6 things that will make you financially independent
Our country got independence way back in 1947 but, but what about our personal type of independence, financial independence – What does it mean to be financially independent?
In simple terms, it means you have enough money to pay for your basic living expenses such as rent, food, clothing, etc for the rest of your life. And it should be enough to enable you to enjoy any reasonable passions or hobbies you have. In addition to that, this money or income should not depend on any formal work that obligates you on anything that you do not want to be working on.
To be financially independent you should start focussing on maximizing your investments with proper planning and rationalizing your expenditure. This measure doesn’t have to be extreme and you can achieve financial independence slowly but surely through a series of prudent moves.
1) Pay Off Debt
The first step to financial freedom is to escape debt. This means ensuring you don’t owe anyone any money, whether it’s through a bank loan, a personal loan from an acquaintance, and so on. If you have any debt, focus on paying it off first, even if it means reducing your spending in other areas of life. You cannot be financially independent if you have interest rates working against you. The exception here may be a personal residence loan. You could balance that with investing in parallel. If the market gives you 8-12 per cent returns on average and your debt interest factoring in all tax advantages is more than that, pay off your debt first.
2) Pay Yourself First
Start by setting aside a fixed amount of money from your monthly income as savings. You can put this money in a separate bank account or directly invest via many SIP schemes. In Cube Wealth, there is SuperSIPs that let you invest beyond mutual funds into many assets, and with you having full control over them to snooze or skip them at any time. It may seem difficult at first, especially if you are used to living paycheck to paycheck. You will have to cut back elsewhere to make up for the reduced cash flow. Even a small part of your monthly income can add up to a lot over the years.
3) Live Within Your Means
Saving money to pay yourself first will be difficult at first. To make this possible you may have to give up on small luxuries. See where most of your money is spent. If it’s rent, consider moving to a smaller house or a cheaper neighborhood. If that’s not feasible look at other areas such as transportation. It may seem counterintuitive at first, after all, it’s human tendency to prioritize instant gratification over long term rewards. But if you keep your eyes on the prize, being financially independent in your 40s or 50s is clearly worth more than several fleeting indulgences per week.
4) Build An Emergency Fund
This is the money that acts like a parachute in case things don’t go as per your plan. Also, no matter how much we plan and prepare, life has its own set of surprises to throw our way. That’s why it’s best to set aside 3 to 6 months worth of living expenses in an emergency fund. You can even invest this money in a liquid mutual fund that offers higher interest than your savings bank account of a fixed deposit. This also gives you easy liquidity whenever you need the money. This way the next time there’s a family emergency you’re not stuck worrying about the state of the markets and whether you should sell your financial freedom investments.
5) Invest For Future Goals
Saving alone is not enough to become financially independent. This is because of a little something called inflation – which simply means as things get more expensive, your money becomes less valuable. Also, recall our goal – we want independence from any compulsion to work. This is why we need to invest money to ensure we’re truly growing our wealth. That being the broad goal, you can break your life’s big expenses into different buckets. This means you need to plan for your short term, medium-term and long-term goals. Instead of simply investing money you’ll invest for specific goals such as higher education, a wedding, a house, etc across different timeframes. And you should also tailor your strategy to your personal risk appetite. Not all of us have the stomach to deal with the current market swings after all.
6) Be Patient and Consistent
This is perhaps the most important rule. None of the above tips will help you unless you’re regular, patient, and consistent. Financial independence requires you to truly grow your wealth and unless you win a lottery that can happen only over the long term. So, be disciplined and stick to the smaller milestones for your savings, spending, and investments. If you’re someone who has trouble doing this like many others, try to automate your savings and investments. Set standing instructions to pay yourself first and automate your monthly SIPs. This way you are setting yourself up for success before you even start.
– by Satyen Kothari, Founder & CEO, Cube Wealth