Golden Rules towards Financial Independence
Financial independence is a state of mind without a concrete definition. For some it may mean the ability to pay for travel and leisure, for others it may simply mean building a fortune for their children. However, every individual craves for financial independence. But, only a few truly understand how to achieve it and hardly a handful sincerely work towards it. There is also a myth that you have to sacrifice all your desires to achieve financial independence. You may have to cut short on your desires temporarily. But in the long run, you can definitely fulfill all your desires. A mix of discipline, consistency and focus is all you need to achieve financial independence that can help you afford a life of your dreams.
Though in the middle of a pandemic, it is truly possible to start your journey towards financial independence. Crises only shift the focus of investment and usually drive change on grassroot level for many industries. Hence, crises in fact become the right time to start investing. However, financial independence is broader than simply investing. Though investing is a major part, it also means educating yourself, defining your goal and constantly upgrading to manage your finances well.
Following are my ‘golden rules’ towards financial independence:
Define a plan
Before you start investing, it is crucial you make a plan. Your plan will not start directly with where you want to invest. It starts with a few milestones and the ultimate goal. For example, the ultimate goal for someone may be to retire at the age of 60 with XYZ amount in the account and some milestones would be buying a car, a house, a luxury item, etc. at so and so age. Take time to think about your goal. Every person’s goal is different. It is going to be very personal and customised to you and you only. So take your time, visualise and set your goal and milestones.
Then move on to allocating your money. Usually around 50% of your income goes into essential expenses but that is not a concrete rule. You decide how much is your essential expense and what is left for investing / spending. You need not earn a salary to do this. You can even manage your pocket money using this plan.
Finally, you must decide how much risk you are ready to take. Risk is simply the possibility of loss. Based on your current savings and income, you can decide your risk taking ability. If you can, define a concrete amount beyond which you cannot or do not want to lose your money.
Before you simply start constructing your portfolio, educate yourself on various options available. The market is full of options apart from FDs, PPFs and Shares. There are various kinds of mutual funds and investment instruments that can help you select the best option.
Construct and execute your portfolio
From this step on, you can either hire a wealth manager or a portfolio manager if you have the kind of money. If not, you may do it all by yourself and it is still possible to manage your money quite efficiently. All you have to do is apply what you learnt. Based on your risk taking capacity and available investment options, build a portfolio of investments. Execute your portfolio as early as possible, it gives room for corrections and alterations.
PS: Do not forget to diversify your portfolio into instruments from low, medium and high risk bands.
Do not fall for someone else’s beliefs and goals
It is human tendency, especially in a pandemic where FEAR is the driving force, to get distracted by temporary market movements. For example, if the stock market corrects itself, people might simply book losses by immediately removing all your money from stocks. However, if they truly understood the market, they would have waited for the market to bounce back and earned profits. The phenomenon has been observed in India during this pandemic. Fear set in when the market crashed in March 2020. But now, the market has not only recovered but has reached its all time high levels. Definitely a correction will come, but the market will again bounce back, maybe it would take some more time. Sometimes time IS money!
I suggest, do not let your emotions take over your rational mind. Do not change your plan or take hasty decisions just because someone else is doing it successfully. Everyone’s beliefs, needs and goals are different and hence, you must stick to your beliefs, needs and goals. You may alter and adjust your plan if it truly serves the purpose, but impulsive actions will not lead you to your ultimate goal.
Revisit the plan for any modification
Regular monitoring and analysing of your plan is important. In this process, you are not only checking if you are able to pay for your expenses and earn profits. What you are truly checking here is that are your actions aligning with your ultimate goal? If yes, boom! If not, then you may have to alter your plan. You may even have to start all over again and that is alright. Till you are correcting your mistakes, you are on your path to financial independence.
No matter how safe your investments are, every individual is subject to risks. Risk to life, risk to property, to money, etc. It is important you pay special attention to insuring your risks. Dedicate an amount for various insurance schemes that best fit your goal. Seek advice from an expert if need be. Do not blindly trust an agent, no matter your relation with him/her. Always do your research. Educate yourself in this stream and cover yourself for any risk you are exposed to. Make a list of all the risks you, your family and your work are exposed to and take actions to cover them.
Stick to your goal
Often we make resolutions on new year’s and tend to not accomplish them by the end of next year, merely due to distractions and lack of dedication. The same can happen here. However, you need to find motivation, internal and external, to stick to your ultimate goal no matter the odds.
Hope this helps! Have a happy journey to your Financial Independence!
Disclaimer: This article is meant for educational purpose. These are not concrete rules and people are free to adopt their own versions. This article aims at targeting beginners with little to no knowledge on how to become financially independent.