Financial Independence: Here is what you should know!
We all have different goals in life, and the ways to earn our livelihood are also different. But the most important thing that everyone is always worried about is the management of finances. The ultimate aim of every individual is to be finally sound, stable, and independent. So, this article will elaborate on how one can be financially independent by following a few basic rules or undertaking necessary steps which may be essential.
What is Financial Independence?
In a layman’s language, financial independence refers to the state in which one’s income is sufficient enough to pay off all the expenses without being dependent on someone for the same. Also, one may create passive income from their earnings by either investing the surplus funds or avoiding risks if any, and generating a corpus out of it.
People, who are earning from their employer, may save a portion of their salary every month and invest them for years, and achieve their financial goals. Similarly, some people prefer to start a business of their own, and those who already run a business try to make it successful and grow over the years, which would yield them income or funds.
Tips for Financial Independence
Here are the tips for moving one step closer towards financial independence, irrespective of the quantum of finance you have now.
Clarity of Goals
It is important to define and be clear about your short-term and long-term goals. Suppose you are a small business owner or want to start a business of your own, be very clear regarding the future of business. Let us assume that the short-term goal of your business may be to earn a Net Profit of 20% of the Net Sales. Or say, the long-term goal may be to expand your business over various cities. For any individual, it might be to retire at the age of 40 years with a sum of 1 crore. So, define your goals clearly; it will help you to take the necessary steps towards it.
Once you define your goals, the next step is the planning stage. One must properly plan every tiny aspect which is related to finance and business at an initial stage. Proper study and research must be conducted before taking any decision. If you presume your business sales to grow at 30% annually, you prepare a blueprint of how you will achieve that. Right from the product launching stage to branding or marketing, everything needs to be considered. For an individual to retire with X amount of money, they have to invest in different avenues and diversify their portfolio. So, if the plan of action is appropriate, following the current market conditions and the economic policy of the country, one may succeed in attaining financial dependency.
Budget plays an important role in forecasting income and expenses at a prior stage. It can help in estimating your savings amount, that inturn helps in generating a passive income and create wealth for the future. Even businesses use budget forecasting techniques to get an idea about the income and expenses and prepare for any contingency beforehand. Businesses that run on a credit-based sales system can use the Cash Budget forecasting technique. For any working individual, preparing a budget is easy if the income is fixed.
Every Indian has a habit of keeping aside some funds for emergency purposes. Every business or an individual should keep some amount aside to be used only during any contingency such as natural calamity or medical emergency. For business, according to the Indian Companies Act, there is a list of provisions and reserves which one can undertake and use during times of need. For instance, small businesses could pay the employees and labourers from the reserves during the global pandemic COVID-19.
Say No to Debt
Try to stay away from debt or the sources such as loans which result in the creation of debt. An individual should avoid taking loans as much as possible because if one gets into the vicious cycle of loans and interest, it becomes very difficult to come out of it. Businesses always need capital, so the owners must focus on studying the working capital cycle and the creation of long-term assets. As loans are an inevitable part of business, one must try to repay them as soon as possible.
In an ever-growing and developing economy, to cope up with inflation, one must not rely on only one source of income. One can earn income through investing the savings in various avenues, renting a vacant piece of property or land, working as a freelancer along with full-time work, or running several small businesses.
One must cultivate the habit of saving regularly irrespective of earnings. Avoid unnecessary expenses and cut down on the expenses which are not important.
Selecting the right Investment source
Invest your savings based on your requirement. You need to determine whether you will be needing the money immediately or after a year or if you can manage without it for 3-5 years. After assessing the risk, one can invest in risk-free securities like Savings Bank A/C, Fixed Deposits, Commercial Papers, Government securities, Govt Bonds, for short to medium term and PPF Account, etc. for risk-free long term. If you are willing to take risks, then you may invest in mutual funds, equity shares, derivatives, etc. But make sure to study the market conditions and understand the trade cycle before making any investment. For any growing economy, the stock market is volatile but is going to grow in the long term.
Diversification of portfolio
The portfolio should be balanced and diversified. This means that you must have risk-free and risk-bearing securities in your portfolio. This will lead to the maximisation of the returns and also help in minimising the losses arising from risk-bearing securities. Simply put, if you have some amount to invest, consider splitting it in an FD and in mutual funds, depending upon the need, to diversify your portfolio.
For any business or individual, insurance is a prerequisite. Right from taking insurance for your warehouse or stockroom to taking insurance for one’s life, we must always be insured against unexpected events and losses.
Loans and Investors
Take fewer loans and try to gain as many investors as possible. This will keep you away from the burden of the payment of the interest and principal. Also, if investors have a good brand name, they can add value to your business.
Do not try to evade tax, but try to avoid taxes. One can avoid taxes by investing the surplus amount in Tax-free Investment Avenues such as PPF A/C, Tax-Free Mutual Funds, investing money under the schemes of Section 80 C, D, and so on.
Surroundings and peer pressure
Try to keep positive people around you who help you build at both personal and business levels. Do not try to imitate any business or idea and do something just because of peer pressure. Analyse any decision well before taking it and understanding the consequences of the same.
Thus, we can conclude that by adopting the above-mentioned tips, we will come closer to being financially independent. Plan properly, try to stick to the plan as much as possible, and stay firm in your faith.