Choose your path to Financial Independence
Financial Independence is having enough residual income/savings so that you no longer have to work for the purpose of sustenance. The saying, “Rome wasn’t built in a day” resonated with what I learned from my experiments with financial investing.
Here Are The 5 Things I Learned:
1. Manage Your Income: Financial Independence cannot be attained overnight. You need to learn how to invest your money before taking the plunge in order to avoid wealth erosion. The first step is to manage your expenses by calculating your monthly income. Doing so will enable you to identify how much of your income goes towards expenses/financial obligations and how much is left in savings.
2. Start Investing Early: You have probably heard of the power of compounding time and time again. It is never too early to start investing and even small amounts grow exponentially over time. In order to invest efficiently, it is crucial to keep in mind your life goals and invest accordingly.
For example: If a person wants to retire at the age of 50 he needs to calculate his retirement fund based on his monthly expenses, and inflation rate. Let’s assume he needs INR 3 cr. as a retirement fund.
The table below shows how much he needs to invest monthly if he starts at different ages at say a rate of return of 10% to achieve his goal.
Financial Independence is having enough residual income/savings so that you no longer have to work for the purpose of sustenance. The saying, “Rome wasn’t built in a day” resonated with what I learned from my experiments with financial investing.
Age at the start of Investment | 23 | 30 | 35 |
Monthly SIP | ₹12,343 | ₹30,325 | ₹60,500 |
This brings us to the realization that starting your retirement fund at age 30 (just seven years later)instead of age 23 requires a monthly investment of 2.5 times that of the amount at age 23.
3. Budget: Create a monthly expenses plan that outlines your financial obligations like rent, tax, and utilities. This enables you to identify what your cash flows are and how much investable surplus you end up with. Where other expenses are concerned, the motto should be “Save first, Spend later”. Living below your means will enable you to achieve your goal faster.
4. Prepare For The Unexpected: Unforeseen expenses like an emergency or a totaled car can derail your long-term investment plans. Build and maintain a contingency fund to cover such unexpected expenses and avoid dipping into your long-term investments. The contingency fund can be invested in relatively low-risk and liquid financial instruments such as debt funds which will appreciate whilst also protecting your capital.
5. Get Insurance: Life is unpredictable. Getting insurance not only ensures your protection but also safeguards your loved ones and the goal to attain Financial Freedom. The treatment cost of an unexpected illness has the potential to wipe out a sizable chunk of your long-term investments. Insurance ensures that you are covered and protects your goal of achieving financial freedom.
To sum it up, financial freedom can be achieved through proper planning and imbibing good money management habits.
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