Financial independence means having enough wealth accumulated to live on without having to work anymore. Financially independent individuals have assets that generate income covering all expenses. Income earned without being employed is called ‘passive income’.
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Following is the typical approach to achieve Financial Independence:
1) Track Your Expenses: One simple approach to save money is by tracking expenses. Maintain a list of all expenses and make sure that you update the list for each expense. Analyze the list of expenses and eliminate unnecessary expenses in the next month.
2) Less Spend: One way to save money is by spending less. Hold back from spending on unnecessary items. No matter how much discount you get by making the purchase, you must not buy if it’s of no use. Try and find low cost alternatives of expensive items.
3) Calculate Your Financial Independence Number: Financially independent number depends mainly on two things: Current spending and your safe withdrawal rate. Safe withdrawal rate SWR, is the percentage of savings that you can safely withdraw without running out over your lifetime.
The portion of income that you can reliably obtain from investments is the product of total amount you have saved and safe withdrawal rate, SWR. Financial independence number is the ratio of current spending to safe withdrawal rate. For example, if your current spending is Rs 60,000 per year and your SWR is 6%, then you would divide Rs 60,000 by 0.06, resulting in a Financial Independent Number of Rs 10 Lakhs.
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4) Get Tax Efficient: Just because you earn more than the basic tax exemption limit does not mean that you must pay tax. There are certain investment and saving schemes which offer tax deductions. You must explore tax saving schemes and invest in those to avail tax deductions. This not only offers tax benefits, but also helps save money which comes handy in the future.
5) Invest Aggressively And Efficiently: You must invest aggressively across various fields. If you start investing at a young age in equity, you will have an added advantage of recovering when stock markets are down. Explore different investment options and start investing. Investing in real estate can be considered a viable option as it appreciates over time.
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The new retirement planning involves the below mentioned factors:
Goals and Values: Set goals and values for retired life. Jot down a specific plan on how you want your future to be and start working towards achieving it. This helps you make it a reality. Understanding set goals and values facilitates in framing and making important decisions on the journey to achieve financial independence.
Figure Out Expenses: List down expenses for a month and budget for each item. Try and stick to this plan as much as possible. Cut down on unnecessary items from the next month onwards. This helps in keeping a tab on spending.
Explore Ways To Fill The Gap: If there is shortage of funds to cope with expenses, then you must explore the ways in which you can fill the gap. You may also consider cutting down on expenses, that are really not that important.
Monitor and Manage: Retirement planning is not something which is done once and forgotten. Managing expenses helps those individuals who save later in life. The flexibility in cutting expenses makes an unviable plan a viable one or course correct and save a plan when retired. You must monitor and review retirement plan at least on an annual basis to make the required changes.
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