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7 Steps to Achieving Financial Independence

Declare Your Independence


NEW YORK (MainStreet)—At the heart of the lively parades and fireworks extravaganzas each Fourth of July is a celebration of America's independent spirit. While our forefathers sought to break free from the tyranny of the British, many of today's Americans envision a different kind of liberation: financial independence.

"Although it means different things to different people, we like to think of financial independence as the point at which an individual no longer has to work to sustain their chosen standard of living," says certified financial planner Tom Orecchio of Modera Wealth Management.

Of course, before you start drafting that letter of resignation and picturing yourself lounging on a remote island in the Caribbean, keep in mind that unless you win the lottery, marry rich or inherit a large sum of money, independent wealth rarely happens overnight. Still, it can be achieved by making smart financial decisions in the years to come.

To help get you on road to financial freedom, we asked several financial advisors around the country to share their top advice. Read on for seven crucial steps to follow along the way.

Create Goals


Are you striving to be a multimillionaire, or could you live comfortably on much less? The answer varies from person to person, so start by coming up with your own definition of financial independence.

"Write down your short-, medium- and long-term goals," suggests says Debra Morrison, a certified financial planner for the wealth management firm Trovena. "Written goals are more likely to be achieved than non-written ones."

Although your goals may seem far off, try not to get discouraged and instead remind yourself that you do have control over your financial future. "Building financial independence is a brick-by-brick approach," says certified financial planner Michael Kay, president of Financial Focus, LLC. "Each spending, saving, and investing decision is made around whether it brings one closer to or farther away from their goal of financial independence."

Examine Your Finances


Once your goals are set, it's time to take a good, hard look at your current financial situation.

For instance, will your income, savings, spending habits and investments allow you to reach your goals—and how many years will it take to do so? If you need help figuring this out, consider meeting with a financial advisor, who can analyze your finances and tell you if you're on the right track. "If financial cash flow projections indicate you cannot achieve your goals, you should modify your goals, change investment and saving strategies, or increase income, perhaps by changing jobs," says certified financial planner James S. Gallo, president of KDI Financial Planning LLC.

Start Saving Aggressively


We know, you've heard this advice countless times, but our experts say that saving money really is the key to financial success.

"The surest way to achieving financial independence is by living below your means and saving aggressively," says Orecchio.

How much should you save?

"I always believe in saving 10% or more of everything you make so that as each year goes by, you have something to show for it," says Rob Siegmann, chief operating officer and advisor for Financial Management Group http://www.fmgonline.com/home. "I believe the lifestyle of living on 90% is not that much different than living on 100%."

Our experts also say that you should start putting money aside as early in your life as possible to maximize your savings.

"Start saving before your have children," says Theresa A. Harezlak, certified financial planner for Savant Capital Management.

"Once children are in the picture the extra expenses of tennis shoes, dance lessons, basketball teams, private schools and so on soak up a lot of extra money." For some extra assistance, consider using money-management software such as Quicken, which allows you to track where you've spent money and set up a realistic household budget based on your spending history.

Get Out of Debt


Of course, you can't be in the black unless you get yourself out of the red, first. While debt can often seem daunting, you can dig yourself out of it by following some basic tips. "Carry Post-it notes in your wallet to record all expenses for the next 30 days, then eliminate excess costs one-by-one," suggests Morrison. "Pay off the highest interest credit card first, then the next highest interest-rate card until they are eliminated."

Contribute to a Retirement Plan


Many Americans envision retirement as the time in their life when they will enjoy financial independence at last. Unfortunately, far too many people don't have enough money to maintain their current lifestyle when they reach retirement due to poor planning. To prevent this, begin contributing to a retirement plan as early as possible in your career. "Defined benefit pension plans are largely a thing of the past and employers have shifted the responsibility for securing retirement to the employees in the form of a 401(k) plan," says certified financial planner Jeff Broadhurst of Broadhurst Financial Advisors, Inc. "You should be saving as much as you can into your 401(k) plan or else you might have a very, very difficult retirement."

How much should you put away into your 401(k) retirement plan?

"Every participant should put away the maximum possible," says Broadhurst. "In 2013, the maximum is $17,500 per participant with a $5,500 catch-up provision for participants that are over age 50."

Many employers will match your contributions up to a certain percentage, but Broadhurst says that your goal should be to eventually contribute an even higher percentage than that. As your salary or wages grow, you should increase the amount you're contributing until you reach the maximum amount allowed.

If your employer doesn't offer a 401(k) plan, our experts advise that you should still set up a retirement account, such as a traditional individual retirement account (IRA) or a Roth IRA.

To help estimate how much money you'll need to retire, consider using the online tool WealthRuler from TD Ameritrade.

Take Risks


Sorry to break it to you, but unless you're a high-paid corporate executive, it's pretty darn hard to become financially independent from your paychecks alone.

"The average employee will never become truly wealthy or independent," says Broadhurst.

The good news, Broadhurst says, is that financial freedom can be achieved if you're willing to take risks.

One type of risk is buying and selling real estate. If you go this route, consider purchasing a home with extra space and renting it out. "Buy a duplex when you're young and just starting out," says Harezlak. "Live in one side and let the rent from the other side pay your mortgage. Save all that money you would have spent on the mortgage and get a good head start."

Another risk includes starting a business in the hopes of increasing your income and one day even selling the business for a large profit. "Starting a business is extremely risky—most new small businesses fail, though the payoff can potentially be large," says certified financial planner Bryan Wisda of Summit Wealth Management of Arizona LLC.

Adds Broadhurst, "Even turning a hobby into a side business may allow that person to earn extra income and have tax advantages they wouldn't have if they just hold a regular job."

Invest


Another type of risk we'd like to mention is investing. While the strategies for potential success are varied, our experts offer a few basic tips to keep in mind.

When it comes to investing in the stock market, be prepared for your money to be tied up for a while. "Anytime someone invests in the stock market, that portion of their money needs to be invested for a long period of time, approximately 10 years or more," says Broadhurst. "If they need their money for some capital purchase such as buying a house, paying for college, or cash flow for retirement, then that money should be invested in safer and more stable assets."

You should also do your research before investing. "Educate yourself on investing strategies by reading many books or seek professional advice or else you will be gambling instead of investing," says Gallo. "You should also understand the risk you are taking by looking at historical data in returns and losses of various indexes, such as the S&P 500."

While making a fortune on your investments is no guarantee, our experts say that you can reduce risk by diversifying your investments among different asset classes, such as stocks (both domestic and international), bonds and cash (money markets).

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