Financial independence is critical for all of us these days. It gives you the ability to maintain and improve your way of life. Once you are financially secure, you have the freedom to pursue materialistic goals in your life. Let us examine the concept of financial independence in depth.
What exactly is financial independence?
It refers to the freedom to live the desired lifestyle without having to rely on work to do so. It means that you have enough money to meet your needs. This provides you with financial security by providing enough funds for emergencies, daily needs, and future requirements. It also implies that you are not securing your finances by incurring debt.
People who are financially independent can retire early as a result of careful planning. You will be able to live the lifestyle you desire after retirement if you achieve financial freedom. It allows you to do things your way without worrying about money.
Those who successfully implement this concept make money work for them rather than against them. Now that you understand the concept of financial independence, let us look at how to achieve it.
The Advantages of Financial Independence
You have already grasped the concept of financial independence. Let us now look at the advantages of achieving financial independence:
- Emergency backup: It prepares you for future financial emergencies. You do not have to be concerned about seeking outside assistance in the event of an unfortunate circumstance. You can safely exit the situation by using your emergency funds.
- Develop more discipline: Once you have the savings and investments, you can begin to develop life discipline. You spend less money on frivolous items, allowing you to appreciate what you have.
- Live your life on your terms: Because you have the option of not working at all or taking a break to pursue other interests, you can live life on your own terms. It makes you want to live your life.
How Can You Achieve Financial Independence?
The methods listed below can assist you in achieving financial independence:
1. Set aside 50% of your earnings
This appears to be a radical idea that does not appear to be feasible. Even so, some people adhere to the idea of saving half of their after-tax income. These individuals put their savings toward emergency funds, debt repayment, and early retirement planning. This super-saving plan allows you to pay off your debts much sooner, before you reach retirement age, and without paying additional interest.
To put this concept into practice, you can do either of the following:
- Use a lower income set for living: This is appropriate for households with two or more earning members. You can use this strategy as a couple, roommate, or partners to maximize your savings. You can plan your finances so that your expenses equal the income of the lower-earning member. You can begin by living on a higher income and gradually transitioning to a lower income lifestyle.
- Maximize your earnings: The name says it all. You must find ways to increase your income or simply reduce your living expenses. However, because utility bills, groceries, and gas cannot be avoided, living expenses can only be limited to a certain point.
2. Become financially independent by learning budgeting
The concept of budgeting supplements the saving habit. Budgeting allows you to maximize your savings by identifying activities where you can save money. You can even save more money by budgeting properly while still doing things you enjoy. The 50-30-20 budgeting rule can be used to live a financially stable lifestyle.
3. Passive Income
Passive income is income that is generated automatically and requires little effort to maintain. If you want to become financially independent, this is one of the most progressive options. It can be earned through a variety of sources, including rental property, the stock market, and company ownership. Because these jobs do not require your full investment, you can continue to focus on active income while earning money from both sources. The following are some examples of potential passive income sources:
- As a freelancer, you can provide services. This gives you the freedom to work on your own terms and at your own pace. You can serve multiple clients at once, allowing you to earn significantly more than a 9-to-5 job. In the long run, you can set your own prices for the services you provide.
- Affiliate marketing: It can help you earn money by promoting products and earning a commission on the sale of those products. You can enter into agreements with sellers to earn money through affiliate marketing.
- Blogging: Blogging can help you drive traffic to your website. You can connect your account to Google AdSense, add affiliate products, and sell your own products on the website. This will be a consistent source of income because your old blogs will also help you earn money.
- Rental property: You can earn rent money by renting out your properties. This will generate consistent income with minimal effort. You will only need to make a one-time investment to purchase the property. Later on, it will provide you with regular returns.
Investments are a major factor in achieving financial independence. You can multiply your money much faster than any other source if you build a proper investment portfolio. Investments rely on the power of compounding to help you build a large financial corpus. There are many different types of investments that can provide positive returns on investment. Let us look at the various types:
- Fixed deposits are one of the most secure and traditional investment options. You must set aside a lump sum amount for a set period of time until maturity. When the maturity period arrives, you will receive the principal and interest amount after any tax deductions (if any). Savings rates of interest are low, whereas FD rates of interest are higher. This is why, rather than putting money in a savings account, you should put it in a fixed deposit.
- Recurring deposits are similar to fixed deposits in that most financial institutions offer the same interest rate on both. This is more convenient for those who are unable to fix the lump sum amount all at once. Instead, they can set aside a specific amount of money on a regular basis with a maturity date. Salaried people frequently choose RD.
- Mutual Funds and SIPs: You can invest in mutual funds and SIPs because they are extremely safe investment vehicles. After calculating and balancing the risk, fund managers invest their money in various securities. This guarantees that you will receive a certain amount of interest on your investments. All you have to do is put money aside on a regular basis.
- Products with Unit-Linked Insurance: These plans fulfill both functions. A portion of your premium is used for life insurance, while the remainder is invested. These are vulnerable to capital-market risk. Before investing in ULIPs, you should carefully consider your risk tolerance and capacity.
5. Expand Your Knowledge
If you want to use these methods successfully, you must understand the concept completely.
You can accomplish this by reading books by experts such as the following:
- Your Money or Your Life: Vicki Robin and Joe Dominguez coauthored this book about the FIRE movement. The book discusses financial tracking tools, passive index fund investing, budgeting, and developing healthy financial habits.
- Skip the Line: This book was written by entrepreneur James Altucher. It teaches you how to start a new business, gain financial independence, change careers, or learn a new skill. This book teaches its readers how to live a life of their choosing.
- The 4-Hour Work Week: Tim Ferriss’ book teaches you how to earn more money even if you work fewer hours per week. The book is a step-by-step guide that will help you reconsider your perception of time and how it affects your productivity.
You can also take online courses to learn about investing, saving money, and budgeting. These online courses can assist you in learning these concepts in greater depth and clarity. Among the useful courses are:
- Fundamentals of Finance: Financial Planning and Budgeting: If you want to learn about different aspects of your behavior that can influence your financial decisions, take a look at this course. This online course will teach you how to create and manage an effective household budget.
- Securing Long-Term Investment Returns: This free investment course teaches you how to use your investment returns. You will also learn about risk-adjusted returns and how various investment vehicles are expected to perform.
- Saving for the Future: This free online course is designed for those who want to save money for the future while compounding it. You will learn how to save money while thinking about retirement goals, future purchases, and dealing with unexpected expenses. You will also learn how to prepare for disasters.
- Mutual Funds: An Introduction: The NSE offers a self-paced course for beginners who want to learn about mutual funds from the ground up. You will be able to comprehend the regulatory and tax implications of mutual funds. You will also learn about investment plans as you progress through the course.
I hope this article has helped you learn how to become financially independent. Keep in mind that it is a way of life that can provide financial security. Once you’ve achieved this level of independence, you’ll have more time to devote to other worthwhile pursuits.