5 Steps You Need To Take To Become Financially Independent

Financial independence is a dream that most of us can achieve in the truest sense of the word. It primarily means a stage where you earn enough for a comfortable lifestyle without compromising on your future.

Financial independence means your earnings are enough to take care of your comforts and luxuries in the present while still enabling you to put aside money for your future. However, the term is a subjective one, and everyone has their interpretation of the same.

But, generally speaking, financial independence is about being in control over your financial matters – having a set actionable plan in hand.

Step 0: Set A Goal

It all starts somewhere with a robust, workable futuristic financial goal. Once you identify your financial goal, short-term and long-term, you can proudly think of being at the threshold of financial independence.

The next step is to prepare a plan towards achieving that goal. Whether it is putting your savings into the bank or investing in debt and equity funds, both the goal and the plan must be S.M.A.R.T.:

  • Specific – Determine financial goals in the short-term and long-term and make plans accordingly.
  • Measurable – You should assess, evaluate and modify goals and plan as need be.
  • Achievable – If the plans are unachievable and too good to be true, your dream of being financially independent will always remain far-fetched.
  • Realistic – Financial independence can be achieved only when the goal and the plan are practical and are synched with your life goals.
  • Timely – It is crucial to give timelines to the goals and the plans. Without a schedule, the dream is going to be unachievable. Also, the goals and the action plan mustn’t be too hard-pressed on time.

Step 1: Don’t Ignore Your Debts

It is a predicament that most people face – should I save for a rainy day, or should I first pay debt before saving! The rule of thumb is to save a little and pay off debts simultaneously.

If your savings is zero at the moment, it is good to start putting small amounts each month so that you have at least a month’s living expense put aside as an emergency fund. But, most importantly, ensure that you pay off more than the minimum interest on your debt.

If you are caught between debt and savings, you need to focus more on the former. The goal should be to pay off the debt first while keeping putting a nominal token amount into your savings.

Existing debt is like a perpetual sword hanging on your neck. It is like you are toiling day and night to put money into someone’s else savings – simply throwing away money for no good of yours. The faster you get rid of the sword, the better it is for your financial health.

Step 2: Save For Retirement

Various experts have their own take on this. Some believe that you should save at least 10 to 15 per cent of your income as a retirement fund; some say it should be at least 20%.

In general, the 50/20/30 plan is quite effective. This is how it works:

  • Calculate your after-tax income.
  • 50% of this amount is for spending on your current needs and necessities.
  • 20% is for savings and debt repayment.
  • 30% is the extra expense amount that you can spend on comforts and luxuries.

While it is not a mandatory rule, you have to make a similar plan best suited for your individual needs and requirements: just remember to start early. If you start in your early 20s, the 50/20/30 plan is good to go.

If you begin in your late 20s or early 30s, you may need to tweak it a bit. When you start in your late 30s or 40s, you will have to major tweaking with your expense-saving plan. The later you start, the more difficult the task will be – so, better to start early.

Step 3: Pick The Right Investment

When it comes to deciding your investment mix, do it after understanding and comparing different types of tax-saving investments.

You can pursue what others are doing by investing in a promising mutual fund. However, it would be best if you were focused on what your individual needs are.

Remember your financial goals and plans? Make a strategy that works for you. If required, take help from a financial expert for a customized plan. The objective should be to optimize the available investment avenues to fit your requirements and risk appetite.

Step 4: Insure Against Emergencies

COVID-19 had many lessons to impart, with one important finance-related lesson: catastrophe and misfortune can come calling anytime.

While we can do our best to tide through such unfortunate incidents – and may even come out stronger after they’ve passed – you need to be financially secure first to see you through such times.

Besides such events, you also need to have insurance cover from unpredictable events like accidents, deaths, natural disasters, and other emergencies.

Step 5: Be Careful When Buying Assets

We all have goals like buying a house, a car and adding other assets to our portfolio. But when investing in assets, you need to be very careful.

Buying A House

When buying a house, understand the kind of mortgage that you can afford – not just for now but also for the future.
While nothing can stop you from buying a house that is multiple times your income, ensure that the mortgage is below double your present earnings or even lower. The lesser the housing costs are, the faster will your dream of financial independence be realized.

Buying A Car

It is quite often difficult to keep within a tight budget when shopping for a car. However, understand the value of a car always depreciates. Also, the higher the car’s value, the more will be the interest on the loan.
One alternative is to buy a car cash-down. Or, if you have to finance it, make sure that the interest costs you less than one-fifth of your salary. This way, you will be within your limits and work actively toward achieving your financial independence goals.

In Closing

Achieving financial stability is not a one-day affair. It takes perseverance and dedicated work. You need to be aggressive to pay off your existing debts; that should be your immediate financial goal.

But as long as the goal and the plan are realistic and achievable, it is possible – you just need to have some patience!

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