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Shahrukh Khan once said, “Don’t be a philosopher or a teacher without being rich. Money is significant — earn it when you can.” There have been contrasting opinions on how important is money, finances and everything that comes with it. While one side of the world  says money can’t buy you happiness, the other side shuns this philosophy and acknowledges the necessity of money upfront. 

Whichever bandwagon you are on, you cannot dismiss the fact that money is important. But more critical than earning money or having truckloads of it is knowing   how to make it work for you. 

This is what financial independence is! Financial freedom is the holy grail of personal finance.  

Financial independence is not just the ability to cover for your expenses. It means to be psychologically free of fears so that you are able to pursue vocations of your choice or take alternate life decisions, without having to worry about sustenance. That being said, it’s a broad term and you will have to do a bit of soul searching to arrive at your own definition of financial independence. Once you know what it means to you, here are 10 steps that you can take to embark on the road to financial independence. Read On!

#1 Arrive at the Desired Corpus

Once you define what financial independence means to you and set a timeline to it, the next step is to understand how much value you assign to your financial independence. This will require you to study your own financial situation, if there are any outstanding loans, your lifestyle and your income. Arrive at an ideal corpus that you would like to have by a certain age which you think will give you financial independence and work earnestly to attain that goal. 

Say you aspire to have a kitty of Rs 2 crores by the time you retire so that you are independent enough after your regular source of income stops. 

Here’s what you will have to consider to arrive at the right number :

  1. Your present age and the age by which you want to achieve financial independence. 
  2. Monthly income requirements based on expenses, existing loans, liabilities, medical needs , education of your children and whether you are a multi-income household. 
  3. Expected inflation rate ( 3-5%)
  4. Whether you have any existing savings or have invested in any saving instruments the expected returns from them. 

#2 Clear Off Your Loans Quickly

A majority of people feel that their inability to save efficiently as well as existing loans and liabilities are a big reason behind them not being able to contribute towards building a retirement fund.

It’s important to know that the first step towards accumulating wealth is to plug the financial leakages. Make a note of all your expenses, loans and liabilities against your cash inflow.

Now prioritize your loan repayment strategy based on the interest rate each loan attracts. If it’s a short term loan like credit card loan, clear it faster to avoid high-interest rates.

This will ensure you don’t fall into a debt trap. The cash flow sheet will also help you to know the exact state of your savings and accordingly you should make monthly provisions to pay off your loans. 

Also Read : Stuck In Debt Trap? Know How To Escape It Smartly

#3 Create An Emergency Fund

Most financial planners say that your emergency fund should have three to six months of your expenses, and it should be in a liquid instrument. An emergency fund is an accumulated corpus that is supposed to help you in case of dire need like a sudden loss of income, patchy employment situations or any other event that poses a risk to your finances. For the same reason emergency funds should be in liquid instruments like ultra short term debt funds, liquid funds, short term funds etc. These are less prone to short term fluctuations and the risk of losing money in a short period is lower. Not only will debt instruments such as liquid funds 

Say your monthly expenditure is Rs 20,000

This includes rent, water and electricity bills, grocery, house help and other lifestyle expenditure.

Your emergency fund should have any amount between Rs 60,000 to Rs 1,20,000. 

Yes, it is a significant amount, and your expenses also increase gradually. Hence accumulating your emergency fund in bits and pieces and moving towards an aspired amount in a phased manner is essential.

#4 Learn To Budget And Keep Track Of Your Expenses.

Cultivating a disciplined saving habit is a crucial step towards financial freedom. Once you start tracking your expenses, you will be able to see what are the places where you are overspending and how can you cut down your expenses. This is often an extremely underrated exercise but one that is hugely helpful. So, be mindful of where your money goes. Don’t spend more than you need to. There are many online tools that can help you keep a tab on your expenses and moderate them. 

Also Read : What is the 50/30/20 Rule of Budgeting?

#5 Create Additional Sources Of Income

Apart from cutting down on expenses, you can also explore other sources of income based on your skill sets. You can then redirect this extra income to towards your retirement corpus to fasten the process. This can also be used to tackle emergency expenses so that you don’t have to reduce your investment amounts to focus on sudden expenses. 

