Here’s how to achieve financial autonomy

We can say that an individual has financial autonomy when he is able to support himself without the help of others.

Whether they work for a company or in their own business, as an informal or formal worker or as a civil servant, they are responsible for their own bills.

So you might think:

A person who works and pays their commitments has financial autonomy.

Indeed, they are able to support themselves from the income they generate, but it goes beyond that:

This person is able to invest 1% of the money they earn, even if it’s not regular.

It’s also worth mentioning that a person who is financially independent has a full or almost full emergency fund.

Most importantly, they have no debts.

They only have long-term debts, such as a mortgage, but everything is well organized in their budget.

So, if a person is in default or can’t make ends meet at the end of the month, they don’t have autonomy.

Financial autonomy, freedom and independence.

To understand the differences between the three concepts, it’s interesting to think of a ladder.

The first rung is autonomy, where, as we said above, the individual has the ability to support themselves, has no debts and is able to invest at least 1% of their salary.

The second step is financial freedom, which is the ability to support oneself and invest at least 10% of one’s income.

An interesting feature is that the person has the peace of mind to make decisions based on their values and goals, without having to look at every penny in their pocket.

Unlike a person who only has financial autonomy, a financially free individual can change their area of work without worrying about their future in a year’s time, for example.

This is because, as well as investing more, they have a robust emergency fund.

This fund represents 12 times your cost of living.

So, if you spend US$3,000 a month, you have US$36,000 saved.

This allows him to make riskier decisions, such as changing jobs or even starting a business.

But note that a person with financial freedom only has money to support themselves for a certain period of time.

Financial independence

The person with financial independence, on the other hand, has enough financial resources to support themselves for the rest of their life.

This is because they have reached the stage where they can live off the income generated by their assets and investments.

As a result, they don’t depend on anyone or the government, let alone their job.

Despite this, many who are financially independent continue to work simply because they enjoy it, not because they have to.

Note that there is no specific amount of money for a person to have financial autonomy, freedom or independence.

This is because the amount of money changes according to your cost of living.

For example, a teenager who needs US$700 a month to live on and is able to invest 10% of their income can claim to be financially free if they have US$8,400.

On the other hand, when we consider a family man who needs US$2,000 a month to support his wife and children, he can say that he is financially free if he has US$24,000 saved.

Both are financially free, but the amount they need to save changes depending on their reality.

Top tips for achieving financial autonomy

First, don’t limit yourself by age.

Simply because autonomy is the first step up the financial ladder, you might think:

Then, only young people at the start of their careers can have this kind of autonomy.

Independence, on the other hand, is a retirement plan that should be achieved after the age of 50 or 60.

Ideally, you shouldn’t set an age limit.

If you are young and know how to organize yourself, you can achieve financial autonomy in a few months.

Likewise, if you are 30 or 40, you can achieve this autonomy and then have financial freedom because there is no age limit.

Similarly, in the case of independence, there are people who have enough financial resources to retire at 30.

So there is no age limit.

The deadlines are set individually.

Now let’s look at the characteristics of a person who is financially independent:

• They are able to support themselves from the income they generate;
• They have no debts.
• Complete or almost complete emergency fund;
• They are able to invest at least 1% of what they earn.

How can you support yourself?

The first big step is to understand how much you cost each month.

This includes all the expenses you have each month, whether fixed or variable.

For example, consider your housing costs, such as rent and condominium.

As well as groceries (food, toiletries, cleaning products, etc.).

Consumer bills (water, electricity and gas), TV, internet and health insurance.

It’s also worth including subscription services (Spotify, YouTube, Netflix), cleaning services (if you hire them), monthly fees (gym, college, course, etc.).

You should know exactly how much each one costs and how much it adds up to.

Next, estimate your variable expenses.

If you’re already in the habit of using a financial control app or spreadsheet, this is easy: 

Add up expenses such as pharmacy, clothing, electronics, leisure, education, transportation, among other sporadic expenses over the last few months, and make an average.

Otherwise, you can just calculate the average off the top of your head, although it’s not precise.

Once you have two figures in hand (fixed and variable costs), add them up and find out if you can support yourself on your current salary.

If the answer is yes, great! You’re well on the way to finally saying:

I have financial autonomy!

However, if the answer is no, you should look for new ways to increase your income or save on expenses.

In our article on extra income, you’ll find out about the best options for increasing your income.

We also have an exclusive article with tips for saving money.

Get out of debt

A person who is financially independent doesn’t have any kind of debt.

Therefore, they don’t have loans, and they know how to check their credit card bill.

By “controlling their credit card bill”, I mean that this person only buys when they have money.

In other words, they don’t run up credit card debts and jeopardize next month’s salary.

Always remember that debt is everything you “bought” and didn’t pay for.

So, if you don’t have a loan, but you always use your credit card without having worked for the money on the bill, you should stop doing this in order to have financial autonomy.

Always think of the worst-case scenario: if you don’t make the money for next month’s bill, how do you intend to pay for it?

On the other hand, if your problem is a loan, organize your finances so that all the extra money in the month is used to pay off this debt.

Your priority should be to pay off the loan as quickly as possible, as this will ensure that you get a discount on interest rates.

If you need more tips on getting out of debt, check out our article on debt snowball.

Emergency fund for financial autonomy

In order to be financially independent, your emergency fund should have enough money to sustain you for 6 months.

If you are working and have already started to structure your fund, this can also mean that you have autonomy.

For example, you already have enough money to support yourself for 3 months.

The emergency fund guarantees your peace of mind in difficult times, such as when a family member falls ill, your car breaks down, or you need to make repairs to your home.

We have a complete article with all the tips for structuring an emergency fund, so it’s worth a visit.

Also, bear in mind that before setting up your emergency fund, it’s worth having a rainy day fund.

By accessing the link above, you’ll understand what this fund works for and the best tips for doing it.

Invest at least 1%

You may be able to support yourself, get out of debt and have your emergency fund, but if you use your entire monthly salary, you still don’t have any financial autonomy.

You might think:

Invest at least 1%. That’s very easy!

But it seems that most of the time we have difficulty with what appears to be the simplest.

If your salary is US$1,000, that means that at least US$10 should be invested each month.

But if you don’t make this investment a priority, you certainly won’t be able to follow this step towards autonomy.

The best tip for investing is to treat it as just another one of your fixed bills.

See it as something you have to pay for every month to ensure your survival.

To do this, set up an automatic money transfer to your investment account.

This way, as soon as you receive your salary, the money is automatically sent to the investment account.

Doing this will make investing a natural part of your life and ensure that you have financial autonomy.

And, of course, don’t limit yourself to percentages or numbers.

You shouldn’t invest just 1% of your income. This is just the initial step.

As the months go by, the percentage will increase.

The more you save and invest, the faster you’ll reach the final step: financial independence.

Daniel 30 de September de 2024