Financial independence comes automatically when you live a life free from risks
There may be two people who work in the same office and have the same salary. Yet you may notice that one is living a comfortable life while the other is in a financial mess. Why does this happen? The reason is the difference in their financial decision making. It is thus important to make right money moves at the right time to achieve financial independence and live a stress-free life.
This Independence Day, let’s take a look at five ways to achieve financial independence and live a happy life.
Investing as per your financial objectives is essential for achieving financial independence. Some people have the misconception that a one-time lump sum investment is enough and they don’t need to invest again. This may be incorrect. Investing—and managing your investment—should be a continuous process. Your financial objectives may change with each new stage of life. Your priorities in your 20s may be different from those in the 30s or 40s. For example, when you are in the 20s, you may have greater risk appetite and therefore you can invest with an expectation of high returns. But as your age increases, your risk appetite reduces, and so does your returns expectation. Therefore, by the time you reach your retirement, you may prefer to invest in a low risk and low return investment product. So if you want to achieve financial independence, try to invest at every stage of your life and focus on your financial objectives to select the right investment product.
When you borrow for any need, it is your legal, financial, and moral duty to repay it as per the terms of the borrowing. A financially undisciplined person borrows recklessly, fails to repay on time, and damages not just his credit score but the health of his finances. Borrowing should ideally be done in a planned manner, and only after your savings are inadequate for making a purchase. With a plan, you can easily balance the weight of EMIs with our other financial matters and successfully clear your debts. From the perspective of financial independence, borrowing should be done more to build appreciating assets. Think home loan to fund property purchase.Take insurance to mitigate various risks
Financial independence comes automatically when you live a life free from risks. Financial risks like sudden hospitalization expenses, partial or total disability, demise of the sole earning member in the family, etc. are some of the threats that a person may face any time in the future. When a person actually faces such a risk, it may take away all his savings and investments. To get protection from such risk, it is important that you get appropriate insurance covers and stay tension-free.
You must take adequate health insurance, life insurance, accidental insurance and any other relevant protections to ensure financial independence for yourself as well as for your family members.Maintain an adequate contingency fund
During the working life, you never know when you may need to face a difficult situation such as a loss of a job or a large requirement of money. When you’re in such a distressing situation without money in hand, you are left with no choice but to borrow from friends and relatives. Thus, you may surrender your financial independence. The best way to stay prepared to face such a situation is to build an adequate contingency fund which can provide you sufficient liquidity in a financial crisis. You can gradually build up such corpus by investing money in an FD or liquid mutual fund, or by keeping money in high-interest savings account so that you can immediately arrange money in an emergency.Manage your taxes smartly
The more you earn, the more taxes you may need to pay. However, if you smartly manage your taxes, you can save larger amounts of money. If you invest money under the eligible sections of the Income Tax Act, you can get deduction benefits and save lots of tax. Sections 80 (C), 80 (D), 80 (CCD), 80 (E) are some commonly used sections providing tax deductions.
Managing taxes is critical to long-term wealth creation. If there are two people with the same income, the person actively managing his taxes would save more and create greater wealth.(The writer is CEO, BankBazaar.com)