Experience financial independence for real

5 MinsAug 15, 2020

Financial freedom may mean different things to different people. It is subjective, abstract and unquantifiable. But ‘financial independence’ is quantifiable and could, possibly, be planned to bring about financial security.  

independence day


Although ‘financial independence’ and ‘financial freedom’ are interchangeably used, there is a subtle difference between the two. ‘Financial Independence’ involves a certain process that paves the path for your ‘financial freedom’ ––which is the end goal.  

If you are financially independent, it adds to your financial security. It allows you to take your own decisions, pay for day-to-day expenses, be self-sufficient, helps endure expenses during trying times, achieve the envisioned financial goals, and much more! And all this enhances self-morale, makes you feel confident, and adds to your financial security. 

Often people strive for financial freedom but fail because they do not take the process or the journey to the end goal seriously.  

If you wish to ensure your financial freedom, here are a few things that you may consider doing… 

(1) Be financially literate – Robert Kiyosaki an American businessman and author of the bestseller: Rich Dad, Poor Dad says: “Intelligence solves problems and produces money. Money without financial intelligence is money soon gone.”

Our education system teaches us to work for money, but keeps us ignorant of how to make, keep, and manage money. So, brush up on your financial literacy for it to be the gateway to your financial independence. Just think of how much time you spend on researching the latest mobile or car. Similarly, make it a point to read up about a financial instrument before you invest in it. 

(2) Make your money work for you – Do note that it’s not just about earning more, it is also important to make money work for you. To put it simply, hard-earned money needs to be invested sensibly in productive asset classes (such as equity, debt, gold, real estate, gold) and investment avenues therein like mutual funds, shares, bank fixed deposits, bonds, second house property or commercial property, and gold ETFs / gold saving funds. This will diversify, the investment portfolio (which is one of the basic tenets of investing) and earn you efficient return on investment (in the form of capital appreciation, dividend, interest, rental income, etc.) that may simultaneously counter inflation. 

Moreover, complement tax planning with investment planning to earn tax-efficient returns. Do not take investment decisions being oblivious of the tax implications.  

As far as possible, make it a point to align the investments as per your risk profile, broader investment objective, financial goals, and time horizon to achieve those envisioned goals. Your risk profile may be contingent on factor such as:

  • Current age
  • Income 
  • Expenses
  • The financial responsibilities you shoulder
  • Current financial circumstances
  • The contingency reserve or the rainy day fund you hold
  • Insurance coverage
  • Time-to-goal
  • Past experiences on investing (whether pleasant or unpleasant)
  • Knowledge about financial products

We are living in uncertain and challenging times, where pay cuts and jobs losses are quite common. In such times, depending on a single source of income may prove short-sighted. Apart from investments, you may consider converting your passion or a hobby into a profession that could serve as the second source of income even after you retire. 

(3) Monitor your investments - Ideally, one should stay invested for the long haul, but don’t get perturbed with market volatility. When you invest hard-earned money to create wealth and accomplish financial goals, it is important to monitor your investments. This will ensure that your financial freedom is not jeopardized. You cannot simply invest and forget. A timely portfolio review would bring the following benefits:

  • Align the investments as per your risk profile, investment objective, envisioned financial goals, and the time in hand to achieve those goals
  • Cull out underperforming and unsuitable investment avenues
  • Provide optimal structuring and diversification for the portfolio 
  • Keep you on track to accomplish the envisioned financial goals 

(4) Borrow, but wisely – Credit cards and loans are handy sources of credit. But when they aren’t serviced efficiently –– meaning, if you do not repay them diligently––they may potentially cause a debt burden. Having a lifeline of borrowed funds does not bode well for your financial independence if the debt is not managed responsibly. It may leave little room for you to save and plan for your financial future. Thus, consciously make an effort to keep debt obligations not more than 30-40% of your Net Take Home (NTH) pay. Opt for loans thoughtfully and do not get swayed by instant gratification because there are easy finance options available.

(5) Take adequate Insurance – Many of us mistake insurance to be the same as an investment. But remember, insurance covers the risk. Optimal insurance coverage frees you from financial worries if some untoward event were to occur. A term life cover and a suitable health insurance plan are essential rather than exhausting savings and investments earmarked for other vital financial goals.

[Also Read: New to investing? Here’s how you can formulate your strategy]

(6) Build a sufficient emergency fund - Life throws a curveball at us when it’s least expected. Most common scenarios are layoffs; a medical emergency; critical illness of a family member; natural calamities unexpected house repairs, car breakdown; a sudden hike in children’s school fee; among many others. So, in addition to having optimal insurance holding an adequate contingency reserve may alleviate the stress. Consider holding around 12 to 18 months of regular monthly expenses (including EMIs on loans) as a contingency reserve or a rainy day fund.

(7) Build a retirement corpus - Retirement is one of the important life goals. If you wish to retire early or live life king size after you hang your work boots, engaging in prudent retirement planning, is important. Ideally, the earlier you start with it, you could potentially build a larger retirement corpus. Life expectancy has increased over the years. So you would require a respectable retirement corpus.

(8) Be cognizant of human biases - Falling prey to emotions and following an imprudent approach could get in the way of your financial freedom. Avoid getting into the trap while taking financial decisions. Learn to maintain emotional balance, be objective, and follow an unbiased approach for your mental and financial wellbeing. Remember a well-trained mind is set to achieve a lot more than a fickle, short-sighted, and cynical mind.

To achieve financial independence, there’s no need to fight or struggle for it. All it requires is to follow a prudent approach, gain knowledge, and patience. 

Pave the path to your financial freedom by taking positive steps and keep financial worries away!

Wishing you all a Happy Independence Day!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.