Target Financial Independence this Independence Day

We all work right from graduating till retirement for five days a week, sometimes six days a week, only to spend what we have earned. In the midst of this daily hustle, how much time do we actually devote to plan for financial independence? Hardly any! Is financial independence a chimera? The answer is NO.

The financial independence refers to a state where we have enough resources at our disposal to meet our expenses as well as to fulfill our future financial goals. But when we earn a fixed salary, month on month, which at times is barely sufficient for meeting monthly expenses, can financial independence be actually achieved? YES. With careful planning and follow-up actions, we can build a financial reservoir to break the dependency on the monthly salary. And what better day to start this journey towards financial independence than the Independence Day. The first step that we should take on this journey is to stop procrastination. The more we, delay the more challenging it will become for us to achieve financial independence.

A smart approach would be to make sufficient savings and investments in the early stages of our career. The regular source of income allows us to build a corpus of funds that is sufficient to take care of all our expenses. We can work towards goals like house, vehicle, education and marriage of children, and still, have sufficient corpus that will give us a regular stream of money to retire peacefully even before reaching the superannuation. This is not a pipe dream anymore. The financial ecosystem has changed so fast that a decade of judicious investment is all that you require to achieve financial independence. Following the six steps mentioned below would help you move towards your financial Independence.

Step 1

Save and Invest 

Start with saving part of your salary by cutting your discretionary expenditures. This can be done by committing to invest at least a minimum of 20-25% of your salary. The more you save now, the more your money compounds. The power of compounding should not be underestimated.  If you invest Rs.1000, compounding at 10% p.a. you will have Rs. 2,593 at the end of a decade, Rs. 6,727 at the end of two decades, Rs.17,449 at the end of three-decade, Rs. 45,259 at the end of four-decade, and Rs. 1,17,390 at the end of five decades. Just calculate the appreciation you will receive on 20-25% of your salary if you save religiously and invest intelligently! 

Step 2

Include a healthy dose of Equity in your financial portfolio 

Equity investments have rewarded the investors by multiplying the investments in a relatively short span of time compared to other investment avenues. If one starts early, plans properly and invests meticulously, one can endeavor to create sufficient wealth thereby helping him/ her to achieve financial freedom at a quite early age.

Step 3

Adopt the SIP route 

If one is unable to commit lump sum investments, systematic investments in equities would also enable an investor to create wealth that can take care of his/her early retirement. SIP option has made it possible for investors to bring the much-needed discipline in their approach towards investment while making the magic of compounding work in their favor. If you make a small SIP of Rs. 1000 per month in an equity mutual fund that offers about 12% annual returns, you will have a corpus of Rs. 35.3 lakhs at the end 30 years! If one has a sufficiently good corpus to invest, post-retirement and needs regular income source, one can resort to invest in equities and plan systematic withdrawal which would not only take care of his regular monthly need of the funds but also keep growing at better rate than the so-called risk free instruments in the market which are usually used by senior citizens to park their hard-earned lifetime savings, thus simultaneously creating wealth for them.

Step 4

Plan for your goals 

Have different investment strategy for your goals (marriage, health, education), quantify them and set the time horizon for the same. You should do research and give enough time to make informed decisions, don’t follow a herd approach and invest time and effort to know about the fundamentals. Prepare your action plan for changing scenario and stick to it during the investment horizon. This will prevent you from making an impulse decision. Don't be swayed by the exuberance or fear of the short-term aberrations. Do not panic when the markets are volatile if the investment horizon is long-term.

Step 5

Manage Risk

Have liquid funds to meet any emergency situation. Define you contingency fund requirements and work towards accumulating the same. The idea is that your financial plans should not get hit by any contingency which anyone can face at any time of life, be it health issues, job loss, repair and renovation to your physical assets. Try to build a reserve which will sustain you for 6 months should you not receive any inflows in this duration. 

Step 6

Keep track of your investment and Review

Though short-term volatility is bound to happen, you should focus on the fundamentals of invested stocks. Once you have created an investment plan, keep it on track. Review your portfolio from the standpoint of the rationale that formed the basis of your investment. Don’t be too adamant just because you have put in time and effort for your previous research; keep that flexibility to amend your portfolio with changes in fundamentals. Remember overconfidence may be hazardous to your wealth.

Like Indian Independence, which entailed dedicated and passionate pursuit of freedom by our freedom fighters, a whole-hearted commitment to financial planning will ensure that you achieve financial independence as well.