How can you be on the path towards financial independence?

In my earlier post I talked about financial independence.

 

Here, let me elaborate on the steps one can take to be on the path to financial independence. While complete financial independence may not be achievable for everyone, with right approach one can at least try to achieve partial financial Independence.

 

Here are the some steps that one can ensure to be on the path to (partial/ complete) financial independence. You may notice that if you follow some basic principles while handing personal finances, you can be well on course.

 

Have a regular source of income

This can be via your job or business and maybe have a additional source of income. This additional source or income can typically be via some part time work like teaching, freelancing (e.g. if you are good at design, you can provide those services). Passive income (e.g. rent or some kind of royalty) may also be a good source of earnings.

One cannot be financially independent without a a decent basic amount of money to begin with.

 

Have financial goals in mind

Identify your major financial goals. Arrive at a number that you’ll comfortable with when you think of financial independence of partial financial independence. Think of what kind of money you’ll need to save every month to reach there. Understand how investments work and align your savings and investments to be on road towards your financial goals. Different people can have different goals depending upon lifestyle, location and aspirations. For some Rs. 50 Lac ( Approx $ 70K) may be enough to achieve partial financial independence, while for some even Rs, 7 Crore ($1M) may not be enough.

 

Spend less than you earn

This is one of the basic principles of personal finance. More the difference between your earning and expenses, more the savings. Avoid debt altogether (except for your primary residence, if needed). Credit card debt or personal loan should be a strict no go zone.

Elementary. No?

 

Have control over lifestyle expenses

Don’t always try to keep up with your peer group and avoid falling prey to lifestyle inflation. If may be good to buy a new car or fashionable clothes or new phones or accessories if you need them. But if you are buying stuff at drop of your hat, then you may not realize when the saving shrink & you are struggling to keep up with your desired savings rate.

Lifestyle inflation can seriously derail your financial plans.

 

Invest regularly

 

Typically it should be in a mix of debt and equity. Historically, equities in India have given higher returns than most asset classes and with a growing economy, should be able to give good returns. However, debt should be a part of portfolio as it might help you in capital protection.

Debt – In India, you can invest in PPF (upto maximum limit of Rs. 150,000 – irrespective of whether you are getting other benefits under Income Tax Section 80C) or VPF (Voluntary provident fund, which is in addition to what your employer deducts). PPF & VPF typically have better returns than Fixed Deposits (FD) and returns may be similar to or marginally higher than debt funds. However, they give tax benefits even on withdrawal and overall returns can be good (8 percent +, if you opt for both and rate of interest rate hover around current rates)

Equity – If you have understanding of equities, then you can invest in stocks of good companies or potential high growth companies. However, if you don’t understand much about equities, you can invest in mutual funds, ideally via SIP (Systematic Investment Plan) route. Depending upon the amount you want to invest you can invest via 2-3 mutual funds and across small cap, mid cap and large caps. (some multi cap funds might offer a mix of these stocks, which you can explore)

 

In addition you may also think of other asset classes – real estate being a popular one. Gold/ silver are also popular asset classes. You may want to evaluate them. May be good for diversification, but may not be the best asset class to invest in.

 

Cover all the bases & get insured

Be adequately insured, be it life insurance (via term plan) and a health insurance. You may also want to evaluate other insurance like personal accident or critical illness cover.

__

With right approach, one can achieve (complete or partial) financial independence. If won’ t happen overnight (unless you suddenly get a windfall gain!) and one needs to be diligent and stay on course for several years.

Advertisements
Advertisements

7 thoughts on “How can you be on the path towards financial independence?

Leave a Reply