India celebrated the 75^th anniversary of her Independence a few days back. As we celebrate the 75^th anniversary of India’s independence, we should also think and plan for our financial independence, and should be an important financial objective for all of us.

In this article, we will discuss what financial independence means, how one can achieve financial independence and how one should go about it.

What does financial independence mean?

Financial independence means that the cash-flows from your assets are sufficient to take care of all your expenses. In very simplistic terms, it means that you do not have to work in order to make a living. A financially independent person is not necessarily a person who is not working or retired. A financially independent person can be working in a job or owning a business, but he / she is not reliant solely on the income from his / her salary to meet his / her expenses. Financial independence implies long term financial security.

Why is financial independence important for everyone?

Some investors think that financial independence is only relevant for HNIs and / or investors in the high income bracket. This is a very misguided perception. Financial independence is important for everyone who is working, especially salaried investors. Once you retire, you will have no regular income in form of salary, but you still have to pay for your day to day expenses. You will have to meet all your expenses from your savings and investments. Even if you are a business owner, there may be periods where the income from your business is less than your expenses. You will then have to dip into your savings unless you are financially independent. Every investor should aspire for financial independence.

How can you achieve financial independence?

The key to achieving financial independence is investing in assets which generate cash-flows for you. The cash-flows from your assets can be in the form of capital appreciation or income (e.g. interest, dividends etc). Assets which can generate cash-flows are mutual funds, fixed deposits, stocks, bonds, rented out real estate (residential or commercial) etc. Assets which do not generate cash-flows like house where you / your family is living in, cars, jewellery, household appliances etc, are not relevant from financial independence perspective. The cash-flow from your assets should be sufficient to meet your regular monthly expenses and also some unexpected expenses like medical emergencies. You should also have some extra cash-flows for re-investments or growth. Remember your expenses will keep going up due to inflation. So the cash-flows from your assets should also grow over time.

Planning for financial independence

• Have a goal: You can achieve success only if you know what your goal is. Define your financial independence goal, by when you want to achieve it and quantify your goal. You should always factor inflation when you are setting your goal for financial independence. You can take the help of a certified financial planner or a financial advisor if you need help in goal setting.


• Budget expenses and start saving: You need to save to invest in assets which can generate returns for you. The famous investor, Warren Buffet said, “Do not save what is left after spending, but spend what is left after saving.” You should assess your post tax income, your expenses (essential and discretionary), assets and liabilities to create your expense budget. Once you have a budget, you know how much you can save. You should be prepared to reduce some of your discretionary expenses in order to save more. You have to prioritize savings if you want to achieve financial independence.


• Start saving early in your career: One of most important factors in wealth creation is time. The longer you invest higher are the returns over your investment tenure. This is known as the power of compounding. It is very important to start saving from an early age.


• Invest your savings to create wealth: Wealth creation should be the financial objective if you want to achieve financial independence. Savings alone will not be sufficient to create wealth. You need to invest your savings in assets which can generate returns.


• Know your risk appetite and asset allocation: This is an important step in financial planning because you need to take the right amount of risk to achieve your financial goals. Different asset classes have different risk / return characteristics. You need to invest in the right asset class according to your age and risk appetite. For younger investors, equity is the most suitable asset class for wealth creation over long investment horizons.
  
  


• Make an investment plan: Once you know how much to invest and where to invest, you have to make an actionable plan. You may have multiple life-stage goals e.g. buying a house, children’s higher education, children’s marriage, financial independence, estate planning etc. You should have investment plans to achieve all these goals. You can take the help of a financial advisor or mutual fund distributor if you need help in making you investment plan and get you started on your journey to financial independence.


• Remain disciplined in your investments: Investment discipline means that you invest according to your investment plan. You should stick to your plan and not make impulsive decisions based on market movements. Mutual fund systematic investment plans (SIPs) are ideal investment options for long term investing. Through SIPs you can start investing for your financial independence with small amounts. As you progress through your career and your income increases, you can increase your SIP investments using the SIP top-up facility. SIP top-up can help you achieve financial independence quicker.
  
  

Why is planning important in achieving financial independence?

• Planning can help you to save and invest more.


• It can help you reduce debt to zero over a period of time and become debt free.


• Planning will help you remain disciplined and committed to your financial decision. You are less likely to make irrational decisions which can harm your financial interest in the long run


• Planning can help you improve your lifestyle in a sustainable way i.e. without compromising your financial goals.


• Tax planning plays an important part in planning for your financial independences. Tax planning can help you make tax efficient investments.

Investors should discuss their financial independence goals with their mutual fund distributors or financial advisors and make an investment plan. You should start saving and investing for financial independence as early as you can.