Independence, by definition, is the ability to live by your own terms and conditions, take your own decisions and control your life the way you want. While there are many factors that can make this happen, financial independence is definitely paramount. What financial independence really means is that you don’t have to solely rely on just one source of income.
Your ability to become financially independent really boils down to two things – how much you spend and how much you save.
Refining your Spending Habits
- Control Your ExpensesA key element in your monthly income is the expenses that are a part of your necessities such as household expenses, rent, maintenance paid, etc. Any additional expenses are classified as lifestyle expenses that serve your wants rather than needs. These are the expenses which you need to be particularly careful about.The lower your expenses are, the more you will be able to save. Tracking your expenses through a monthly budget or a simple expense tracker can help you trace your spending habits. It is essential to get them under control and in line with your income in order to start taking steps towards financial independence.
- Income and Outflow AwarenessThe person who doesn’t know where his next dollar is coming from usually doesn’t know where his last dollar went. You need to be aware of your income and outflows.Income implies the salary that you receive as well as any extra remuneration you may happen to receive. Similarly, outflows don’t necessarily just mean expenses. They can also mean the amount of money that goes into your monthly SIPs, insurance policies and other means of savings and investments. Therefore, classifying the income and outflows based on what they are systematically is bound to give a clear picture of your financial status.
Enhancing your Saving Habits:
- Start Early
Everyone knows how difficult it can be to develop good habits. However, a habit such as systematically saving money from your income is a habit that is going to come in handy in a very real sense, if you do it right, and early. It is never too early to start saving, especially if you have a fixed monthly income. You can be assured of how much amount you can dedicate to your savings account after taking your expenses into consideration. The sooner you start, the quicker you will develop a habit of saving, and only you are the one who benefits from this.
- Set Goals, Plan InvestmentsAs you take up more responsibilities in life such as owning real estate, starting your family and so on, your financial needs will also increase. Before these responsibilities start feeling like a burden, keep a track of them. Think of them as goals, rather than responsibilities. Setting financial goals will make your responsibilities more tangible and achievable.Once you set specific goals and assign a time horizon to each of them, plan your investments suited to each goal. There are many direct investments in equity, debt and hybrid products that can be selected as per your risk profile. Keep in mind that higher returns come with the condition of taking higher risks. You need to find your capacity to take risks and invest accordingly in suitable instruments. Ideally, one must avoid investing in high risk investment products for their short term goals because it will be affected by the market volatility. Therefore, do your research and keep in mind your risk taking ability, time horizon and the goal which you wish to fulfil.
- Magic of CompoundingCompounding typically refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest. This means, the returns generated by your investments depend on the amount of time for which you stay committed in that investment. So, the earlier you start the richer you can get.Therefore, it is not just the rate of returns, but the duration of the investment that also matters when we talk about investment. It is often referred to as “magical” because it is one of the most fundamental ways to build wealth, yet takes the least amount of effort. Given time, earning interest on interest can exponentially grow wealth. A good investment strategy with long term plan will assure benefits due to compounding and allow you to realize the goal of being financially independent, provided you allow yourself enough time.
To sum up:
It is said that a man who both spends and saves money is the happiest man, because he has both the enjoyments. In order to become financially independent, it is important to find the right balance between the two, and maintain it through the journey of life.