Independence Day 2020 Special: 10 money rules to become financially independent at a young age

Independence Day 2020 Special: You might have always dreamt of living your life just the way you want — like going on a world tour in your 30s or retiring early. However, many of you probably won’t be able to do that unless you were born rich or achieve financial freedom.

Financial freedom, in fact, is the luxury of having sufficient income to take care of the expenses of self and family members despite not doing a regular full-time job or running a business. With financial freedom on your side, you can live your life to the fullest, afford anything and everything you desire, and travel the world.

Here are five ways to become financially independent at a young age.

1. Live within your means

While credit cards and loans allow people to live a certain quality of life instantly, they can impact their financial stability in the near and long term. Hence, the first step towards financial independence is to learn to live within your means. Follow the 50-30-20 rules of budgeting so that you are comfortably able to allocate your post-tax income to all three buckets — 50% of the income goes to needs, 30% for wants and 20% to savings and investing.

2. Prioritize saving and investing

Usually, youngsters tend to spend first and invest whatever amount is left at the end of the month. Try to reverse this process. Based on the average expenses, determine a fixed amount that you would want to save and/or invest every month. Invest first and spend whatever is left. This can also be achieved by instilling the habit of budgeting in your life. Also, start small but start early and invest in investment options that can offer your inflation beating returns.

“Starting early in accelerated wealth generating avenues like mutual funds and stocks will help you benefit from the power of compounding as well as spread out your risks. Keep an investment horizon of 10-15 years. You can start investing through SIPs to inculcate discipline. Keep increasing your contribution towards your goal in proportion to the increase in savings/increments received so that you reach the desired corpus faster,” says Harsh Jain, Co-founder and COO, Groww.

3. Make investing a habit

You don’t have to be born rich to become financially independent. You can achieve financial freedom by staying financially disciplined over a long period. “Investing regularly will help you amass a considerable sum in the long run. Set aside an amount from your monthly salary towards investments. The power of compounding will make you financially independent over time,” says Archit Gupta, Founder and CEO, ClearTax.

4. Increase your savings and investment rate, and invest in the right options

If you are to become financially independent at a young age, you should necessarily increase your savings and investment rate. Analyse your expenses and cut off the unnecessary ones. This will leave you with more money in hand which can be diverted towards your investments. The more you invest, the faster you become financially independent.

You also need to invest in the right options. In fact, there is no example of someone becoming wealthy by parking their savings in a regular savings bank account. “If you are to get rich and financially independent, then you have to invest in suitable investment schemes. You have to analyse and compare the various available options and pick the one which best suits your profile,” says Gupta.

5. Stay away from borrowing

If you have a loan to repay, then it makes it difficult or slower to achieve financial freedom. Hence, you have to stay away from all kinds of loans, and if you already have any, then you have to close it soon. You have to be as self-sufficient as possible so that you are not required to avail any kind of loan.

6. Create an emergency fund

Life is unpredictable. Hence, financially preparing yourself for an emergency can help avoid any sudden jolts to your finances. Based on your average monthly expenses (living costs), ensure that you have an emergency fund that can allow you to survive without income for at least six months. This will protect your investments and keep you away from unwanted debt. “You can invest in liquid funds for this purpose so that your emergency corpus is easily accessible. Additionally, ensure that you have sufficient insurance cover so that you don’t have to dip into your investments,” says Jain.

7. Plan your taxes and have sufficient insurance cover

Plan your taxes in advance and make sure your tax planning is aligned with your long-term financial goals. Look for avenues that serve the dual purpose of wealth creation and tax saving. Also, make sure that you buy insurance with sufficient cover if you haven’t already as premiums get more expensive with age.

8. Review your financial situation regularly

Cultivate a habit of reviewing your finances once every six months. This includes tracking the performance of your mutual funds and your portfolio as a whole. This will keep you in control and allow you to make changes like increasing the investment amount, redeeming certain investments, portfolio rebalancing etc with ease. Reviewing your financial situation will also help you keep your debt levels in check.

9. Invest in yourself

Most importantly, invest in yourself and in activities or vocations that enrich you as a person. “Read books on investing or get inspired from industry leaders who started small, yet achieved financial independence with discipline. As you learn more about the nuances of investing and expand your circle of competence, you will be able to explore more wealth creation avenues and take smarter decisions regarding your portfolio,” advises Jain.

10. Don’t get into peer-pressure

There are two categories of young professionals. The first one likes to be financially disciplined and would want to attain financial freedom at the earliest. The second one is rather reckless in terms of handling their finances and would blow up their money on buying expensive items and taking extravagant vacations. “To attain financial freedom at a young age, you should not get influenced by the young professionals falling in the second category,” says Gupta.