How to achieve financial independence

Financial freedom is necessary for each one of us so that we are not dependent on other people to support us for our requirements

August 14, 2013 11:31 IST | India Infoline News Service

Our finance is like using water everyday. We store water in a pitcher with a tap for outflow at the bottom of it. The water flowing into the pitcher is our income and the water flowing out of the pitcher are our expenses. Sometimes, the water may not be available to you, so do we stop using water? No! We don't stop using water, we store water when it is in plenty and use when it is scarce. This act is called saving.

Similarly, we need money to meet our present and future financial needs. We also need money to achieve financial independence. Financial freedom is necessary for each one of us so that we are not dependent on other people to support us for our requirements.

Therefore, financial freedom gains importance for all of us. Most of us earn surely have some source of earning income. Some of us would be employed, have business, etc. But all of us are so busy at work, home, shopping, etc that we often remain ignorant to our finances. We constantly delay our financial decisions like to track our investment or invest in new financial products among others.

It is high time now that we start thinking seriously about our savings and investments to achieve financial freedom. Financial independence is necessary to meet our financial goals such as money needed for our retirement, buying a house, our children’s education, their marriage, etc.

Financial independence helps us to make a budget of our daily expenses, buying the right insurance cover and making smart tax and investment decisions. By and large, financial independence is primary. Try some of the below mentioned steps to increase your financial freedom/

Make a financial plan

You need to identify your financial goals, then make a financial plan and list out the ways to achieve them. Remember don’t set up too many or unrealistic financial goals. Otherwise, you may be unable to achieve them.

Resolve your debts

If you owe too much debt on your credit cards, determine how much you can realistically afford to pay off to your credit card company. Negotiate with your credit card companies to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. 

You can also seek help of a non-for-profit financial counseling service centres available in your city. They will offer you one-to-one counseling. This service is usually free and your information remains safe and confidential with the counselor. These financial counsellors are well-trained and supportive. They help you resolve your debt issues.

Gain financial education

You need to have some basic financial knowledge. Financial know-how does not come within a day. Most of us are quite grim about how to manage finances really well. You need to differentiate between your needs and wants. For investing in financial products such as insurance, mutual funds, etc, you need to have some basic knowledge. Try to attend financial seminars and workshops.

Understanding finance will help you a long way. You need not become an expert. All you need, is to understand the basic fundamentals that apply to your investments and finances. There are several books that can coach you on personal finance. You can find useful information on the Internet as well.

Don't jump into returns

Before investing in a financial product ask yourself whether you really need this product. Don't invest in the product on the basis of the high returns which it offers. You need to know what is the risk-reward ratio. While buying an insurance plan, you need to read the fine print carefully. Make an analysis of what is covered and what is not covered under the policy. Ensure that you read the terms & conditions of the policy thoroughly. You can also seek help of your agents in case of doubt.

Build a 6-month emergency fund

You should maintain an emergency fund—that is some amount of cash reserve—which would cover three to six months’ worth of household expenses. Rest assured, someday you will need it. Sickness, job loss, house maintenance, car repairs—there are so many things that can shake your financial boat.

Make a list of all of your regular monthly expenses like housing costs, food, utilities, debt repayments and transportation costs and all of your other ‘must-pay’ bills. Add all these expenses to find out your total expenses and multiply the resulting figure by the number of months that you chose—say three or six months. For example, if your monthly expense is Rs. 25,000, then for three months you need to set aside Rs. 75,000 in your emergency funds. You can save your emergency fund in a savings account which will also earn some interest.

Good habits to achieve financial independence

My philosophy is ‘income’ minus ‘investments’ and the remaining is for ‘expenses’.

  • I have a financial plan & a purpose for investing.
  • I always try to gain financial education to make informed financial decisions.
  • I save regularly in good financial products.
  • I check my accounts statements regularly.
  • I monitor and review my investments regularly.
  • I have an adequate amount of term plan as my family is dependent on me.
  • I avoid buying too many credit cards and make limited use of my credit cards.
  • I know the total amount of my debts and make payments on time.
  • I focus on risk-reward ratio while making investments.
  • I store all my financial documents safely & have informed my family about the same.

Save regularly in good financial products

Regular savings can provide exceptional returns over the long run. Despite your busy work and personal life, you must set aside a fixed amount every month. The power of compounding is phenomenal. Your savings grow exponentially with time, and the sooner you start the more will be the amount of returns. You can also consult a competent financial planner who has accurate information about products and the client’s needs.

Thus to gain financial independence, you need to save regularly and benefit from the power of compounding to build a corpus.  

Track your portfolio & monitor your finances

Making investment is not a “one-time process”. You can’t just buy an insurance policy or invest in a mutual fund, savings bank account or other financial instruments and forget it. You need to “track your investments” on regular basis. Updated information about your investments will also help you comply with the income tax laws—you need the buy-sell data for claiming exemptions or paying capital gains tax while filing the returns. You need to review bank account statements, fees, interest charges and automatic payments regularly.

Buy adequate amount of term plan

Most of us are not aware of ‘how much’ insurance we need to buy to protect our family against an eventuality. If you have dependents or significant debts that outweigh your assets, you likely need insurance to ensure that your dependents are looked after if something happens to you.  

Explore additional income sources

You can explore additional income sources such as doing a part time job, renting your additional vacant house, etc. Generating additional source of income can have a major impact on your finances. Even an extra income of Rs. 5,000 each month could go a long way to paying down debt or increasing your investments.

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