The entire nation is celebrating the 75th year of Independence Day to commemorate the sacrifices of brave hearts who fought against the mighty British empire with the sole intention that future generations of this land must enjoy the benefits of independence. In fact, the true meaning of independence goes beyond political connotation. For a nation, political independence without economic independence makes no sense. Similarly, for every individual financial independence is a precondition to achieve his/her full potential.
In simple terms, financial independence refers to having complete control over your finances. It also means having the peace of mind that comes with knowing that you have invested enough to manage your expenses and lifestyle for the rest of your life. In the long run, financial independence gives you the confidence that irrespective of your age or life stage, you are well-equipped to handle all responsibilities.
But achieving financial independence cannot be done overnight. Just like political independence, achieving financial independence too requires adequate planning, meticulous execution, and patience. So here are six key rules to declare, fight for, and win your way to financial independence:
1. Evaluate lifestyle and outline goals: In the pursuit to be financially independent, first, you must prioritize your financial goals for the long-term while keeping life events in mind. Then divide your current income into three buckets – savings, expenses and investments – in a way that helps you achieve these goals. As your income increases, you should re-evaluate your allocation to each bucket
2. Be a habitual investor, not an occasional investor: Any ‘investment’ should not be a one-off thing. To achieve financial independence, you have to adopt a disciplined approach to investing. Build and expand your portfolio systematically and routinely. Investments made with a long-term horizon will offer sufficient time for your capital to appreciate and help you achieve your goals more easily
3. Diversify your investment: There is no magic formula for investing and neither is there a one-size-fits-all investment strategy for everybody. But an ideal way to protect your portfolio in a single asset class is to diversify your investments. Invest in a mix of asset classes, including equity, debt, gold, international markets based on your time frame, financial goals, and risk appetite
4. Prepare an emergency fund: Life is unpredictable, and no matter how well we plan and prepare, we will be surprised by what life has in store for us. So ensure you have an emergency fund that can allow you to survive for at least six months based on your average monthly expenses (living costs). This will act as a safety net if things don't go as planned, secure your investments and keep you out of debt
5. Save for life post-retirement: In the rush to achieve current goals, don’t forget to factor in savings for life post-retirement. That is the time when you will not have a regular or substantial inflow of funds, and therefore, you need to depend on your savings. It is thus important to allocate a part of your portfolio to investments which you do not withdraw in the short or medium term
6. Review your investments periodically: Make it a habit to review your finances every six months and keep track of the performance of your entire portfolio. This will keep you in control of your finances and allow you to make changes as needed. For example, increasing the investment amount, redeeming certain investments, rebalancing your portfolio, and so on. Given life’s uncertainty, achieving financial independence is today paramount for people across age groups. Following these simple steps will help you inch closer to this goal.
(Raghav Iyengar is the Chief Business Officer of Axis Mutual Fund. Views expressed above are his own.)