#6 Do Proper Tax Planning 

Proper tax planning can help save you a lot of money that can be channelized towards your retirement corpus. By investing Rs 1.5 Lakh per year in tax-saving avenues under Section 80 C, you would be able to lower down your tax liability.

However, due to lack of awareness or by procrastinating tax filing till the last minute, many individuals are not able to fully avail the tax exemption limit and ultimately pay more tax.

This can be easily avoided if you select the right investment avenue that not only helps you save tax but is also in line with your long term goals. An investment that can help you fetch money and also reduce your income tax definitely leaves you with more cash at hand, making you stronger financially and reducing your dependency on other instruments.

#7 Get Insurance of Sufficient Cover. 

Insurance plans are another instrument that saves you from any unforeseen circumstances. Life insurance lets dependants of the deceased have a financially independent life and health insurance lets you cater to health emergencies. Medical costs are extremely high, and treatments can go up to lakhs.

There is a rule of thumb that says that your life insurance plan should be 10 to 12 times your annual income.

Say you earn Rs 7 lakh per annum; your life insurance plan should be at least Rs 70-84 lakhs. 

However, this is subject to many variables. Say you get married later and you have more dependents in future, your need for life insurance will also increase. It is good to know thumb rules but they are not set in stone. Assess how much you will need on your own.

With health insurance, the size of your plan depends on your age, any pre-existing diseases, any history of diseases in the family, your geography, your occupation and how prone you are to risks and many such factors. With increasing healthcare costs, health insurance will make sure you don’t have to prematurely stop your investments or dip into your corpus to meet medical expenses. 

#8 Choose The Right Investment Avenues 

Following the above 7 steps will help you sort your finances and give you a clear picture of the final monthly inflow and outflow. Whatever remains after you have contributed towards your emergency funds, loans, EMIs, tax saving investments, daily expenditures and maintenance costs, constitutes your savings or investible amount.

Now that you know that small sums set aside and invested every month can help you claim your financial freedom, it is important that you thoroughly understand your risk profile and invest in avenues accordingly.

Ideally, you should consider investing in a mix of safe to moderately risky avenues and start investing as early as possible to spread your risk. Once you have selected the avenues you want to invest in, decide on the asset allocation strategy. Asset allocation is a technique that you use to apportion your investments across different investment options based on your risk profile. 

For example, if you think you can take risks in the market, you can keep a higher number in equity investments and have a lower exposure towards safer instruments.

You may begin with a 60:40 asset allocation, 60% in equity or equity related instruments, rest could be in debt, commodities and other ‘safer’ instruments.If you have low risk appetite, you may keep a conservative approach, have lesser exposure towards equity and more towards debt instruments.

With age, your risk level and requirements may change. Your risk appetite may go down when you are closer to your retirement. In that case you may have to change your asset allocation strategy, rebalance your portfolio and increase the weightage of safer instruments in your portfolio

#9 Keep Track Of Your Investments

Once you have selected well performing mutual funds or fundamentally strong stocks, remain invested for the long haul. However, keep tracking the performance of individual funds/stocks as well as the performance of your portfolio. Check the progress of your portfolio in accordance with your goals and targets and make adjustments if need be.

For instance, if your mutual fund investments are consistently giving low returns( for more than 2-3 years) you may want to make a switch and reinvest your money to better performing funds.

This is however advisable only when have compared the performance of the fund with similar funds and against the benchmark. However, also remember that making constant changes to your investments as this will defeat the purpose of staying invested for longer for maximum gains. Also, keep increasing your contribution towards your goal in proportion to increase in savings/increments received so that you reach the desired corpus faster.

#10 Believe Your Goal Is Achievable

A lot of people do not invest actively to achieve early retirement simply because they believe it’s not achievable. This is far from the truth. It begins with the simple step of committing to save at least 20 percent of your salary every month. This is not an impossible task if you are mindful of the above points and put financial freedom as your objective above any unnecessary expenses. It may not seem like much to you but with little savings every month you build upon the power of compounding which will give you solid returns by the time you reach your goal. 

To Sum Up,

Independence is achieved through the consistent and dedicated pursuit of a single goal. The same applies to our financial investments and our pursuit of financial independence. The guidelines suggested here are for you to get started on your journey to build and accumulate wealth for your future. 

Happy Independence Day and Happy Investing!

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