Posted On Wednesday, Aug 13, 2014
“At the stroke of midnight hour, when the world sleeps, India will awake to life and freedom. A moment comes which comes but rarely in history, when we step out from the old to the new, then an age ends, and when the soul of a nation, long suppressed, finds utterance.” The iconic speech delivered by India’s first Prime Minister Jawaharlal Nehru as we declared our independence, the fruit of the great struggle, still inspires a sense of pride and patriotic affection.
As we celebrate our nation’s independence this weekend, what better time to reflect on where we stand on the path to our own financial independence!
What is financial independence… to you?
We could begin with taking stock of what financial independence, means to us. It is about how we want our finances to match our life priorities and facilitate them. Broadly speaking financial independence mostly revolves around the idea of being able to maintain a desired lifestyle without being dependent on anyone, even when there are no regular streams of income.
It could be the freedom to quit the regular 9-5 job in order to pursue one’s interests. Or it might mean the ability to freely switch jobs without worrying about the temporary loss of income. Others might be content to think of financial independence as the financial status to be achieved at retirement…once they reach the age of 65 years or more. Thus financial independence could mean different things to different people.
3 must-haves for financial independence
Financial independence is an achievable goal. Here are 3 must-haves that are essential for us to be on the path to financial independence.
i. Avoid unnecessary debt
Carrying large credit card balances and other consumption debts is a sign that our lifestyle exceeds our income. Such consumption borrowings come with very high interest and they hurt one’s financial wellness. Unlike a home loan which creates an asset i.e. real estate property, the interest paid on consumer debts is totally forfeited.
Getting rid of high interest consumptions debts, at the earliest possible, is the first step towards achieving financial independence. Once free, keep off them as much as possible.
ii. Pay yourself first
Saving could be viewed as the practice of paying oneself first. Traditionally savings applied to whatever is left of income after the long list of expenses. However to achieve financial independence that equation needs to be turned around –
Expenses = Income – Savings!
We ought to decide how much is to be saved and then limit our spending to what remains.
The habit of paying yourself first will go a long, long way in creating wealth. Most people might believe the secret to wealth and financial independence is a high paying job. Or that it is a prospering business. However it is neither of these. It essentially lies in spending much less than what a person earns. It lies in saving adequately to create assets that can generate income for you. And that brings us to the third good habit for financial independence.
iii. Invest in growth assets
Growth assets are typically those assets that have the potential to give capital appreciation over the long term as against in generating current income. Examples are equity shares, equity mutual funds, real estate and gold. Growth assets help in building wealth. Generally a balance of income assets and growth assets would be required for an investor at any life stage. The role of proper asset allocation for achieving investment success cannot be understated.
How long you let your investments compound is a major factor in determining how large they grow. So it’s good to follow the old thumb rule that says invest as early as possible, as often as possible… and as much as possible!
Much like India’s freedom struggle, achieving financial independence is a slow process and one cannot hope to reach it overnight, over a few weeks or even months. However every step you take in that direction would bring you closer to the goal. Before making any investment decisions please consult your financial advisor.
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