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How to create financial independence

March 12, 2021  |  #Finance

A guide to creating financial independence, from preparation, creating a passive income and living your dream retirement.

Financial independence may mean different things to each of you. The definition of financial independence is being able to support your lifestyle without needing to work and can be supported by income through investments or assets. For some of you however financial independence may take on its own meaning of being able to financially support yourself without relying on someone else. Being financially secure is the top life goal for many Australian. So how can you achieve this and ultimately become financially independent?

  1. Improve your financial literacy
  2. Gain control of your finances
  3. Pay down debts
  4. Create a healthy financial relationship with your partner
  5. Boost your superannuation
  6. Build on investments that will provide a passive income

 

If you would like to discuss your options and how you might manage them from a financial perspective, please get in touch.

 

How to improve your financial literacy

While the current school curriculum may teach us many things including maths, there is still sadly a gap when it comes to financial literacy and how to navigate basic finances as an adult. You may learn these skills from a relative or through a bit of DIY but taking the time to educate yourself financially can make a huge difference to your finances for the rest of your life. Researching into things like super, long term investments and even basic budgeting can put you on the right path to becoming financially independent sooner.

So how can you improve your financial literacy? There are now dozens of great podcasts, books and websites that discuss everything from budgeting. We recommend a few of our favourites below.

Podcast:

  • Australian Finance Podcast
  • She’s on the money
  • Equity Mate
  • My millennial money
  • The Australian Investors Podcast

Books:

  • Why didn’t they teach me this at school?
  • Broke Millennial
  • The richest man in Babylon
  • Total money makeover
  • You are a badass at making money
  • Rich dad poor dad

Finance websites

 

You may also be interested in joining our 10-week money bounce back program which provides you with free tools and weekly activities to help get your finances in order.

 

How to gain control over your finances

To gain control over your finances you first need to have transparency of your finances. You can do this by creating a picture of your current financial position that includes your income, expenses, debts, savings, investments and even your super balance.

Once you have that transparency it will become clearer where you need to make adjustments or put more energy towards improving.

Creating a budget is a great place to start. You can download our free budget planner here.

You may also find the following articles useful:

A simple guide to budgeting

Taking control of your finances in 2021

 

How to successfully pay down debts

Successfully managing your debts is essential to becoming financially independent. Whilst you have debts it will be harder to be financially independent as it requires an income to make the repayments.

Generally speaking, you should look to pay down debts with the highest interest rates first such as credit card and personal loans. Then you can start boosting payments on debts that are also growing your assets such as a mortgage, now is a great time to get ahead in the low-interest-rate environment.

Given interest rates are so low, now could be a great opportunity to consolidate or refinance your loans.

Read our guide to managing debt to learn more about this.

You may also be interested in our article “how to manage debt when approaching retirement”.

 

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How to create a healthy financial relationship with your partner

If you’re in a relationship, it’s important to make sure your partner is on the same page as you when it comes to your finances and goals. In the case of creating financial independence, you should try communicating why that’s important to you, what that will look like for both of you, and steps you will both need to take to achieve this.

Finances are one of the main causes for divorce in Australia, so the earlier you address these issues the easier it will be for both of you moving forward.

It can also help to have the perspective from someone outside your relationship as it can be easy for emotions to get involved.  You may also have a hard time prioritising each other’s goals or even getting your partner on board in the first place.

PRONUP is a financial agreement between you and your partner designed to help you achieve your dreams and goals together, and create transparency between you. It can help provide you with direction and take any financial tension away from each other.

We have numerous articles on finances and relationships that you may find useful:

 

How to boost your superannuation balance

Superannuation is the primary source of retirement income for most Australians, however, there is currently a gap between how much you need for a comfortable retirement and how much you have. This is particularly so for women who may be experiencing a pay gap, but also for the partner both male or female who may stay home with the kids while the other partner works. Unfortunately, due to the COVID-19 pandemic, the gap has also widened for those who accessed their super under the Super Early Release Scheme to support themselves financially.

As a result of this, it’s important to consider strategies to boost your super. It’s also important to consolidate multiple super funds you may have and review your super annually to ensure employee contributions are going in and you’re investment options match your goals and circumstances. Below we discuss some other strategies you may be of benefit to you.

Make additional super contributions

Salary sacrifice allows you to make pre-tax contributions towards your super, allowing you to contribute more to your super and lowering your tax at the same time.

For example

You have $300 spare a month you wish to contribute towards your super.

You can salary sacrifice $458 (pre-tax), which after-tax only put you out of pocket $300.

Allowing you to put an additional $158 towards your super each month.

*This will vary depending on your tax bracket

Money Smarts super contributions optimiser tool allows you to see how much you could be additionally putting towards super by salary sacrificing.

You can find the optimiser here.

 

Super Contributions on Behalf of Spouse:

If your spouse earns less than $37,000 per financial year, you can make a super contribution to their super account to boost their retirement savings and earn a tax deduction for yourself. Super contributions of up to $3,000 into a spouse’s account can earn tax benefits of up to $540. Additionally, you may also submit a request to split your super contributions with your spouse to even up any significant balance differences.

You can read more on this and additional ways to boost your super in our article “why making super contributions can benefit you come tax time”.

You may also be interested in our articles:

 

Creating a passive income off investments

Aside from your superannuation, you may have other means of income that will allow you to become financially independent or even retire before the retirement age of 66 where you can access both your superannuation and access pension payments if eligible.

This includes assets that provide you with an income such as rent from investment properties, dividends from shares/bonds & interest from savings. You can read more on ways to invest your money here.

Ultimately, you want to be in a position where your investments are now providing you with an income that can comfortably support your lifestyle.

You may be interested in our articles:

 

Finally seek professional advice, the sooner you start thinking about your future the more likely you are to reach financial independence. You are never too young or too old to see a Financial Adviser, they will be able to help you successfully achieve the steps mentioned above and ensure your investments are aligned to your personal goals and needs.

 

Speak to us today to find out how we can help you become financially independent. 

What you need to know

This information is provided by Invest Blue Limited (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.