On your commute to the office, have you wished for a time when you could just skip work? You might have even fantasized of a future where your imagination wasn’t limited by the daily grind of office. Well, you can skip office. But you’ll have to achieve financial independence first.
What is Financial Independence?
Financial independence is being able to thrive while not actively working for income.
Some people believe not having any debts is financial independence. Being able to switch jobs without financial trouble is another definition according to a few. Just managing to survive without working is financial independence according to some. For a significant number of people, financial independence means being able to do whatever they please without worrying about money.
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Being able to do whatever you wish to without ever having to worry about money is something only the world’s wealthiest might be able to do. But that doesn’t mean you absolutely need to become a billionaire to be financially independent. There are different degrees of financial independence. Being able to buy whatever you wish for the rest of your life – that kind of financial independence is a bit harder to attain. But the more reasonable kind of financial independence – all needs and a few splurges – can be met with careful planning.
Why Do I Need Financial Independence?
Having financial independence will give you the freedom to do a lot more than you’re able to do now.
Remove the stereotypical image you have of financial independence. It does not mean retiring early in life. What financial independence allows you is a choice. Even after achieving financial independence, you can continue to work if you enjoy it.
The benefits of financial independence are many. To list a few:
- +Job Insurance: If the economy goes downwards and your boss asks you to leave, you won’t be rattled. You can comfortably take your time looking for a new job, or not work at all! You won’t be crushed under the burden of not knowing how you’ll pay for your daily expenses. If you plan carefully enough, you won’t feel any difference in lifestyle even when you don’t work.
- +Take Risks: You’ll be in a much better position to take risks if your daily needs are met. The start-up you had been planning for so long but couldn’t commit? Trying that might finally be possible. You can try switching jobs to an industry you’ve never worked for, travel the world, work for charitable organisations, and so much more.
- +Follow Your Calling: There are many things we all like to do that do not pay much, or at all. Sitting and watching movies all day will not make you any salary. Likewise, painting, music, pottery, meeting new people, lazing all day at home, you name it. You can do whatever you please.
- +Reduced Stress: Reaching office on time, the painfully slow moving traffic, reports, presentations, meetings, deadlines – everything that makes you sweat – all gone! Sounds practically impossible. Financial independence can actually make such days true. With stress reduced to such low levels, your health will improve drastically.
- +More Free Time: How often has it happened that you come home from an arduous day at the office but your kids have already slept for the day? More frequently than you’d like to admit. Another perk of being financially independent is that you can have so much more free time. Your friends and family will definitely appreciate your willingness to give them company.
How Can I Achieve Financial Independence?
Careful planning and following through with the plans will help you become financially independent.
- Step 1: Emergency Fund. Life has its fair share of surprises. Think vividly of all the things that could go wrong and how much you would need to deal with them. Based on the likelihood of them happening, decide how much you should set aside for unforeseen occurrences. Set aside this amount of money and don’t touch. Use it only for an actual emergency. Here is a portfolio of mutual funds where you can park your money and retrieve with ease.
- Step 2: Debt. Get rid of all the debt you have. Pay off all your credit card bills. Pay off bigger debts like a home loan and car loan as soon as possible. You cannot achieve financial independence if you are dependent on money that isn’t yours.
- Step 3: Insurance. Make sure you have insured your car, your house, and most importantly yourself. Plan both, medical and term insurance cautiously. When an unfortunate incident happens, you should worry about recovering fast and healthily. Worrying about medical bills in such a situation would not only be annoying but could also affect your recovery. Besides health, make sure you have a good term insurance. If something happens to you, your family would be sufficiently guarded.
- Step 4: Aspirational Expenditure: Life isn’t all about saving and living below your means. The occasional international vacation or long aspired luxury car should also be a part of your planning. Account for the money you’ll need for your splurges when planning for financial independence. Here is a portfolio of mutual funds that can help you achieve your aspirational goals.
- Step 5: Retirement: Retirement doesn’t always mean old age. People these days are choosing to quit the rat race much sooner in life. To be financially independent, you have to plan for your expenses later in life. Rising medical bills, inflation, want for a better standard of living – consider all when planning for financial independence. Here is a portfolio of mutual funds that’ll help you build your money for retirement.
