How to achieve Financial Independence? Explained in simple language
Almost everyone in today’s era wish to have financial independence. At least most of the people I have met wish so. Isn’t it?
However most of them have no idea how to become financially independent?
Oh yes, I have heard this term many times in TV talk shows and have also read about it in the newspapers. It sounds too complicated to me. Can you explain to me what is Financial Independence in a simple language?
Financial Independence is a state which is achieved when you have earned and saved enough money so that you do not have to work anymore to support your lifestyle for the rest of your life. In short, you do not have to work to earn money. Don’t get confused. You still can work even after achieving financial independence. You can do whatever work you like, you can work just for pleasure. Financial Independence means you no longer have to slog that 9-10 hour shift everyday in order to pay your monthly payments, credit cards etc.
Wow, this sounds great. Can you throw some light on how can I be Financially Independent?
There is a simple time trusted formula with few set of rules for achieving Financial Independence.
- Your spending should always be less than your earnings
- Increase the GAP between your income and savings – Earn more
- You must invest what you save judiciously
If you follow the above 3 step formula, none can stop you from achieving financial independence.
Hmm… looks simple per say but how to implement this into practical life?
Ok, let’s take each step one by one
- You must always spend less than what you earn:
- It’s quite possible to spend less than what you earn. If you are able to control your spending habits, you will be able to achieve this equation. First tool to achieve this is Budget. A simple budget can save you from many things. It will tell you where your money is going without you making a note.
- Don’t splurge in buying that big house just because you can afford it. Buy the right size house. Home ownership can be a quite expensive affair.
- Don’t buy big automobiles. Remember, your car is not your asset. Monthly payments on big cars will never let you move towards financial independence.
- Be little frugal in your living. Cook at home, eat out less frequently. This will not only save you money but also save your health in the long run. Stay fit and be WEALTHY.
- You must strive to Increase your earnings:
- Importance of education can never be denied. If you are well qualified academically, you have a better chance to land a high paying job. Keep working towards increasing your income by augmenting your qualifications, certifications. This will boost your ability to save and invest more towards your main objective, which is financial independence.
- If you are good at something, try to earn some income from it. For example if you are good at graphics designing, use your spare time to take up some freelance projects which can earn some side income for you.
- You must invest wisely:
- Savings are important but savings alone will not make you financially independent. Invest wisely so that your money grows at a healthy rate
- Use a mix of equity, debt and use diversification so that your investments remain recession proof.
- Invest from day 1 of deciding that you want to achieve financial independence. Do not wait for the right time to invest.
- Avail tax exemptions to minimise the loss of money to taxes.
- Structure your investments properly and practice goal based investing
If you are able to achieve a healthy saving and investment rate month on month and manage your investments properly, you can be financially independent sooner than you expect.
We at WealthSamurai always believe in a healthy savings rate and proper investments as the best tool to take control of your financial life.
That’s really a helpful. But how do I know the details like where to invest, which stock, which fund to buy?
Once you start tackling the three points mentioned above you will get more insight into the micro equations like where to invest, what amount to invest, what percentage of diversification is required etc. But important is to take the first step towards financial independence and keep going.
Happy Investing !!!