How to achieve financial independence faster?
How to achieve financial independence faster?
Every one of us would struggle to earn money till retirement. By that time, we have money, there is no life to enjoy. Old age keeps us busy visiting Doctors, Hospitals, etc., How about achieving financial independence early in your life? This independence day, I would provide you some mind blowing tips on how to achieve financial independence and reaching your financial goals faster than you thought.
What I mean for Financial Independence faster?
Every one would have set financial goals like buying a dream home, best child education, accumulating money for daughter's marriage, earning money for retirement, etc. The issue is these goals are set for 10, 15 or till the time individual attains 60 years of age. Some of the goals are not accomplished due to death of the individual. How about reaching your goals at 50 years of age? Won’t you get excited if you achieve all your financial goals before 45 years? What would you think if your family would achieve all the financial goals irrespective whether you are there in this world or not? This is what I feel is called as achieving financial independence faster in life.
How to achieve financial independence early?
Now let me come to the main point. To achieve financial independence in the early stage of life, you may need to follow these 10 simple tips.
Tip # 1: Consider term insurance to achieve your financial goals in your absence
Last week I got a message on this blog from Ms Sujatha Ramakrishnan (Name changed) indicating that she brought an insurance policy for Rs 2 Lakhs per annum for her just born baby. In a casual email exchange she indicated that this is ULIP and risk coverage is Rs 20 Lakhs. She says, I want to give quality education to my child irrespective whether I am there or not.
There are thousands of individuals who think like this due to lack of awareness about investment options. She can still do it by taking a term insurance by paying Rs 10,000 per annum for a risk coverage of Rs 50 Lakhs and invest Rs 1.9 Lakhs in a bank FD earning 9% interest.
Your first step in achieving independence should be taking a good term insurance plan. This would help your family achieve financial goals in your absence.
Tip # 2 – It does not matter how much you earn, but matters how much you save
A few years back, I was earning Rs 30,000, and was saving 10,000. My friend was earning Rs 20,000 and was saving Rs 10,000. When I realized this fact, I started questioning myself, why the hell I am thinking that my income is growing, but my objective should be to increase the savings first.
I rephrased the formula of Savings = Income minus Expenses with Expenses = Income minus Savings. Now my concentration is both increasing income and increase savings and keeping expenses constant.
Tip # 3 – Make a budget and go over it
The best way to be within the expenses is prepare a budget for the month and go over it. It would be difficult in the beginning, but when you start planning, you do well. How many of you think of going for window shopping and spend money which you have not planned? You prepare an expense budget for the month and strictly follow it. You may put a cap on luxury expenses and go and enjoy it to that extent.
Tip # 4 – Be financially literate and invest in high yielding investment options
You have saved money. But how well you are growing such savings? There are several investment options like Bank FD, RD, Mutual funds, Stocks, IPO’s, NCD’s, Corp Fixed deposits , etc. Where are you investing? Do you know that a low risk appetite investor can still invest in mutual funds provided he or she invests for the long term in best mutual funds in India. Intelligent investor would study investment options and would double, triple money in 3 to 5 years time. The poor knowledge investor would invest in ULIP schemes and would lose money. I am not asking you to join any certified financial planning course. You can follow simple financial blogs, 30 minutes in a week to know more about investment options and the risks involved.
Tip # 5 – Create multiple sources of income
While you would invest your money in bank FD or mutual funds or stocks, you should actually create multiple sources of income. What happens if you lose your job? What happens if you incur loss in your business income and your income stops? Creating multiple sources of income would help you to manage your commitments as is. If you are employed in a company, you can still earn money by spending few hours in a week in what you are passionate about. You may like to write articles, spend your mornings by teaching people, creating blogs like this etc. You can build income earning assets like buying property and giving on rent. The day you feel that you are able to earn at least 30% from other sources compared to your salary or business income, you have achieved this goal. You should continue this.
Tip # 6 – Be ready to face unexpected financial problems
You would have invested in a mutual fund which would have provided losses. You would have invested in a real estate property and real estate prices would have fallen down. Be prepared to face any such unexpected financial problems.
Tip # 7– Pay off your high cost debts
You have a car loan and you have a personal loan. Which one do you want to pay faster. How many of us know that personal loan comes with much higher interest rates and car loan comes with lesser rates? If you have surplus money do you pay off some of the housing loan or pay off personal loan or car loan? If you have debts, analyze how much interest rates they are charging and which one you can pay faster. What are the pre-payment charges or early payment charges. This would help you to pay high interest rates and come out of debt at a faster pace.
Tip # 8 – Reduce income tax
What I meant here is not to avoid income tax. You can legally cutoff income tax in several ways. Apart from 80C deduction of Rs 1.5 Lakhs, you can get 80D deduction for health insurance premium, housing loan interest up to Rs 1.5 Lakhs etc.,
How may of you know that you can get unlimited housing loan interest rate exemption on second housing loan?
Instead of investing in Bank FD for 10 years or more and paying FD interest tax every year, invest in PPF for 15 years where you would get tax free returns after 15 years.
How many of us know that you can open second PPF account in your spouse name and invest Rs 3 Lakhs in total in your name and in your spouse name and get Rs 94 Lakhs after 15 years which is tax free.
Tip # 9 – Take help from your family to make savings
I believe in reducing expenses by discipline and not ask my family to reduce expenses. I would narrate a small incident happened 2 years back.
I was planning for my investments in my room in my laptop. My daughter was reading in their bedroom. My son was busy doing a painting in the living room. My wife was preparing a special food that day in the kitchen. We all occupied in separate rooms. I called all of them for a minute and showed what was happening. We were wasting power energy without our knowledge. Our power bill was coming around Rs 2,000 per month. I have educated to my son and daughter about saving. “Use it when you need”. Now we all try to sit in a single room whenever possible and reduce power consumption. You cannot believe that now our power bill comes to less than Rs 500.
A small discipline and support from my family, helping me to save Rs 10,000 per annum. What happens if you find 10 such savings in your house? Why you cannot implement them now?
Tip # 10 – Take help of your financial advisor / Financial experts
Still, if you think that you want to take experts opinion about your finances, you can approach a financial advisor and take his expert opinion. You should be able to realise in case there is any biased advices from him or her. Some money minded financial advisors would keep recommending ULIP schemes or local ponzy schemes which you should be able to avoid. Don’t mind paying some fees which you may definitely afford.
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How to achieve financial independence
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