Financial Independence is living life on your own terms. It’s having the money to pay living expenses without having to work for the rest of your life or being dependent on others. Financial Independence is a great thing, but it remains a pipedream if you don’t take steps to achieve it.
You work from graduation to retirement with little time for financial independence. The consequences are no retirement savings as you spend what you earn. But, when you earn just a fixed salary each month, how can you achieve financial independence?
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The biggest enemy of financial freedom is procrastination. This is the art of postponing what can be done today. You can never achieve financial freedom if you postpone it.
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You must cut on discretionary expenses and save at least a part of your salary. This can be 25-30% of your monthly salary. The more you save, the faster the money compounds.
Let’s understand the power of compounding with a SIP calculator. You invest Rs 5,000 a month in a mutual fund scheme through SIPs. Assume 11% compounding returns and you invest for 10 years. You will have Rs 11 Lakhs after a decade which is quite a sum. This is the power of compounding.
Now, how much will you have at retirement on investing 20-25% of your salary?
Equity investments help multiply wealth. Make sure you invest in equity at a young age. Invest in equity mutual funds and stocks for the long-term. This is a time horizon of 5 years or more.
Invest in equity mutual funds through systematic investment plans or SIPs. This is a method of investing in mutual funds, where you invest small amounts regularly in a fund of choice.
Equity helps create sufficient wealth and achieve financial freedom at a young age.
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Different financial goals like health, marriage or higher education require separate time horizons. This is why you must do the research before locking-in on an investment. Invest based on risk profile.
Never follow the herd approach when investing. Stick to your action plan across the investment horizon. Avoid making impulsive decisions. Volatile markets have no effect on your portfolio if the investment horizon is sufficiently long.
Create a liquid fund with at least 6 months of living expenses. Make this 3 months if you are unmarried. Invest in liquid funds for emergency corpus. This money will come in handy if you lose the job, face health issues or have to repair and renovate your home.
Investments are not fire and forget. You have to continuously monitor and track them to earn good returns. Make an investment plan and stay on track.
Practice flexibility in investments. Dedicate time and effort and continuously monitor the portfolio, taking corrective action if necessary. Being overconfident in investments can be folly.
Reduce unnecessary expenses if you want to achieve financial independence at a young age. Squeeze the juice out of every rupee you earn. If you have taken gym membership, make sure to attend the gym regularly. Keep track of all expenses and pay bills in time to avoid penalties.
Follow this rule of thumb: If your net worth is more than 25 times annual expense, you are financially free.
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Money is never truly yours unless you repay all loans. So, get rid of debt fast. Understand what’s a good loan and a bad loan. If you take a personal loan to go on a foreign holiday it’s a bad loan. Personal loans and credit cards charge high interest. Personal loans charge 14-22% interest rate a year and credit cards 2-3% a month. Personal loans are emergency loans and must be used only in emergencies.
If you are already in the debt trap, get out fast. Get rid of high-cost loans like personal loans and credit cards. If you must avail loans; look at loans against securities. These are loans against PPF, loan against life insurance, loan against FD or loan against shares or mutual funds.
These tips should keep you far from the debt trap. Make sure EMIs don’t exceed 50% of income, don’t take too many loans or you could struggle with repayments, keep fixed expenses like rent, kids education fees and so on, less than 70% of expenses. Never withdraw cash from the credit cards as this has high cash advance fees of 2.5-3.5% of the amount withdrawn each month.
Make sure you have a life insurance plan, especially term life insurance to protect loved ones on an untimely demise. This is a pure protection plan which offers risk cover. Premiums are low and you can easily opt for a sum assured of a crore. Take sufficient term insurance so that your family can repay loans if you are not around to do the job.
Avail health insurance to cover medical emergencies. This protects your savings as out of pocket medical expenses can leave you broke. Life and Health insurance form the very basis of financial freedom.
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