- Step 6: Tax Efficiency: Plan your finances with a watchful eye on taxes. There are many policies aimed at reducing the burden of tax on you. Find out which ones are relevant to you and take advantage of them. By being tax efficient, you will save more and add to your corpus. Here is a portfolio of ELSS tax saver mutual funds.
- Step 7: Investing: This is probably the most crucial of all steps here. You need to grow your money. Investing is a very effective tool in fighting inflation. Very few are able to plan for inflation. If you estimate inflation to be of a certain value, and the actual inflation turns out to be higher, you could have to make painful compromises. By constantly investing, you have a fighting chance to beat inflation. And besides, if you invest your saving, you might earn a lot more. And more money is almost always a good problem to have. This portfolio of SIP mutual funds will help you grow your money quickly.
Okay, I am Convinced I Need to Invest. What Are My Options?
The ways you can invest money is practically limitless.
You could start a business, invest in crypto-currencies, try for a lottery and what not! But let’s face it, the risk involved in those investments are not very supportive of financial independence. You can probably take such risks after you’re financially independent. Till then, here are the most popular options for you to invest:
- +Share Markets: Share markets or equity markets have generated astronomical wealth for those who know what they are doing and are patient enough. Though not as common as some people believe, it is even possible to get returns in excess of 1000%. Needless to say, there is risk involved. If you do not know what you are doing, you can easily lose a lot of money here. Investing in shares requires great understanding and knowledge of the markets. Only those equipped with the skills needed to invest in the share markets should invest in it.
- +Mutual Funds: The idea behind mutual funds is very simple. It is almost like hiring an expert to invest your money in return for a small fee. Mutual funds are of many types. There are mutual funds that invest in the share markets, bonds, deposits, and various other money market instruments. Some mutual funds in India have returned rates as high as 50% in the past. Different types of mutual funds have different types of risks and returns. The higher the returns, the higher the risk. Mutual funds are ideal for people who cannot spend too much time exploring and learning the skills needed to invest effectively. If you want to take advantage of the growth in the equity markets but do not have the requisite skills to invest in them, mutual funds that invest in equity are your best bet! Likewise, different types of mutual funds suit different needs and risk tolerances.
- +Real Estate: Real estate has long been looked as a safe investment that guarantees high growth over a period of time. Unfortunately, property price growth has slowed down in recent times. This is not to say that you cannot make money out of your real estate investments. You definitely can but it is much harder than before. While earlier, nearly any purchase was assumed to have the potential to grow, such is not the case anymore. To profit out of real estate requires careful research and planning. Besides, real estate investment requires large amounts of money. If however, you are in the market to buy a house for yourself to live in, this might be an excellent time.
- +Gold: This has long been a favourite investment of Indians. And by the looks of it, stills enjoys considerable popularity. Unfortunately, as an investment, gold is not doing very well in recent times. In the past 5 years, the price of gold has remained virtually unchanged. Gold performs well in tough economic conditions. If your understanding of the economy is good, you can time your investments in gold.
- +Fixed Deposit (FD): Another very popular investment, fixed deposits have so far only been able to just cope with inflation. The rates in case of FDs at present aren’t very promising and you are better off investing elsewhere. Income earned from fixed deposits is also taxable. Therefore, after paying taxes, the actual return received is much lower. Check out these mutual funds that are considered better than doing an FD.
- +PPF: At 7.9%, the rate of return is not spectacular, though it is better than investing in FD. For a little bit more risk, you could invest in debt mutual funds that can generate considerably more returns. If planned well, those returns can be tax-free too.
- +Bonds: Government and corporate bonds offer a wide variety of returns depending on the risk involved. The higher the rate, the higher the risk involved. A big disadvantage of investing in bonds is long lock-in period. Bonds are also traded in the markets. By investing in debt mutual funds, you can take advantage of the bond markets. Debt mutual funds are usually considered much more stable than other types of mutual funds.
- +Others: There are more investment options like monthly income plans (MIP), post office savings, senior citizen plans, etc. These usually offer much lower returns however most of them offer assured returns.
If you’ve decided to become financially independent, you need to set a goal. Carefully factor in all that is written above and more while coming up with a goal amount. 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.
Happy Investing. Happy Independence Day!