Financial independence means achieving that stage of life where you do not have to care about your post retirement expenses, and any uncertain expenses occurred in life. It’s not because you have inherited a lot, but because you have sorted your finances in such a way through making enough investments, protection plans, and emergency funds.
Let’s dive deep into the how’s of financial independence.
Not only in business, but also in personal financial management, we need to care about our expenses and draw a clear and specific line between our needs and wants. We could not compromise on our needs but we can budget our wants and try not to cross it.
READ MORE: Is it possible to achieve financial independence if you are not earning enough?
Your active income is likely to be allocated to the fixed expenses. It's your passive income that will help you in becoming financially independent. Passive income is the best example for making your money work for you. For example, dividend, rental income, car rentals, and many more ways to get your passive income in line for your financial independence.
According to age, your risk appetite is decided, so the compounding effect. There are various instruments to invest in according to your interest like stocks, commodities, debts instruments, government securities, ETFs, and many more to name a few. A well diversified portfolio according to your financial objective and risk appetite will help you in achieving financial independence through their magic of compounding in the market.
READ MORE: Credit planning vital for complete financial independence
Life insurance, health insurance, and other general insurance as well are helpful in protecting you and your family when the time is unfavourable to you. If you are the only member of your family it becomes necessary to buy life insurance to protect you against financial loss in case of your absence. Increasing healthcare costs in India can disrupt all of your savings and investment and the importance of health insurance is realised by everyone during the Covid cases.
In personal financial planning building a corpus for the times of financial emergencies like sudden job loss, accident, any sudden medical emergency, and temporary incapability of work. It will help you in keeping your finances stable enough to sustain for a while.
You must have an emergency corpus for at least 6 months of your expenses. It must be in liquid form as the name suggests your such finance is for your emergency, it should be available for you whenever you need it.
READ MORE: FIRE: Did the 50:30:20 rule work for early financial independence?
The greed of earning any type of return on the same would be a mistake as almost all the investments have some lock-in-period to liquidate. It is better to not invest your emergency corpus and keep it as liquid as possible, for example, in saving bank accounts or liquid funds.
Financial independence is all you need to manage your personal finances. However, it is not a one process, it has to be done on a regular basis to keep your financial stability at par. These above mentioned are primary ways and can work as sign that shows you are in the right path of achieving financial independence.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com