How about you being able to celebrate your own Independence Day! Your Financial Independence Day to be more precise. Let’s have a look at what you can and must do to be financially independent in India.
While money cannot buy all in life, being financially independent is important and not all can boast of that. So then how do you achieve financial freedom? Does earning a bomb of a salary mean financial independence? If so, then why is it that we often hear news of highly paid sportsman, actors, models etc. going bankrupt once they pass their prime even though they earned handsomely during their hey days? Why is so, that in spite of having a 6 figure salary, people feel cash strapped when some emergency strikes? Why is it that sometimes even an auto driver is able to meet his financial emergencies better than most of others around?
Well the answer is simple; those who understand the difference between income and wealth, and how to create it manage to be financially independent. Also we need to value money for what it is and not make these mistakes found here. Income is merely the flow of money that enables you to meet your day to day expenses, provide for roti, kapda, makaan, some leisure and wants to be able to survive, whereas wealth is an outcome of what you do with the income and how well you accumulate and improve your financial strength to be able to sustain for a long term.
12 steps to achieve financial freedom in India
1. Get an Income:
First and foremost, get an income. The sooner you do, the sooner you can take the first step towards financial independence. It can be a job, or your own business, that can give you consistent and stable income for a long term. Of course you can switch jobs for better pay and stuff, but at least make sure you maintain some level of steady income over a long term as this is the foundation on which the structure of your wealth and financial independence would stand.
2. Save, save, save and leave it for long:
Savings is the most crucial and most important aspect of wealth creation and achieving financial freedom. Save in whichever way you can and as much as you can. Even if you are a student getting pocket money, save from that, it will help you develop that habit for the future. SAVE first spend later. Never ever make the mistake of spending and then saving from what is left; it will never happen. Instead save first and whatever is left you can spend from that. The younger you are and the earlier you start, try to save as much as 50-60% if you can, at least for the first 5-6 years in your career. If your income increases, save more. Also once you save, forget about it, and leave it as long as you can. However do not become a miser by not wanting to spend where you should, simply put; if a fly falls in your tea, don’t suck the tea of the fly; but if you have a perfectly good cup of tea, don’t waste it by throwing the last few sips. Even you are on a tight budget you can still save by using some tips from here.
3. Stick to your needs and push back your wants:
This is the secret to achieving higher savings. Just spend on things that are needs and not on what you want. At least not until you have met your goals. There is a quote from a famous finance and investment guru that says “if you spend on things you don’t need, you will soon be selling things that you need“. Don’t fall in that trap. Yes you can indulge once in a while as after all you have one life to live. But the indulgences or impulse purchases or shopping should be as limited as possible. It should be only from something left over after you have made your monthly compulsory savings and met your fixed monthly expenses.
4. Start early:
The sooner you start, the sooner you will be financially independent. The sooner you save the sooner you will reach your goals and build your wealth. When you are young and single, you are free from a lot of responsibilities that you may have to take on later on in your life. Take advantage of this and start early by not just saving but investing your savings simultaneously as well. Mere savings will not grow your money and for your money to grow you need to invest it as soon as you can. Investing also makes your existing money work for itself and earn more money. Also make a contingency fund for up to 3 to 6 months of expenses that can be handy in case of some crisis.
5. Invest smartly… And Keep Insurance Separate:
You should start investing early on in life, and have a long term goal to let your investments grow and take advantage of compounding. If your investments mature, and at that time you do not have any genuine need for cash, do not liquidate that investment, instead re-invest in something else or the same scheme. If you do not know how to go about investing, you can read our beginners guide to investment here. Also make sure you do not invest in expensive investment instruments.
For example if you need some investment that works as a life insurance as well as gives you market based returns, opt for term plans or simple life insurance policies and mutual funds separately and do not go for ULIPs or Unit Linked Insurance Plans as these have high administrative charges to manage your investments. Always remember to diversify your investments and not just put all your money in one asset class.
Get adequate insurance for your life and medical expenses. Get a pure-term plan with an accidental rider and get a mediclaim plan, which covers your family as well. Keep these separate from any othe investment is CRITICAL – as these are not something you can take a chance with nor should you think of them as an investment which would give you returns. Also, keeping them separate would mean – much lower premiums, and the money thus saved can be invested in mutual funds via SIP and the returns in the long run, would be much more than any other product which combines insurance and investment. You MUST read this and this to understand this better.
