost completely cut out buying new clothes. This year I’m actually experimenting with re-introducing expenditure on fun things, but it’s an intentional process where I’m seeking value.
8. Pay off your debt (excluding mortgage)
Depending on how much you owe, this might not be realistic in your first year, but getting rid of any high interest consumer debt should be your first target. Not only does it make sense mathematically, I’ve found it kick-starts more of a growth mind-set, and removes a source of stress even if it’s only there on an unconscious level.
Once you’re completely out of debt, there is more incentive to keep out of it. I still have a credit card for random things like hire car deposits, but my balance is always $0 at each payday.
Although it wasn’t very high interest, last year I paid off my student debt (see my post on this decision) so that I could get rid of the task to make an overseas transfer once every couple of months, and the need to keep an eye on my overseas bank account. This year when I made my budget, it was great not to have to work around these big payments and I had a clean slate to build from.
9. Build your emergency fund
Again, might not be possible in your first year, but should be one of the very first things you aim for. Building an emergency fund means you don’t have to use credit cards, and there is less of a ‘world falling apart’ feeling when the inevitable mini life disasters strike.
A rule of thumb is 3-6 month’s living expenses. Personally, my risk tolerance for my emergency fund is quite high as I’m in a very stable job and I don’t have many financial commitments (just my mortgage and basic living expenses), so mine is just built up to $5k. I also quite often dip into this fund for things that are technically non-emergency items, but that I don’t think I’d be able to pay for in one paycheck. Last year this included some big ticket home renovation items that would have created delays if they hadn’t have been purchased, but I built the fund back up straight away.
10. Make your first investment
You should only start investing when you understand enough about the share market to feel comfortable with the amount of risk you are taking. When I first started, it took me about three months of researching LICs, ETF, dividends, CHESS holdings, trading platforms, management fees and all those unfamiliar financial terms until I felt I knew enough to make my first investment. Even then, it was only $1000.
Once I’d made this first commitment, it was much easier to keep investing. More importantly, I didn’t panic when my shares went down as I had a good idea about how the market works and expected it.
Even if you don’t have the funds just yet, you can spend some time in your first year improving your financial literacy and doing some research on where your first investment might be.
What were your first steps towards financial freedom?
Disclaimer: I am not a financial professional, this blog is an anecdote of my personal financial journey.