What Will It Take to Declare Financial Independence and Freedom?

While most of us will never be billionaires (or even set that as a goal), we do want adequate earnings, savings and investments to afford the lifestyle we desire, plan for a comfortable retirement and contribute to society in meaningful ways.

Financial freedom means different things to different people, but to get there, you need clear financial goals, sound saving and investment habits and, especially for marginalized communities often left out of economic prosperity, an understanding of obstacles you may face and strategies for navigating them.

Use time to your advantage

The biggest aid to saving and investing is time because compound interest creates a snowball effect. Over time, you earn interest on both the money you first saved and the interest that money has earned. Your interest starts earning interest.

Personal finance columnist and author, Jean Chatzky, provides this example in Her Money. If you start investing $200 per month at age 25 at 6% return, you’ll have $393,700 at age 65. If you wait until age 35 to start with the same plan, you’ll end up with just about half that amount, only $201,100.

Unfortunately, we often think about spending when we’re young and saving when we’re older. The key takeaway is to start saving and investing as soon as possible and to make it a habit.

Consider these tried-and-true principles to chart a path to your financial freedom.

Start with big life goals. Money is a means to achieving the things you want to do, so you need a good understanding of how you want to spend your time, how much you want to work, where you want to live, who you want to help support, how you want to give back and major purchases you might want to make before you can set meaningful and realistic financial goals. Many of these things will change over time, but linking your money to the things that matter most to you can make it easier to be a more disciplined spender and saver.
Get more granular. Once you identify those big goals, home in on short-term needs and sound budgeting. The bedrock of any financial plan is to spend less than you make.

Consider tracking every expense for at least a month, preferably three, to get a firm grip on exactly where your money is going. The funds to make an extra mortgage, car or credit card payment may be hiding in undisciplined purchases and indulgences that detract from larger goals. If you carry credit card balances, pay them off first (their massive interest rates make them a financial drain you need to plug).

Make it automatic. Having bills set to autopay is a great convenience and helps ensure you won’t get hit with late payment fees. But setting savings to automatic is equally important. “When you can make sound choices about saving and investing just once or twice a year and then use automated systems to implement them, you gain fiscal discipline and reduce the effort involved as well as distractions and temptations that can get you off track,” according to Allison Mitchamore, Certified Financial Planner, Founder of WealthWise Financial Solutions and former Director of Corporate Finance for a Fortune 50 company.

One of the most effective ways to save is to direct automatic paycheck withdrawals to company retirement vehicles or your own retirement plan, such as a 401K. While founders may be tempted to plow all of their money back into the business, it’s critical to conduct your own personal savings as well to create a more diversified portfolio and safeguard against business downturns.

Monitor your credit score. When you need a loan, the interest rate you’re offered will be determined by your credit worthiness. Your credit score even affects rates on car insurance and life insurance premiums. By law, you can get a free credit report each year from the three credit reporting agencies at com.

Special concerns for women and people of color

Racial and gender inequality are at least as evident in the financial arena as they are in other aspects of life. Due to generations of discrimination and lending policies that kept people of color from buying homes (the primary method for most people to build wealth) or from qualifying for the GI Bill, white Americans hold eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic household, according to the Federal Reserve. People of color and women also earn less throughout their lifetimes, further exacerbating the difference in financial security.

The Colour of Money report in the UK similarly shows Black African and white Bangladeshi households have only 10% of the average wealth of white British households. Australia also reports significant wealth gaps with Aboriginal and Torres Strait Islander people, migrants, refugees and women most likely to live in poverty.

These disparities are unacceptable and must be addressed through state and federal actions. Individuals can also take steps to help level the odds. That starts with building financial literacy. Numerous online resources exist through nonprofit organizations such as the National Endowment for Financial Education and informational websites such as Napkin Finance.

Another key step is to develop a relationship with a local bank. While there are fewer banks in non-white majority neighborhoods, and there is a long history of discrimination by financial institutions, developing a relationship with a well-regarded bank is important for meeting future needs or to secure a loan.

Another important component of personal financial security is to advocate for yourself in the workplace and negotiate for higher pay. Look up salary data online on sites like glassdoor and have a good sense of what you should be earning. Read up on negotiating and don’t be afraid to ask for what you’re worth when accepting a job, or to make the case for advancement or a salary increase in your current role.

Finally, while it’s understandable that communities of color have less trust in the stock market, investing is a critical strategy for long-term financial health. According to the Federal Reserve, 61% of white households invest in the stock market compared to only 34% of Black households and 24% of Hispanic households. That is a critical gap because the stock market has a strong track record of generating wealth over time.

You can work with a vetted and trusted financial advisor, research relatively uncomplicated investment vehicles, such as mutual funds, and access free and low-cost advice from organizations like the Foundation for Financial Planning. You can also check out the Association of African American Financial Advisors, and the Hispanic Center for Financial Excellence.

The most important declaration you can make for financial independence is to get started today: educate yourself about key financial concerns, create a budget that allows you to live below your means, reduce debt, map out key financial goals and begin investing with even a small amount now to build financial freedom for the future.