Welcome back, Gen Z friends!
In Part 1 of our guide, we covered the topic of financial independence.
We covered what it was and what it could look like.
Now let’s talk about HOW to achieve financial independence .
Adopt the Anti-Budget.
Does the idea of scrutinizing a line-item budget sound super lame to you?
Cool. It sounds lame to me, too.
Don’t waste your time with it.
Instead, skim your savings off the top and live on the rest.
This is called the “anti-budget,” because you’re not detailing the amount you spend on groceries vs. electricity vs. toothpaste.
Your job is simple: automatically divert savings from every paycheck. Stash this in a separate account, which you use for debt payoff, investing, or storing cash reserves. Relax about the rest.
Decoding Your Pay Stub
Understanding your paycheck is key to financial literacy – here’s what every paycheck consists of:
- Gross Pay: Your total pay before deductions.
- Taxes: Federal, state, local deductions.
- Deductions: Health insurance, 401k, etc.
- Net Pay: This is what you budget with.
Mind the Gap:
The most crucial money lesson in three words. In between “what you earn” and “what you spend,” there is a gap. Your job is to make this gap as wide as possible.
There are two ways to increase this gap: Earn More or Spend Less. Both are critical. But the more you make, the easier it is to save – and the more substantial those savings become.
Frugality is necessary, but not sufficient. Earning more, on the other hand, fast-tracks your path to freedom in ways mere penny-pinching never could.
Your mental bandwidth is limited, and if you devote your precious brainpower to clipping coupons and chasing buy-one-get-one-free deals, you won’t widen the gap – not in any meaningful way.
Boost Savings in One Percent Increments
- Pay off debt: Credit cards, payday loans, and other debt with double-digit interest rates should be paid off aggressively before any other financial priorities. This stuff keeps you stuck in a debt cycle.
- Emergency Fund: 3-6 months’ expenses in a high-yield savings account. Before you do any other investing, build a cash cushion of 3-6 months basic living expenses. This protects you from having to go into debt when unexpected expenses come up. Feel like you can’t save anything? Start with one percent of your income, which is $10 for every $1,000 that you earn.
- Short-Term Goals: Save for vacations, weddings over 1-3 years.
- Medium-Term Goals: House down payment, grad school in 3-5 years.
- Long-Term Goals: Consistent savings for retirement and financial independence over decades.
There’s a limit to the amount you can save. Your income, however, holds unlimited upside potential. Focus on finding opportunities.
Retirement Planning 101
Navigate the world of retirement accounts:
- 401(k): Workplace retirement account with pre-tax (or post-tax if a Roth-401k) contributions. If your employer offers a 401(k) match (free money!), contribute at least enough to get the full match. This is a 100% return on your money that shouldn’t be passed up.
- IRA: This is similar to a 401k only it’s an individual retirement account separate from your work company (Roth or Traditional).
- Invest Smart: Opt for low-fee index funds over actively managed ones.
The Art of Side Hustles
Implement the anti-budget; boost your savings with one percent tweaks, and then turn your attention towards the more lucrative side of the equation: earning more.
Create a “side hustle,” a microbusiness you run for roughly 5 to 10+ hours per week.
This holds two benefits:
- You hold multiple streams of income. Don’t rely on your boss for 100% of your income. Now that’s risky.
- You can harness every dime of this extra income into boosting your net worth. After all, you don’t “need” this money. You’re already living without it.
There are two types of side hustles:
- Gig Work: Quick money with limited upside (Uber, Doordash). Good for the short-term but don’t get stuck here.
- Small Business: Build for growth potential (consulting, coaching, crafts).
You can read hundreds of articles about earning more on this website, including:
Benefits of Multiple Income Streams
Discover the power of diversifying your income:
- Accelerate Financial Goals: Every extra dollar earned boosts your net worth.
- Surplus from Side Hustles: Additional income accelerates financial goals.
- Money and Freedom: Your money buys your time and opportunities.
This guide contains the basics, but financial independence is an ongoing journey!