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India achieved Independence from the British on August 15, 1947, due to the struggle and sacrifices of the freedom fighters and the common man. The nation had been under shackles and most of the production was done in the country for the benefit of the empire and the British rule of nearly two centuries had almost bankrupted the country, pushing the people to abject poverty. The foundation for progress was laid by the new Indian government and the country has been progressing slowly and steadily towards being a developed country. The path has not been easy but India is on the way to becoming a financial powerhouse like it was a few centuries back.
Many people wish to retire at an early age and enjoy their remaining life under no financial stress but are not sure how to achieve this. The notion of financial independence is not the same for everyone. Some would like to be independent without any help from their parents, others would like to retire early when they are still healthy and wish to travel, spend quality time with their family and enjoy the whole process with their ample financial resources. There are others who simply wish to see their family members progress with the resources that they have.
India has been able to reach this growth through the plans they have put after discussion and deliberations and in a similar way even a common individual can hope to achieve financial independence by working according to a plan. Financial independence would mean that you go to work because you love to work and over the weekend would be able to relax peacefully without financial worries. To achieve this you would require a plan, discipline to work through the plan, and a passion to continue investing for a long time to achieve the results. By working on the following steps a person would be able to achieve financial independence and freedom-
1) Set out financial objectives and goals-
Make a commitment by putting things in writing. You can refer to the goals again and again. Make them very specific and measurable. Knowing where you are and where you wish to be will provide you with a clear roadmap to reach the destination.
The goal here is to achieve financial independence from having to work for a living and living life on your own terms. When you are in your 20s you have decades ahead to achieve those goals and you can work out a strategy to achieve the goals, save more money, invest, and retire early in life. The other goal may be to eliminate debt and you can have a plan for when you can achieve this. When the objectives are written and available in front of you they will serve as reminders of the time by when you wish to achieve financial independence.
The goals should be your own and not focus on what others are doing. If some of your friends are renovating their house or purchasing a second car doesn’t mean that you have to do the same things.
2) Prepare a budget-
A budget is like a foundation from which you can lay out your financial goals. You know all the money that is coming in and all the expenses that are taking place in your house. The budget will give you a purpose as to what to do with the money and will make you aware of where the money is being spent.
The budget creates financial stability in a household. With the tracking of expenses, the budget makes it easier to pay the bills on time and save for big expenses, like a vacation or the purchase of a car. Budgeting would help the person to map for the short-term, medium-term as well as long-term goals. A track can be kept of the small expenses that may otherwise go unnoticed. Due to a budget, a person can avoid blowing away hard-earned money. It also gives you an idea of how much you have and how much risk you can afford in your investments.
3) Choose the right asset for investment-
Now that you are aware of the money available for investments, you have to select the asset class for investment. Each asset has its risks as well as rewards.
- Stocks as an investment class are coming on their own in India with the quick opening up of Demat accounts. The returns from equity have been the highest among the asset class in the last few decades. The investment in systematic investment plans of mutual funds is at an all-time high. Though there is volatility in the stock markets the returns of the BSE Sensex are 16% since its inception in 1979 which has been able to beat inflation by a sufficient margin.
- Gold is an important investment asset in the country and India is the second largest consumer of gold worldwide. It has been an important investment asset since the concept of wealth creation in human civilization. Over the last 20 years, gold has given returns of 12 % but in the last decade, it is only 5.25%. It is difficult to store gold in the house due to the risk of theft but people can always invest in the sovereign gold bonds issued by the government of India. A person can invest 10% of their portfolio in gold as part of the asset allocation plan.
- A bond is a loan from an investor to the borrower which may be the government or the company. The issuer of the bond is obliged to pay the holder the principal as well as interest over a specified period of time. The bonds can be purchased from brokerage firms, banks, and bond dealers.
A person should always have the right asset allocation after factoring in the level of risk. Many people have their portfolios skewed to the extremes which are that they will have innumerable stocks and mutual funds or all their savings would be in real estate or fixed deposits. Others may have all their investments in life insurance plans paying a huge premium.
A good way to know how much to invest in equities is 100 minus the age rule. Let’s say a person is 22 years old and wishes to invest Rs 10,000 every month. With the 100 minus age rule, they need to invest (100-22) 78% in equities which is Rs 7800, and the remaining Rs 2200 in debt.
If a person with a small salary can save and invest money in an equity mutual fund it can become a big amount over a period of time. Suppose there is a person with Rs. 35,000 salary, has a family, and wishes to invest Rs 10,000 every month in mutual funds through a systematic investment plan. The mutual fund scheme can easily give a return of 12%. In 30 years the total amount would be approx. 3.5 crore with an investment of Rs 10000 every month taking a 12% return into consideration. Thus we see that even a small amount invested can turn into a big investment over a period of time through SIP.
4) Have a plan for contingency-
Life is not always smooth. A person who is working and has a job may suddenly lose the job which may be due to the company running into a loss or personal performance not being good. We have seen during the pandemic that many small businesses had closed down leading to massive job losses. A person should have money in an emergency fund to meet the contingencies and this should be six months of the monthly income. Since the money would be required immediately the emergency fund can consist of cash, liquid fund, debt mutual fund, or can be even in a savings account. Many liquid funds allow immediate redemption and will credit the money to the bank account instantly.
Besides this, you should have adequate insurance cover. The life insurance cover should be 10 times the annual income which can help your family members in case of any untoward event. You should also have a health cover as your emergency fund will not last long in case of hospitalization. Sufficient insurance would give you mental peace during a health crisis as you would not be starved of money.
5) Review the plan and take corrective action whenever required-
There are many changes in a person’s life over the years and in keeping up with the times the financial plan may have to be restructured to be on track to reach the goals. A person may get a good increment, may have a second child, may get divorced or the wife may also start contributing more with her career progression. So small changes may have to be made in the plan from time to time.
There should not be too frequent changes in the plan. It depends on the person and they can review it every six months, in a year, or every two years. There may be short-term goals that you have already met and some of the financial products that you are invested in may be maturing. Once you have reached the amount that was planned by investing in mutual funds and equities you can shift the money to a fixed deposit when you feel the interest rates are at their highs or the stock markets are already very high and are likely to go down over the years.
Now that you have achieved financial freedom you can proceed as you deem comfortable. You can even retire from your job early and pursue your hobbies. The daily walks that you have planned can be carried out without any stress, but do remember that no one sits idle at home. Achieving financial freedom reduces your stress and you can educate your next generation on money matters and investments. You can carry out philanthropic activities which will bring a great amount of satisfaction. Achieving financial freedom is one of the biggest achievements in life.