6. Stop living on credit:
Remember that credit card does not give you free money; in fact it is the most expensive form of money if used unwisely. While you can argue that you pay up your credit dues on time and hence escape the steep interest rates of credit cards, but you cannot negate the fact that credit cards make you buy stuff that you may not be able to afford right now. Just because you can get that thing right now, does mean you should take it right away. If you do not have the money for it, don’t buy it and save for it and when you have cash, you may as well swipe a debit card, if you do not like to carry much cash but avoid credit cards as much as you can. The problems is more, now with all the zero percent EMI schemes, but check the truth behind the zero % schemes here. Yes, credit cards do have their advantages at times when there is an emergency and you don’t have cash you can just swipe it and pay later, but should not be used just for the heck of it everywhere. It’s a power to use money today that you do not actually have, but as they say “with great powers comes great responsibilities“. Be responsible while using credit. Also don’t take loans for everything you need, see if you can postpone the thing for sometime and can save for it or not. Take loans judiciously and also be careful with the type of loan you choose. You can also refer our guide to various loan options here, to have a clear picture.
7. Plan your retirement:
Plan for your retirement, if you haven’t already, do it now. Even if your company may provide a handsome gratuity or provide a pension plan, it’s always good to plan for your own life after 55. Put aside some part of your money in equity or balanced mutual funds and let it grow. You may also choose some pension scheme from various investment houses and insurance providers. If you can’t put in more money right now, fine put aside as much as you can and as and when your income increases you can take top up cover or add to your existing investment. Also PPF account is a good idea for retirement investing, but don’t make it your primary retirement backup.
8. Plan your taxes:
While earning, saving and investing are important, so is tax planning. What is the use if all your savings and income is reduced to half by taxes? I am not saying evade taxes, pay them, but only pay what is actually required. Make some tax saving investments when you plan your investment portfolio, file returns regularly and follow up if your refund does not arrive. Get a good CA who can help with managing your taxes effectively.
9. Compliment your income:
More often than not your primary income may suffice or you may think so. However, if you are single and young you must think of ways to compliment your existing income. You can get a secondary income by means of a part time job near your home or office so that you can save time traveling to another place. Or you can get some work at home job, but beware of the fraud ones. Also if you can get some additional income by means of your skills be it writing, drawing, your expertise in a subject; you can use these as a means to generate a permanent secondary source of income, even if you do not find time for a part time job. You could teach, freelance, consult etc. However do not exert yourself too much. Remember to enjoy life and if possible keep weekends to relax and do your own stuff.
10. Consolidate your savings and investments over the years:
Consolidation is also crucial for leading a financially sound life. After all your savings and investments, you must know what to do with them. If one matures how to use that fund; don’t spend it unwisely. Also your wealth accumulation is a long term process and may even be life long. You may reap the benefits of it much later in life, but your kids may feel the advantages much sooner because you planned well. Don’t give up and maintain a discipline when comes to managing your finances.
11. Build Assets pay up liabilities:
As and when you get a chance pay up all outstanding loans and liabilities or any money you owe anyone. It could be that car loan, or home loan or just some money borrowed from a friend or relative when you were in need. Buy a home even if it small or in an upcoming area. It will give you a sense of security when you sleep at night, also provides a sense of security to your family. If you are staying on rent, all the rent you pay is just an outflow and won’t give you anything once the lease expires. While homes are not affordable commodity these days, just buy a small place in a relatively less expensive but developed area. For instance in a city like Mumbai one cannot afford a home in the suburbs, but they can always invest in places like Mira Road, Virar or Navi Mumbai. You may not live there, but it is building an asset for you. You can very well sell it off and consolidate some of the other funds and maybe buy a place a bit closer later on. It may strain you a bit if you pay the rent of your current place as well as the EMI of this new home, but then you can always put the newer home on rent till you not live there or in worst case you can still shift there and avoid the rent part and travel a bit longer. Let your kids inherit your assets and not your liabilities.
12. Make a will:
Once you reach a stage in life where more people are dependent on you and you have something to give to them even when you are not around, it is time make a will. It makes sure that your assets and heritage is distributed among the people you want and the way you want and saves unnecessary trouble or disputes when you are gone and thus in a way safeguards the financial kingdom you build with your hard work and dedication even in your absence.
Being financially independent is a long term process, but then again every freedom movement in world history was. Take part in this freedom struggle to make your own life financially worry free and not dependent on factors you cannot control. Give your family a history of financial self reliance. Happy Independence Day!