Step by Step guide to achieving financial independence and freedom
August 12, 2021
As we near the Independence day of our nation let us think about the various kinds of freedom. Think of some of your biggest dreams in life. You want to own a beautiful home. You want to provide for your family. You want to be able to travel the world and experience incredible adventures. What’s preventing you from doing these things?
More often than not, the answer is money. While you might be able to reach some of these goals as time goes on, to achieve them all while remaining in a good place money-wise, you need to establish financial freedom.
While a lot of fads like the FIRE (Financial Independence, Retire Early) movement have been made popular, they often lead to a rather frugal lifestyle at the cost of your happiness. Efficient financial planning is what you actually need and here in this blog, StockAxis tells you how you can actively achieve your financial independence in a practical way by being economically smart.
First, do the math
Before you get into the action mode, it is important to assess your financial situation and understand what needs to be done. This includes setting your financial goals such as travel plans, child education, retirement etc. Calculate your target amount and the time and understand the gap between where you currently are and where you intend to reach.
Additionally, be smart with debt and leverage. Businesses often rely on debt due to tax reasons but as an individual, you simply cannot afford to mismanage debt and end up in a chaos of interest. Credit cards can feel so freeing but they can also lock you into spiralling and expensive debt. It’s fine to use credit cards for convenience, but only if you don’t charge more than you can really afford and can pay off in full every month. Keep close track of your payment cycles and avoid dabbling in futures and options as the high volatility & leverage can magnify the risk beyond your risk appetite.
Understand that Income is not Wealth
You need to understand the difference between income and long-term wealth in order to escape the spending trap. Income is an obvious component of wealth, but it's not the only factor. Most people believe the key to wealth is a high-paying job. Yes, it's easier to build assets if you have more monthly income, but one key to increasing your net worth is to spend less than you make.
Simply put, earning a good income is not enough to secure your financial future. Incomes are often countered by ever-growing expenses and can only last till you keep working. Financial freedom can be efficiently achieved by investing. That way your money works for you and you are free to enjoy your financial freedom!
Create Surplus Funds to Invest
Historically, India has an inclination towards saving culture as opposed to investing culture. But that is changing rather quickly. The reason being that savings like fixed deposits, provident funds and alternatives like insurance policies & gold often fail to counter the effect of inflation which eats up your savings.
The only way to take advantage of investment opportunities is to have the money to invest. There is a certain point in successful investing where you reach critical mass, and the returns generated on your assets can change your life. The reason behind this is the magical effect of compounding! Compounding is when your money starts working for you so that you can focus on living your life stress-free.
Focus on high return investments like Stocks & Mutual Funds.
As mentioned before, fixed deposits, provident funds, insurance policies, gold etc often fail to counter the effect of inflation which diminishes your purchasing power in the long run. The Indian stock market is full of potential and is easily accessible. Investing long term in the stock markets has proven to be one of the best ways to ensure that your money works for you and earns you a multifold return.
There are many stocks that have generated 1000%+ returns in the last decade. However, knowledge is power and quality research is essential to not only protect your capital but also to amplify your returns. Therefore, consider investing in a quality investment advisor who can help you navigate through the complexities of the investment world.
Invest in accordance with your risk appetite & financial goals
It is of utmost importance to ensure that your investment portfolio is designed to achieve your financial goals & in accordance with your risk appetite. A lot of investors are attracted towards derivatives and intraday as the short term and often leveraged profit booking seems rather lucrative. It is only a matter of time before this backfires.
The time horizon is too short and volatile which is why these are considered to be high-risk financial instruments and should be avoided.
An individual with a solid financial plan in place always follows a disciplined strategy free of emotions and the adrenaline rush of intraday trading. Read more about why intraday might not be your best bet for a successful financial future here.
- Tax Deductions: Consider investing in ELSS Schemes to ensure tax deductions.
- Redirect your cash gifts or pocket money: Redirect your savings towards recurring deposits instead of a saving bank account. This can get you extra earnings.
- Career planning: Plan your career early. If the plans are well executed, one will have a high chance of success.
- Avoid or minimize debt: Use credit cards wisely and try to avoid debt as much as possible.
- Reduce your spending: The magical formula is Income - Savings = Expenditure. This means that out of your income you need to save first and then take care of your expenses.
- Get yourself insured: Insurance is necessary as one never knows the amount of money required for any unforeseen circumstances.
- Build an emergency fund: An emergency fund is crucial for staying financially assured in life.
- Have a backup plan: No matter how focussed one is to make the ‘A’ plan work always have a plan 'B'. You know, just in case.
There are no shortcuts to anything in the world. But a proper financial plan followed with discipline can change your life. So take a step back if you are into it and make the right choice! Happy Investing!