Declaring Your Financial Independence

The Fourth of July holiday is a good time to resolve to clean up your finances and start freeing yourself from debt, particularly because it often starts the two months of overspending on summer fun. Make this the year you tighten up your own personal economy and sharpen your long-term money plans.

Steps to achieve financial independence:

1. Pay yourself first.

This personal finance axiom is one of the wisest, but Americans tend to make it a priority only in challenging times. Set aside a portion of every paycheck, preferably automatically, for long-term savings before you pay bills or spend any of it. Start small and add 1% every six months as you adjust to having less spending money. Build up to saving 15% of all income for retirement.

2. Live within your means.

Or better yet, live beneath them. You’ll increase your future options.

Setting up a budget and sticking to it is one way to help ensure you stay frugal. To really achieve your long-term goals, you may also need to take major cost-cutting actions such as skipping vacation travel for a year, getting rid of a car, or moving to a less expensive home..

3. Keep an emergency fund.

Save a minimum of three to six months’ expenses in a separate interest-earning account. The fund will help cover expenses in the event of a job loss, car accident or big medical bills, or if you want to switch careers and have a financial cushion while you’re doing it.

4. Be smart about credit cards.

Before you can pay off your debt, you have to stop adding to it. Get in the habit of using credit cards only when you must, and don’t buy non-necessities like TVs or iPods until you can pay cash. Don’t get sucked in by sales.

Pay off your card balance monthly. Don’t fall victim to the minimum payment trap, which could keep you on the hook for years and pile thousands of dollars of interest onto what you owe. Thanks to one aspect of the recent legal reforms, credit card issuers now must spell out on every bill how many years it will take to pay off the balance and how much extra it will cost if only minimum payments are made.

5. Insure yourself adequately.

Make sure your medical, home and disability insurance policies are in order, along with life insurance if you have a family. A setback could destroy your best intentions.

But don’t buy more insurance than you need. It will slow down your quest for financial independence.