Becoming Financially Independent is everyone's dream! Everyone wants the freedom to spend money on anything their heart desires. Not needing help from banks, parents, family, and even friends makes us feel confident in our abilities. Knowing that we have a backup fund assures us and keeps us calm during tough times. The recent COVID scare has made the need to be financially independent an essential quality to survive.
Before we move on to the 'How' part, let us first understand the 'What'! What does it mean to be Financially Independent?
Financial Independence, by definition, is the ability to pay for daily expenses throughout your life without the need to have a job or business. Consider it equivalent to retirement, but quite early in life. This is as people like to call it - "Fancy Bookish Knowledge!"
In the real practical world, people's views vary widely on the topic. We conducted a recent poll on LinkedIn, where we asked the participants to vote for what they believe is True Financial Independence! Let us show you the results:
- Buying anything, anytime! - 29%
- Saving money in the bank - 7%
- Not needing Parent's money - 29%
- Earning a Side/Extra Income - 36%
This poll indicates that the traditional definition of having enough in the bank does not fit the bill! What people need are ways to turn their income into permanent wealth.
With that need in mind, let's move on to the 'How' part of Financial Independence!
How to achieve Financial Independence?
If you do a basic search on Google on 'How to be financially independent?', you will find most of the articles pointing towards a maximum of 1-2 strategies that can be used to achieve it. However, that is not the case. If you go through our About Us section, you'll see the multiple options we tried to achieve Financial Independence.
However, without wasting time in ambiguity, let's find out the ways to get what you all dream for!
First Strategy: Save till you drop!
Some experts say that if you are a big saver, you will never have to worry about running out of money! We say saving is just the first step towards the final process. You need to save money from your regular income stream, but saving alone won't help you out.
Nevertheless, if you can save roughly 40% of your income each month without being tempted to buy something off the rack just because you have a big bank balance, then you can become financially independent.
If this is not your scene, and you would like to know more about the second step (according to us) or the second strategy, read ahead!
Second Strategy: Take One sip at a time!
This is what we and all the experts out there agree on! You need to start an SIP! What is an SIP? SIP stands for Systematic Investment Plan, and for a layman it means starting an EMI.
But there is a major difference between a regular EMI for loans and SIP!
Difference between SIP and EMI
How is a SIP different from a regular EMI? Well, when you buy something and start its EMI, you are basically paying for something that keeps depreciating year on year.
For example, if you buy a car and start paying EMI for the loan, you will pay off the bank with the car's actual cost plus the rate of interest. However, you are paying more for the car as the years go by (thanks to the interest charged by the bank), but the car itself depreciates!
Think about it, the car you bought for, let's assume for 10 lakhs, will be worth somewhere around 4-5 lakhs after 5 years of EMI! The total amount paid by you in those 5 years will be 12 lakhs +.
So you paid 12 lakhs through EMIs for 5 years for something with a net value of approx. 5 lakhs (value will depend on the wear and tear). That's a loss of 7 lakhs!!!
On the other hand, SIPs are used to invest in financial instruments that build wealth over time. For example, you now pay the same amount of EMI for 5 years, i.e., 12 lakhs in total, in a Mutual Fund with a CAGR (Cumulative Annual Growth Rate) of 12% (industry average), then your financial instrument would have been worth 21 Lakhs +! That's a profit of 9 lakhs!!!
Still need a reason to save money and invest through SIP instead of buying a car, mobile, big screen TV???
Third Strategy: The father's favourite!
The most traditional way of saving money and building wealth, which is also a favorite amongst the fathers and grandfathers in India, is "The Fixed Deposit!"
We have all used it at least once in our life or are currently using this because it is considered a safe bet (low risk of losing money). Being low risk also means low income from these options. The range of interest rates varies from 4.5% to 7.5%.
Using the example above, you would have earned a little less than 17 lakhs! That's a profit of 5 lakhs!!!
However, the biggest myth surrounding FDs is that they don't involve any risk. Which was true for the most part as Banks never default payments, right? However, with the recent developments of Banks getting scammed and some of them shutting down after losing customers, this option is no longer risk-free!
Fourth Strategy: The Mother's favourite!
Do I really need to spell it out for you? G-O-L-D, there, I just did.
Gold is the oldest form of savings done by the mothers of India. Gold ornaments were passed on generation after generation and are considered the best instrument for a financial emergency.
We absolutely agree; gold and silver have been the best commodities ever since their discovery, increasing in value each year! They are a high liquidity asset, i.e., they can be exchanged for money instantly. However, the current generation or the generations after the Millennials consider Gold to be too cumbersome to keep safe in their homes!
The alternative solution to keeping physical gold is to buy Gold Bonds issued by the Government or buy the commodity off of the Secondary Market. If you are not sure what all of this means, read our post, where we explain what are Gold bonds and how to buy them.
Our Strategy: divide and rule!
India's history is a living proof of how Divide and Rule has always brought great returns!
However, we don't want you to think that drastically, just divide your savings from First Strategy and Invest in the other 3 equally (33% each) and you will be guaranteed great returns!
Our Ultimate Strategy involves giving you a wide range of options to invest in through the SIP route, so make sure to follow this Blog and do engage with your comments below. We would love to be a part of your Financial Independence journey!
Let's wrap this up
Do not fret if you feel this was all a bit much. We have barely scratched the surface with the options available for investments. There are a lot of asset classes where one can invest money. However, we don't like to bore people with too many details in a single post.
Our Ultimate Strategy involves giving you a wide range of options to invest in through the SIP route, so make sure to follow this Blog. If you are looking for a specific asset class and its benefits or if you personally need financial advice, please tell us in the comment section below. We would love to be a part of your Financial Independence journey!