scorecardresearch6 key ways to know how you can be financially independent

6 key ways to know how you can be financially independent

Updated: 08 Apr 2022, 08:04 AM IST

You can adopt and practise simple ways to become financially independent. 

To achieve financial goals it is important to identify your objectives as well as the timeframe for accomplishing all of them.

To achieve financial goals it is important to identify your objectives as well as the timeframe for accomplishing all of them.

Gaining financial independence is not an impossible dream to achieve. This word holds different meanings to different people. For some, it can be an accumulation of corpus worth crores of rupees while to others, it may be just a definite amount needed to pay for life’s necessities sans any hassle. In today’s world, meeting self-sufficiency may not be easy with rising prices of products. Lifestyle choices can be a big impediment to meeting financial goals for many.

However, following a few simple steps can put you on the road to financial independence.

Calculate how much money do you need

You have an estimate of how much money you may need in future depending on what are your expenses at present. Depending on the same, you can chalk out a financial plan that includes both short and long-term investment options depending on your income and liquidity. Effective money management now will help you continue with your financial plan uninterruptedly. The opposite also holds as detailed financial planning secures the much-needed finances for us in future.

Decide on the ideal asset allocation

There is no hard and fast rule to evaluate the exact asset allocation that would serve our purpose. However, depending on your need for liquidity and attitude towards risk, you can choose from myriad combinations of debt, equities, cash and cash equivalents. Also, depending on your financial goals, you can check your investment tenure too. However, while deciding on the kinds of investments and the period for which you would like to stay invested, you must check for the inflation rate and the presumed rate of return these investments would earn over the period. This will also help you decide if you want to invest in a lump sum or through systematic investment plans (SIPs).

Invest early

The time in the market is more important than timing the market. This is why you must invest early and continue to stay invested over the stipulated period. You can start by parking your money in several investment options through regular SIPs over a period. However, in case of a sudden windfall wherein you have access to a big amount suddenly, you can invest in a lump sum in various funds depending on your choice of assets.

Many people inquire why it helps to invest through SIPs. The key to making money is not just choosing the right investment options. Instilling the right financial discipline is necessary. This becomes possible if you choose to invest through the SIP mode. Also, paying towards investments ensures rupee cost averaging as you get to buy more units at lower net asset values (NAVs) during market corrections.

These are investments that can beat inflation. 

Have an emergency fund

What if you suddenly find yourself in dire need of money and are unable to garner the necessary finances? This explains the importance of having an emergency fund in place. When you decide on an emergency fund, consider the equated monthly instalments (EMIs) also that you must pay towards your loan. Doing this will keep you in good stead during an unforeseen financial crisis, for example, due to a sudden loss of job or income.

Prepay your loans

Take care of your assets but keep an eye on your liabilities too. A prolonged loan tenure translates to a larger financial outflow as interest. This explains why you must consider prepaying or foreclosing your loans, especially, during the early years of the loan tenure. Loan prepayment ensures higher savings on the interest cost. Try to repay your loans early be it a home loan or personal loan or vehicle loan or credit card debt or any other kind of financial liability.

Opt for a balance transfer

Not many people are aware of this concept and how this alone can help you get rid of any liability at lower interest rates. Compare the various loan rates offered by various lenders. Club your existing loans and find out the total loan amount. Then borrow that loan amount from the lender offering at the lowest rates and repay your current debt. This way you are not only able to consolidate your liabilities in one place, but also repay them at much lower interest rates, thus, saving you a lot of money on the interest outflow.

First Published: 08 Apr 2022, 08:04 AM IST