Working hard, earning money, and spending that money. This is the formula to living a happy life that most people are familiar with. Everyone follows this formula to attain financial independence. You do everything to try and make sure that you can be financially independent one day. You Apply for Personal Loan, Home Loan, Credit Cards, and other credit, but that independence often remains elusive.
What is financial independence?
The term financial independence refers to that state where you have accumulated enough wealth to live comfortably, without having to work.
How does this state of financial independence work?
A person who is financially independent will have assets that earn income or cash flow for him of an amount greater than what his expenses are. Let’s say, for example; there is a person called A. A owns X number of stocks and these stocks earn him a dividend of Rs. 10,00,000 per annum. While A’s expenses for the same year are only Rs. 8,00,000, this Rs. 2,00,000 is A’s surplus or can be called savings. A earns more dividend than his expenses and saves a healthy sum without having to work; A would be considered financially independent.
Your assets and liabilities determine your level of financial independence. These are important factors and cannot be overlooked.
What are an asset and a liability?
In the simplest of terms, an asset is anything that you can easily get converted into cash to pay for any contingency or debt or outstanding payment. A liability is pretty much the opposite of this. A liability is a responsibility or burden of paying compensation. For example, your shares, bonds, debentures, and houses and cars with no mortgages are all assets, while your loans, outstanding payments, and bills are liabilities.
Can financial independence be achieved?
Yes! Although not a very simple task, achieving financial independence is not something that is unattainable or impossible. Many people work hard, and become financially independent, and so can you. It is not easy though, because you need to make provisions for a lot of things that might occur in the future. Simply covering your current year expenses cannot be called financial independence. You need to make adjustments and reserves for the future. Stuff like inflation, changes in government policy, taxes, and so on that are beyond your control have to be accounted for. You have to keep separate reserves for medical emergencies, sudden requirements and numerous other things.
How can financial independence be attained?
There are no set guidelines to attaining financial independence. Everyone has different requirements, desires and aspirations. The conditions depend on the age of the person, their required income each month, their monthly expenses, and a host of other details. You can, however, follow a few basic guidelines in your quest to achieving financial independence.
These seven guidelines are:
- Evaluate your current situation: The first step you need to take is looking at your current financial situation You need to understand where you stand financially. Look at your current income, its sources, how much of it you save and where you spend it. Then you need to evaluate your wealth. After this, take a long and hard look at your expenses.
Most importantly, how much you spend and where you spend it. Then look at your debts, and Credit Card bills. Once you examine and evaluate the situations of all your assets and liabilities, you can understand where you stand and where you need to get by and by which road.
- Set your financial goals: Once you understand your current situation, you can set your financial goals. These goals depend upon what you want, but, a good place to start is savings. In an ideal situation, you should have around 4-6 months of your salary as savings. Do not stress about this too much though. Remember, always start small but keep an eye out for the future.
- Budget: Although financial independence means that you do not have to work, it does not mean that your resources somehow become unlimited. So, you need to budget yourself, especially when you are starting.
- Dealing with your debts: Although difficult, you should try paying off all your debts as soon as possible. Or you can try and convert your loan if it is suitable. Loan conversion here refers to you paying off one loan by applying for a Personal Loan if it is suitable. For example, let’s say you have a student loan at 12% rate of interest, you go to Capital First and apply for a Capital First Personal Loan to pay off your debts if it is at a rate less than your current student loan. You can pay off your Credit Card bills too by applying for a Personal Loan at a rate usually lower than that on credit cards.
- Have surplus to invest: You should always aim to get surplus funds that are excess of income over expenditure. This surplus should not just go into your savings; instead, you need to re-invest a certain amount. Money earns money. Wherever you invest will also get you a dividend in a sort of chain reaction.
- Diversify your investment: You need to make sure that you invest in a diversified portfolio. This is a great strategy for the long-term because this makes sure that if a certain section you are invested in, crashes, you are somewhat cushioned by your other investments.
- Plan for the future, always: Whatever steps you take towards financial independence today, will pay-off in the future, so make sure that you work accordingly. Take into account inflation, policy changes, government changes, ever-changing fashion and trends and then make your investments.