Financial Independence – Part 2

In continuation to my last article, here I am with the detailed discussion on the points which we need to be mindful to achieve financial independence.

You can refer my previous article in here (https://www.dhirubhai.net/posts/venkatesh-prasad-0b004015_personalfinance-motivational-trending-activity-7150099500110405632-d1HW?utm_source=share&utm_medium=member_desktop)

?

1.?????? Goal Setting

The first important thing in any journey is to set the goal. We should know clearly what we want, that will solve half of our problem. You may be thinking that, at this age can I think of something new and start setting a goal to achieve? I would like to Quote “You are never too old to set another goal or to dream a new dream” by Lewis.

?

Like we discussed on our previous article, we need to access our upcoming financial requirement both in terms of long term and short term. After you list down your goals which you want to achieve, try to assign a value to it. This will help you to know how you are placed now. So that you can do the course correction and start working in a right direction.

?

For example, please refer the table below.

There is absolutely nothing right and wrong in finance. It’s just based on our affordability. For someone financially affluent buying a home may be a short-term goal but for someone else going a luxury vacation may be a long-term goal. While you draft the goals my suggestion is to keep yourself unbiased.

In this case let’s set our goal to 4 Crore Rs.

?

2.?????? Creating a Budget

In a layman’s language Budget is like a plan of expected income and expenditure over a period (say a month/year). Drafting good budget will take you another step closer to the financial independence. This is a stage, where you will come to know that how much expenses that you have for any given month and what’s your income to meet them.

?

Now start re-thinking about the financial goal of 4 Cr. We have set in the previous step. Start allocating funds based on the requirement. For example, let us pick up one short term goal and analyze how to fund them.

Luxury vacation with family – 5 Lakhs – 3 Years to go.

If you could stay invested in a financial instrument which can give you an annualized interest of ~12% p.a. for 3 years. Your monthly investment of Rs. 11,500 will be good enough to accumulate Rs. 5 Lakhs in 3 years.

?

In a similar way start allocating your income to ear marked expenses which were part of your Goals. This will make your life easier on a long run. Many a times it happens that, you may be left some more money on hand after allocating. What to do with that money ? is a very good question. Now either you can add them to any of the long term goals, that will help you to speed up or else use in a way which you think appropriate, as your financial commitments were taken care of. It’s a very subjective and I repeat don’t think about right and wrong here, it’s just the way you see the life.

?

?

3.?????? Reviewing High Interest Debt

While working on the Budgeting. Consider the debts which you already have and list them out to get a clear picture. The one which is having the highest rate of interest is the one you should target to close early.

If you have any hand loans or personal loans where you are paying higher interest, try to over cum that by opting a lower interest rate debt.

?

For example. If you have borrowed a money from a person or institution at 12% P.A. and if you can able to avail a personal loan from another bank at 10.35% P.A. take the loan at lesser rate and clear off the debt which is at higher interest rate. The reduction in your interest payment will leave you with extra money.

?

While you opt for lower interest rate debt be mindful about the risks too.

?

?

4.?????? An unbiased assessment of spend

This is a very hot topic. In most of the cases which I have see in my experience, we couldn’t just think unbiased. We all ways think we can achieve it anything and everything but the fact is we forget the time line. The point which I am trying to make here is, while you are capable of making everything don’t turn a blind eye towards your spend. Take control of it and stop justifying the spend which you really don’t need it (unless you are able to afford them).

?

Here comes another interesting question, what is affordability? how we access them?

While I was reading a book “Rich dad and Poor Dad”, the author has given a beautiful and simple solution to this problem. He says before you buy anything, just think if you can able to buy 5 such things. If your answer is Yes, then it’s in your affordability range else No.

Let’s look at an example to be clearer. Say you want to buy an iphone which costs around 80K, then think can you buy 5 of them in one shot. Which cost you 4 lakhs. If you think yes, you can buy 5 iphone's without putting stress on your financial position then go ahead and buy an iphone.

?

Spend Control is the key to our future financial independence.

If we are not keeping a close watch in it, then we are filling the water into a bucket which has the hole at the bottom. We think I am putting lot of water consistently into the bucket but which never get’s filled.

?

Try to identify the expenditure which you could reduce / cut down.

Try to identify the expenditure which didn’t added any value to you.

Try to identify the expenditure without which you will continue to have a same lifestyle.

Try to identify the expenditure which doesn’t make sense to you.

?

Remember a Quote from Warren Buffett “Do not save what is left after spending but spend what is left after saving”.

?

?

5.?????? Building a saving habit

The very key to financial independence is building a savings habit. The money which you have in surplus today need to be properly channelized (towards savings) to ensure you can retrieve them with interest when you opt not to work.

The money which you have saved / invested is the one which will come for your rescue when you stop earnings. Hence, give at-most important to savings and start building it as a habit.

?

We have seen and experienced it in the past that, we will try to start saving big and eventually we will stop because it will impact your lifestyle. If you agree and experienced such a situation in your life, then here is my suggestion, Start small. Start with a small / manageable amount without putting more stress on your budget.

?

If you are not able to find a surplus, as discussed in above para, start making a small amount savings at the beginning of the period itself through an automated / standing instructions. This will help you start building a corpus at less risk.

?

Another suggestion is, we should start rewarding our selfs when we achieve a savings milestone. Say when you complete the first 5 Lakhs of savings it certainly calls for a celebration. This will give you a senses of accomplishment and also motivates you to do more.

?

?

6.?????? Contingency plan

Another important point which we need to consider is Contingency plan. As we know, the life is not really as simple as we think nor it goes as we planned. Hence, it certainly calls for a back up plans.

?

While you are focused on building your wealth and gaining financial independence, if anything mishap happens to you then your family will be in risk.

?

In my suggestion, always keep the insurance as a back up plan. If you have a home loan, don’t forget to buy a property insurance. If you own a car keep your car insurance up to date, Based on your earning capacity and future need consider buying a term insurance, similarly keep a heath insurance. This will act as a contingency plan for yourself and your family and comes your rescue when you need the most.

Wish this this article will helps you think and build your own plan.

If you have any questions feel free to drop me a message and will get back to you as soon as I can. I will repeat, finance is very dynamic and one solution will not fit all. We all need to make our own adjustments to suit our requirements.

Happy to help you all.