Financial independence doesn’t have to be out of your reach. Here are a few simple tips to become a financially-independent individual.
Who doesn’t desire to lead a life without any financial constraints? Unfortunately, the vast majority of us find it extremely hard to attain financial independence or ‘Findependence’. Being a young adult, who has just stepped out of college and thrust into your first job, can be one of the most difficult phases in life, financially speaking. The reason is the small paycheck that most employers pay entry-level employees (unless you’ve passed out from premier institutes like the IIMs or IITs).
Don’t be hard on yourself though. Financial independence is not something out of your reach. In fact, you can easily become financially independent by being smart with your finances.
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So, what is financial independence? Well, ‘Findependence’ is basically having a roof over your head (rent-free), being completely debt-free and having enough cash at your disposal to lead a happy, worry-free life. It is that point in your life when you don’t have to worry about whether you’ll get your salary the next day or not.
Although we did mention earlier that becoming financially independent is not something that can’t be done, it is important to keep in mind that it isn’t something that can happen overnight either. You have to work your way towards financial independence.
One of the ways to reach financial freedom is by creating a sound financial plan and committing yourself to the plan. Oh, and don’t forget to be patient. It’s just like trying to lose weight. You need to work towards it while being patient at the same time.
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Here’s why being financially independent is a good idea:
- You no longer need to depend on your job for income. Rather, working becomes more of a choice for you. You have enough saved up for your future.
- You have lots of extra money to spend. This doesn’t mean you go around spending unnecessarily. But, being financially independent means you have enough cash reserves to satiate your desires. Want that awesome car? Get it for yourself without having to worry about running out of cash.
- Early retirement isn’t a dream anymore. Being financially independent means you were wise enough to invest in the right avenues. And this means that you have enough income from your savings and investments, so you really don’t have to depend on your full-time job. And you can happily retire; probably start your own restaurant or café, and chill for the rest of your life.
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Okay, time for some simple tips to set you on the path towards financial independence. Here goes:
Do you know where you’re spending all your money? If you don’t, then start keeping a track of your expenses or you’ll never be able to identify where you’re wasting money unnecessarily.
Jotting down your expenses can help you analyse your spending and cut out the unnecessary expenses. Also, you need to ensure that you don’t spend more than you earn. Budgeting will help you cut down on needless expenses and save more money.
For example, you may think smoking three to four cigarettes in a day isn’t a big deal. If each cigarette costs Rs. 10 for example, you’re spending almost Rs. 1,200 in a month on cigarettes alone.
Now think about it – do you really need to spend so much on something that is ultimately killing you? No, right? Besides, imagine that extra amount vegetating in your Savings Account every month. In a year, it could become Rs. 14,400 (this is without investing). Now, think of how much it would become if you actually invest it in other avenues.
Writing down all your expenses helps you formulate a budget and stick to it. And with budgeting in place, you’ll be saving more money, which would ultimately help you to become financially independent.
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The 50/20/30 budgeting rule
You don’t need to be a financial expert or manage multiple spreadsheets to understand how much money you should be spending. Just follow the 50/20/30 rule. This rule is the most recommended budgeting strategy by experts.
Under this rule, your expenses are categorised into three:
50% of your income is utilised for necessities such as paying your rent and other bills, monthly groceries, food, utilities and transport.
30% of your monthly take-home pay should be dedicated towards savings, investments and other financial obligations. Financial obligations can include paying off your Credit Card debts and Loan EMIs also.
20% of your income can be spent on personal stuff. These can include your grooming sessions, buying new clothes, etc.
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Renting a place? Get a roommate
When you’re on the road to financial independence, it requires you to do everything in your power to save as much money as possible. And one of the best ways to save some money (maybe not much, but even a little matters) is by getting a roommate if you are renting a place by yourself.
Suppose you have to pay a rent of Rs. 10,000 in a month, you’ll pay only half that amount if you get a roommate. More savings means more money at your disposal. Sounds good, right?
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Pay no attention to your neighbours
This is the golden rule for all modern folks. Stop trying to keep up with your neighbours, friends and colleagues. Ultimately, you gain nothing by doing so, but you do end up losing more and more of your money. Why would you want to waste all your hard-earned money to please your friends and neighbours?
Your neighbour buying a new car or your colleague getting a new penthouse isn’t something you need to be jealous of. Having a roof over your head and a car that runs fine is more than enough. You don’t need to own a mansion or a luxury car just because your friends have them. Instead, you should focus on building your finances so that you and your family can lead a decent, debt-free life.
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Me first, please
Putting yourself first is very important, especially when it comes to your finances. No, don’t you worry. It doesn’t make you a selfish person. Rather, you’re being sensible by doing so. You’re striving towards financial freedom and you are bound to prioritise saving above all else. And for this, you need to put yourself first.
So, what does it mean to put yourself first when it comes to money? It just means that you need to pay yourself (savings) before you pay others (when you receive your monthly cheque). Initially, this may seem like a daunting task, but it really is the most effective way to save more money and build wealth. In addition, it will teach you to live within your means.
When it comes to building wealth, a sound investment plan with proper asset allocation can do wonders for you. Also, your investment portfolio shouldn’t be only for short-term durations; rather, it should be a mix of short-term and long-term investments.
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Another common mistake most amateur investors commit is halting their investments when the market is down. Bad decision! You’re compromising on a lot of wealth that could have been yours. Over the long haul, you will easily accumulate a lot of wealth if you keep investing through the bad years. If you’re still not convinced or don’t feel confident enough about this, feel free to consult a financial planner who could help you with your investments through the good and bad market phases.
Allocating assets is also essential when you’re building your investment portfolio. In your early years, you should take more risks and invest in equities. These can fetch you high returns over the years. However, in the later stages of your life, you should shift your investments to debt funds as they possess less risk. As mentioned earlier, you could always take the help of a financial advisor to build your portfolio.
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Stop eating out
We all love to eat out. Not only do we get to eat our favourite cuisines, but it is also so much more convenient. You don’t have to do the cutting or cleaning. How awesome! Well, it isn’t that awesome when it comes to your wallet or your health, actually! Eating out frequently eats into your savings and at the cost of your health, especially if you tank up on junk food. Think of all the money problems and health complications that you’ll face as you age.
If you want to attain financial nirvana, then you have to make a few sacrifices. No, you don’t have to give up eating at your favourite restaurant; you just need to limit yourself.
We’ve got a simple solution to help you. You get to treat yourself at your favourite restaurant once a week. But, you have to stick to homemade meals for the rest of the week. Simple and easy, right?
Now, here’s a small challenge for you – try the above method for a week and make a note of the amount of money you save.
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Be content with what you have
Yes! Being content with what you have is the secret to building wealth and living a debt-free life. Don’t believe us?
Let us tell you the story of Shrutika, a 26-year old. Once she completed college and got her first decently-paying job, Shrutika thought she could splurge on everything she ever wanted. So, one day, she took her Credit Card and went out on a shopping spree. She bought herself the latest iPhone, a 110-inch Ultra HDTV and the latest fashion accessories.
Along with these, she also ended up saddling herself with a Credit Card bill of Rs. 1,50,000. Well, we don’t have to tell you the rest of the story, do we? Anyway, just so you know, she is still struggling to clear that huge debt.
Don’t be like Shrutika. Before making such expensive purchases to satiate your heart’s desires, take a minute to ask yourself if you really need all that stuff. You might as well save the money and make more important purchases later on in your life. Food for thought?
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Aren’t these tips simple enough for anyone to follow? Saving money isn’t an impossible feat. Get started with the above tips and work your way towards financial independence.