4 Simple Tips to Achieve Financial Independence

1. Create and follow a budget.

This is the very first step to taking control of your personal finances. Everyone has different needs and wants, so this needs to be specifically tailored to you. Some people like to write down their budgets on paper, but I am a huge fan of Google Sheets. They can be accessed from anywhere on any device, and you can share your budget with your significant other.

The best way to create a budget is to begin with your monthly income. Look at your pay statement, and write down your after tax income.

The most important expense is YOU. Pay yourself first. Put a set amount aside (aim for 25-30%) for your future nest egg, and let it grow. Don't touch it.

After paying yourself, you can allocate the rest of your income to your fixed expenses. The biggest expense is usually housing. You should typically spend no more than 30-35% of your income on shelter. If you spend more than that, you either need to downsize your living situation, bring in more income, or move to a more affordable city.

After fixed expenses, the remainder of you income can allocated to your variable expenses. This is all your food, transportation, clothing, medical, car or house repairs, activities, hobbies, etc. This should be no more than 40% of your income.

Like most FIRE enthusiasts, I am a firm believer that NOBODY should ever have a car loan. If you have a vehicle with a car loan, you can not afford it. Sell it right away, pay off the loan, and save up to buy a good quality used vehicle between 5-10 years old. The average Canadian household spends 15% ($12,000 per year on average) of their income on transportation (1). That is insane. Cutting transportation costs to just $300 per month for the average 35 year career and investing the difference of $700 per month at 8% would generate $1,600,000 for retirement! A recent survey (2) showed 26% of retirees still had a car loan! No wonder the vast majority of Canadians are worried about retirement.

Make a simple budget, like the one below, and follow it. Track your spending manually, using spreadsheets, or by using software such as Mint.com.

2. Build credit and check your credit report.

Canada is becoming an increasingly cashless society (3). It's nearly impossible to be part of society without access to credit and a credit card. Everyone should have a credit card that gives cash back or rewards, but does not charge a yearly fee (4).

Having a credit card is convenient, they provide benefits such as car rental insurance, and it makes it much easier to track spending.

However, in order to be able to take advantage of the benefits, the credit card must be paid in full every month before the due date in order to avoid the costly interest.

Some of the best ways to build wealth are through leveraged investing. However, in order to ensure that you get the best possible interest rate on your investment loan or investment LOC, you need to check your credit report at least once a year.

There are several ways to check your credit report. You can get a free yearly credit report directly from Equifax or Transunion. Another convenient way is to sign up for Borrowell or Credit Karma. Updates to your credit score and report are posted every week or two, and are also emailed to you.

3. Invest at least 25% of your income.

Most Canadians don't know how simple it is to achieve financial independence. It can be difficult, but it is very simple.

SPEND LESS THAN YOU EARN.

Last year, Canadians saved only 0.8% of their income (5)! With a savings rate that low, Canadians will have no nest egg during their golden years. They will have to rely entirely on CPP, OAS and GIS, which were created only as a supplement to personal retirement funds.

Most financial experts recommend that people should save 10% of their income for retirement. However, with a savings rate like that, you would have to work for 51 years!

Things start to look a lot better once the savings rate increases to 25%. At that rate, your working career would only have to be 32 years. That is assuming a 5% growth rate, and a 4% withdrawal rate once retired (6).

If you are able to save even more, your working career gets exponentially shorter. A 50% savings rate equals just a 17 year career.

But where do you put your savings?

Recently, Canadian ETF providers have come out excellent with all-in-one ETF funds. For example, VGRO contains a basket of 80% stocks and 20% bonds with an MER of 0.22%. iShares' XGRO ETF is also an 80/20 mix, with an MER of just 0.18%.

Personally, I prefer 100% equities, so Vanguard's new 100% all-in-one stock ETF VEQT would be perfect for long term growth savings. To purchase these ETFs for free, open an online brokerage account such as Questrade (use my QPass key 575712653417044 to receive a $25 bonus).

4. Make a plan.

"A goal without a plan is just a wish." - Antoine de Saint-Exupéry.

Most people dream of retiring early, but just continue living their life without planning on breaking the status quo.

If retiring early is what you want, or if you just want financial independence, you need a plan.

Your plan needs to be SMART.

Specific

Measurable

Achievable

Realistic

Time-Bound

For example, my personal goal is to fully retire at age 43 using my pension and dividend income. This goal is specific (I know exactly what I'm aiming for), it's measurable (I can check my investments to see if my goal is on track), it's achievable (even using conservative estimates, I can achieve it), it's realistic (my goal isn't one BILLION dollars, it's only a million), and it's time-bound (I have 15 years to achieve this goal).

When you make your plan, include anything that can affect it. This includes potential job/career changes, family changes (marriages, children), or potential relocation. Include debt/mortgage payments, budgeting, investing, insurance, and maintenance costs. Include any lifestyle changes that will help you achieve your goal, like free hobbies (hiking, running), and cutting out expensive or unhealthy addictions (smoking, excessive drinking, overeating).

Most importantly, write down your plan. Tell your friends and family so they can help you along the way. Check up on your plan frequently so you don't stray from your path. If you do run into obstacles, adjust your plan, and keep going. No one is perfect, and life happens.

Follow these 4 simple steps, and you will be well on your way to Financial Independence!