6 Steps that will take you to Financial Freedom
The Independence Day is celebrated every year on 15th August and this year, the country is celebrating its 72nd Independence Day. This day is commemorated as the Independence Day of India, as India got freed from the clutches of British rule.
Independence is the essence of life which gives an individual the sense of individuality, freedom and liberation to lead his or her own life within the specified parameters of society, legislation and the constitution.
One such kind of independence is being financially independent. It gives you the freedom to lead a life on your own terms and without having to worry about managing finances and fulfilling goals.
Now, what exactly is Financial Independence? Financial Independence means that you have adequate money to survive without further income. To be precise, it means that if you were to quit working today, you would not lose any substantial part of your way of life due to a lack of a working income. Financial Independence is basically a state of having sufficient personal wealth to live your chosen lifestyle, without any need to work regularly to fulfill the basic necessities.
By attaining financial independence, you can enjoy the below mentioned benefits.
- Freedom to live on your terms: If your investments give you returns with which you can easily pay your expenses, then you are in a situation to decide your own terms regarding how you work, who you work with, and you are not bound by the employment contracts.
- Live your own lifestyle: Having financially independence means you have enough funds to survive, even if you lose your job. You don’t need to rely on unemployment pay cheques that only cover the basic necessities. With financial independence, you can continue to live a comfortable lifestyle.
- Extra spending: Your investments and savings can help you realize surplus of income that you would not otherwise receive. This additional income helps you to spend more on your lifestyle or better to invest towards building assets that would also generate income in the near future.
- Early retirement: If you can live entirely on income from investments or interests from savings, early retirement could become a reality. Having financial independence can easily afford early retirement.
- Peace of mind: If your passive income can meet all your current & future financial expenses, you can enjoy greater flexibility. You are not bound to live a stressed life and live life on your own terms.
If you are really looking to accumulate and improve your financial strength, here are the following tips that will help you attain financial independence.
Setting goals and having a plan of action is extremely essential to achieve those goals. Unless you know your destination, you will not be able to take a right route, how much fuel you need to reach the destination, etc. The first step towards achieving financial independence is to identify and set your goals. Once the goals are identified, you need to quantify the goals and set the time frame say 3 years, 5 years, 10 to 20 years for achieving those goals. Here, you can set a goal like ‘being financially independent by the age of 45 years’. While setting the goals, don’t ignore the factors that could hamper your move towards achieving it.
Once the goals are set, you need to control your expenses. It is advised to spend on things only that you need and don’t make superfluous expenses. You need to first put apart the savings from your income/earning and then consider spending. Impulse purchase should be avoided, as it can hinder you to achieve higher savings. It’s better to make a budget and make expenses accordingly. Also, do regular checks on you/your family’s expenses, so you can have a sufficient amount of money for investments that will help you realize the goals. In case, you are not able to achieve savings, you may think over ways to compliment your existing income. You can get a secondary income by a part time job or work at home/freelance job.
The earlier you start savings and start investing, the sooner you will be able to build your wealth and become financially dependent. As soon as you start earning, you should start investing to achieve your financial goals. Investing your money works in favor of you, as you can earn money from the invested funds. When it comes to investing, you should set a long-term goal that can fuel your investments to grow with the help of compounding. It would be a prudent choice to have an investment portfolio with a good mix of equity, debt and money market instruments, depending on your risk taking capacity.
While you are focusing on investing, don’t forget about tax planning. You are advised to make some investments that help to save tax, pay taxes on time and file returns regularly. You can also consult with your chartered accountant who will help manage your taxes effectively.
If you are seeking for early financial independence (say by 45 years), you need to have the asset allocation as required to meet your financial goal/s. Don’t ever put all your funds in a single asset class, diversify your investments that don’t just let you lose all your investment money, but also ensure decent returns as well.
In case, you want to plan for your retirement, you may invest with pension plans that will ask you to invest regularly and you will receive a lump sum amount at the vesting age and a monthly pension amount is also payable. Investing with a PPF account is also a fair option, when looking to have a backup for your post-retirement life.
The next step to climb towards financial independence is managing risks. You never want to get your plan thwarted due to any unforeseen eventuality such as death, health issues or sudden job loss.
Cover Life Risk: In order to cover death risk, it is advised to buy a pure term insurance plan which at a low premium provides a large life insurance cover. In case, you want to accumulate a corpus amount say after 20 years and in the event of your death, your family may have to face a major financial setback. However, a term life insurance plan secures your family financially and pays a lump sum amount that can help your family to fulfill various financial expenses.
Cover Health Risk: Health issues may occur to anyone and the hospitalization expenses may burn a hole in your pocket. It is thus always better to get an adequate health insurance cover for yourself and your family. A health insurance plan pays all your hospitalization expenses that you may have to pay from your own pocket, in case you have not opted for a health plan.
A Health Insurance cover does not let your finances destabilize and thus, it plays a key role in achieving financially independence.
Cover Job Loss: In order to cover the fear of job loss, you may buy a job loss insurance plan. However, it is advised to make a contingency fund that covers expenses for 3 to 6 months, in case of job loss.
Managing the risk triangle of death risk, health risk & job loss will ensure that you are on the right path towards realizing financial independence.
Getting out of debt is a major move and extremely essential to fulfill the financial goals. Debts such as loans always hinder your dream of financial independence. With time, you have to take loans to buy a car or home, but you need to clear them off as early as possible. Moreover, the lesser money you pay towards loan EMI’s, the more money you can put towards achieving your financial freedom. If you have investments which gives you back less returns than the interest you pay for making such investments, it would be wise to sell off those investments and get out of debt. Most people owe a huge amount of debt on their credit cards, even without thinking of his/her re-payment capability. In case, you have taken too much of debt on your credit card that you can’t pay, it would be a prudent move to resolve your debt with a ‘settlement’ option. If you have borrowed money from a friend or relative, pay it back to ensure zero debt on your side.
Apart from investing, it’s also important to build assets such as buying a home. Although, buying a home in a well-developed area is not an easy affair, but having your own home not only gives you a sense of security, but it is also building an asset for you and your family. Inherit assets and not liabilities to your kids.
Being financially independent requires investments to be done smartly and in a regular manner over a long period. After all, every freedom movement requires serious efforts and you only need to save and invest to achieve your goals and thereby attain financial independence.
Gift your family the financial self-reliance this Independence Day!