We celebrated our 72nd Independence Day a few days back.
The essence of being independent gives us the courage and freedom to lead a life on our own terms.
Financial independence is one such freedom which allows us to live our lives as per our own choices.
To win independence, India had to wait 200 years.
But to become financially independent, you need not wait for that long.
In this article
- Financial Independence: What Is It?
- Financial Independence: Why Is It Needed?
- Financially independence: Benefits
- Financial Independence: How to Achieve this?
- Financial Independence: Why Mutual Funds?
- Why should you invest in mutual funds to reach financial independence?
- Financial Independence: Why few achieve it?
Financial Independence: What Is It?
Financial independence is a state in which an individual or household has sufficient wealth to live, without having to depend on income from some form of employment
In other words, financially independent people have assets that generate income that is at least equal to their expenses.
Not having any debts doesn’t mean that you are financially independent. Neither switching jobs without any trouble.
For a significant number of people, financial independence means being able to do whatever they please without worrying about money.
In reality, only the very rich might be able to do that. But that doesn’t mean you absolutely need to become a billionaire to be financially independent.
There are many ways to reach financial independence, and it’s not just for the wealthy.
Some people achieve this by saving and investing over many years while others build successful businesses that can generate income without daily supervision.
Financial Independence: Why Is It Needed?
We need money to meet our present and future financial needs.
Financial independence is necessary for each one of us so that we are not dependent on other people to support us for our requirements.
You cannot be truly free without financial security.
Every time you depend on others for money, you are reducing your own capacity to have a say in important matters.
Financially independence: Benefits
1. Greater job security
At the time of recession, your company may ask you to leave.
In a scenario as such, you won’t be rattled if you have financial independence and can comfortably take your time looking for a new avenue in the job market.
You won’t be crushed under the burden of not knowing how you’ll pay for your daily expenses.
2. Stop thinking of various risks
Your tendency to take risk increases if your daily needs are fulfilled.
You can pursue your dream of starting a new company without any hesitation.
And you can even try switching jobs to an industry you’ve never worked for.
Not to mention, you can do other amazing things like traveling the world, work for a charitable organization, and so much more!
3. Listen to your inner self
There are many things we like to do that do not pay much or do not pay at all.
If you have financial independence, you can pursue any profession you like, without actually worrying about how much it pays you.
4. Extra spending power
Your assets and investments can realize additional income you wouldn’t otherwise receive; consider it a bonus that you earn, irrespective of your salary.
5. Comfortably retire when you need/want to
For many, this is the number one motivator for being financially independent.
We have seen friends and family forced to retire because of health concerns even though they weren’t financially stable.
Hence, financial independence will help you to retire comfortably on your own terms.
Financial Independence: How to Achieve this?
Financial Independence is an amalgamation of two words, “financial” and “independence”.
Financially pertains to the art of managing money and independence signifies a state of autonomy, wherein, you are capable of doing things on your own
So, if you wish to attain a state of financial independence for yourself and your family, then you must have a clear and disciplined approach towards your financial goals right from the day you start investing.
You need to make strategic long-term investments across diverse assets.
Mutual Funds are one such investment option that helps you prepare for the future. Mutual fund schemes offer various easy, smart and convenient options to meet specific needs of investors.
Financial Independence: Why Mutual Funds?
Mutual funds have become an incredibly popular option for a wide variety of investors.
A mutual fund is an investment instrument, which is basically a collection of stocks and/or bonds, managed by professionals of an asset management company.
Investors will put their money in different types of mutual fund units depending on their risk appetite and duration of the investment.
Why should you invest in mutual funds to reach financial independence?
1. Achieve your desired goals
Mutual funds can help you achieve different kinds of goals.
Debt-oriented mutual funds can help with short or medium term investment goals. They can add a blanket of security to your portfolio.
On the other hand, Equity oriented mutual funds help achieve long-term investment goals and help you earn higher returns.
Therefore, mutual funds provide you with the flexibility of choosing your investment goals to achieve financial independence.
2. SIP it
In a mutual fund, all you need is a small sum of money to start building your corpus.
Mutual funds come with the option of Systematic Investment Plan (SIP). SIP is a way of investing money in mutual funds at regular interval.
Invest as much as ₹1000 or ₹500 or even ₹100 every month in a mutual fund through an SIP and see your money grow over the years.
With the benefit of rupee cost averaging, investing in mutual funds via the SIP mode becomes most favorable.
3. Immediate liquidity during emergencies
How easy it is for idle cash lying in bank accounts to be spent. Use this idle cash wisely and earn a return. Through Liquid Funds, your idle cash can be ready for the important times like medical emergencies.
liquid funds are debt mutual funds that invest money in short-term market instruments like treasury bills, government securities, etc. These funds can invest in instruments with a maturity of up to 91 days.
Your hard-earned money that lies in a savings bank account fetches you only 4% interest per annum. However, the best liquid funds have returned as high as 6-7% on an average in the past 1 year period, on an annualized basis.
4. Plan for your kids
You can use Mutual Funds to not just invest in yourself, but also to nurture your kids’ lives. There are many Child Plans available through which you can build a corpus for your kids’ higher education and other needs.
5. Retire wealthy
A truly independent person would wish to remain so even after retirement.
Investing in equity funds over a long period can help you earn an income even after you retire. Once you retire, you can use Systematic Withdrawal Plan (SWP) to earn a fixed sum every month.
SWP can be the best option after retirement for those who will not be getting a pension once they stop working. SWP can act as a pseudo pension for them.
6. Financial independence for your family
In life, there are times when your family members require your financial assistance.
In such cases, giving money at one g, isn’t the most helpful approach.
Your loved ones might need your help for an extended period of time and on a regular basis.
Under such circumstances, you can think of dedicating an SWP to a family member. Mutual fund houses have started offering unique options to transfer money to your family members.
7. Tax benefits
The more you earn, the more taxes you may need to pay. However, if you smartly manage your tax, you can save larger amount of money.
Equity Linked Saving Schemes (ELSS) are a popular choice for many investors as they are an excellent way to grow your money and save tax at the same time.
Among all mutual funds, ELSS funds offer tax benefits under section 80C of the Income Tax Act and has a lock-in period of 3 years, as compared to the 5+ years of lock-in period of other popular tax saving instruments.
Read more: 15 Things to Know About ELSS Funds
Financial Independence: Why few achieve it?
Most people want to become financially independent, but only a few get there.
One of the secrets to attaining financial independence is accepting that it doesn’t usually “just happen”. It starts with a detailed plan, and a willingness to commit to that plan.
Even after having done with all sorts of financial planning and investing in right assets, you need to review them from time to time and analyze whether are they giving you the best possible returns.
You need to make strategic long-term investments across diverse assets for financial independence. These investments need to have a balance of risk appetite, duration of investment and areas of investment.
If you’ve decided to become financially independent by investing in mutual funds, you need to set a goal.
It might take a while before you reach your goal. It is very necessary that you remain patient during this period. Reacting to short-term volatility can negatively affect your investments in the long-term.
Investing in mutual funds online is very simple and paperless.
Simply log in to your Groww account, choose a fund, and invest using net banking – exactly like you would when shopping online.
Disclaimer: The views expressed in this post are that of the author and not those of Groww