“Don’t be a philosopher or a teacher without being a rich man. Money is noteworthy — earn it when you can.” There have been contrasting outlooks on how important is money, finances, and everything that comes with it. While one side of the planet says money can’t buy you happiness, the opposite side shuns this philosophy and acknowledges the need for cash upfront.
This is what financial independence is! Self Financial freedom is the holy grail of Individual finance.
Financial independence isn’t just the power to hide your expenses. This understands to be psychologically free of fears so that you are able to pursue vocations of your choice or take alternate life decisions, without having to worry about sustenance. That being said, it’s a broad term and you will have to do a bit of soul searching to arrive at your own definition of financial independence. Once you recognize what it means to you, here are 10 steps that you simply can fancy start the road to financial independence. Read On!
#1 Arrive at the Desired Entity
Once you define what financial independence means to you and set a timeline thereto, the subsequent step is to know what proportion value you assign to your financial independence. This will require you to study your own financial situation if there are any outstanding loans, your lifestyle, and your income. Arrive at a perfect corpus that you simply would really like to possess by a particular age which you think will offer you financial independence and work earnestly to achieve that goal.
Say you set one’s heart on to have a kitty party of Rs 2 crores by the time you retire so that you are independent enough after your regular source of income stops.
Here’s what you’ll need to concede to reach the proper number :
I. Your present age and the age by which you want to achieve financial independence.
II. Monthly income requirements based on expenses, existing loans, liabilities, medical needs, education of your children, and whether you are a multi-income household.
III. Expected inflation rate ( 3-5%)
IV. Whether you have any existing savings or have invested in any saving instruments the expected returns from them.
#2 Clear Off Your Loans Quickly
A majority of people feel that their incapacity to save efficiently as well as existing loans and liabilities are a big reason behind them not being able to contribute towards building a retirement fund.
It’s important to understand that the primary step towards accumulating wealth is to plug the financial leakages. Make a note of all of your expenses, loans, and liabilities against your cash inflow.
Now prioritize your loan repayment strategy supported the rate of interest each loan attracts. If it’s a brief-term loan like a MasterCard loan, clear it faster to avoid high-interest rates.
This will make sure you don’t fall under a debt trap. The income sheet also will assist you to understand the precise state of your savings and accordingly, you ought to make monthly provisions to pay off your loans.
#3 Create An Emergency Fund
Most financial planners say that your emergency fund should have three to 6 months of your expenses, and it should be during a liquid instrument. An emergency fund is an accumulated that is supposed to help you in case of dire need like a sudden loss of income, variable employment situations, or any other event that creates risk on your finances. For an equivalent reason, emergency funds should be in liquid instruments like ultra short-term debt funds, liquid funds, short-term funds, etc. These are less susceptible to short term fluctuations and the risk of losing money in a short period is lower. Basically in the market only will debt instruments such as liquid funds
Say your monthly expenditure is Rs 20,000
This includes rent, water, and monthly electricity bills, grocery, house help, and other lifestyle expenses.
Your emergency fund should have an amount between Rs 80,000 to Rs 1,50,000.
Yes, it is a considerable amount, and your expenses also increase gradually. Hence accumulating your emergency fund in bits and pieces and moving towards an aspired amount in a phased manner is important.
#4 Know your Budget And Keep Track Of Your Expenses
Cultivating a disciplined saving habit may be a crucial step towards financial freedom. Once you start analyzing your expenses, you will be able to see what are the places where you are overspending and how can you cut down your expenses. This is often a vastly underrated exercise but one that is hugely helpful. So, be mindful of where your money goes. Don’t spend more than you need to. There are many online tools that will assist you to keep a tab on your expenses and moderate them.
#5 Create Additional Sources Of Income
Apart from lowering expenses, you’ll also explore other sources of income that supported your skill sets. You can then switch this extra income towards your retirement to fasten the process. This can even be wont to tackle emergency expenses in order that you don’t need to reduce your investment amounts to specialize in sudden expenses.
#6 Do Proper Tax Planning
Proper tax planning can help prevent tons of cash which will be channelized towards your retirement corpus. By investing Rs 1.5 Lakh per annum in tax-saving avenues under Section 80 C, you’d be ready to lower down your liabilities.
However, thanks to lack of awareness or by procrastinating tax filing till the eleventh hour, many individuals aren’t ready to fully avail of the tax exemption limit and ultimately pay more tax.
This can be easily avoided if you decide on the proper investment avenue that not only helps you save tax but is additionally in line together with your future goals. An investment that will assist you to fetch money and also reduce your tax definitely leaves you with additional cash at hand, making you stronger financially and reducing your dependency on other instruments.
#7 Get Insurance of Sufficient Cover
Insurance plans are another mechanism that saves you from any unexpected circumstances. life assurance lets dependants of the deceased have a financially independent life and insurance allows you to cater to health emergencies. Medical costs are extremely high, and coverings can go up to lakhs.
There is a rule of thumb that says that your life assurance plan should be 10 to 12 times your annual income.
Say you earn Rs 7 lakh per annum; your life assurance plan should be a minimum of Rs 70-84 lakhs.
#8 Choose the proper Investment Avenues
Following the above 7 steps will assist you to sort your finances and provides you a transparent picture of the ultimate monthly inflow and outflow. Whatever remains after you’ve got contributed towards your emergency funds, loans, EMIs, tax-saving investments, daily expenditures, and maintenance costs, constitutes your savings or investible amount.
Now that you simply know that tiny sums put aside and invested monthly can assist you to claim your financial freedom, it’s important that you simply thoroughly understand your risk profile and invest in avenues accordingly.
Ideally, you ought to consider investing during a mixture of safe to moderately risky avenues and begin investing as early as possible to spread your risk. Once you’ve got selected the avenues you would like to take a position in, choose the asset allocation strategy. Asset allocation may be a technique that you simply use to apportion your investments across different investment options that supported your risk profile.
#9 Keep Track Of Your Investments
Once you’ve got selected well-performing mutual funds or fundamentally strong stocks, remain invested for the end of the day. However, keep tracking the performance of individual funds/stocks also because of the performance of your portfolio. Check the progress of your portfolio in accordance together with your goals and targets and make adjustments if need be.
For instance, if your open-end fund investments are consistently giving low returns( for quite 2-3 years) you’ll want to form a switch and reinvest your money to raised performing funds.
#10 Believe Your Goal Is Achievable
A lot of individuals don’t invest actively to realize early retirement just because they believe it’s not achievable. this is often far away from reality. It begins with the straightforward step of committing to saving lots of a minimum of 20 percent of your salary monthly. this is often not an impossible task if you’re mindful of the above points and put financial freedom as your objective above any unnecessary expenses. it’s going to not appear to be much to you but with little savings monthly you repose on the facility of compounding which can offer you solid returns by the time you reach your goal.
Thank you, Learners!
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