5 Steps to Achieve Financial Freedom

If your idea of life is to sit in a cubicle till you turn 60, then it's possible that you are happy being part of the rat race.

But honestly, we understand that if people had a choice (and of course lots of money), almost no one would want to be part of such a race. Isn't it? And we believe that you too want to someday run a race of your own and not just be a participant of some rat race.

As India celebrates its 70th Independence Day, most people would be looking forward to it as a temporary respite from the normal routine, office work and everything that they hate about their daily lives.

But Independence Day is just a 1-day holiday.

Wouldn’t it be nice to have a permanent holiday? Not having to worry about how to pay bills, pay for partner’s shopping, saving money for future goals like children’s education, etc.?

We bet it would be more than just ‘nice’. And that is what financial independence is all about. Many people mistake it for a well-planned retirement. But that is not the case. To put it very simply, Financial Independence is achieved when:

• You can maintain your current standard of living in future,
• You already have investments to take care of all future financial goals,
• You also have necessary buffers to help you with unexpected one-time or recurring expenses in future

And most importantly, all these without having to worry about earning even a rupee from your active income.

Yes. That is the real financial independence.

And there is no point worrying about what-will-I-do-with-my-life-when-I-have-everything. Nobody is stopping you from moving from a state of financial independence to the state of financial abundance. You can always choose to continue getting wealthier. Isn’t it?

How to achieve Financial Independence?

Now financial independence is not difficult to achieve.

You just have to get a few basics right (about how you manage money) and you are on your way. So let's see what needs to be done by YOU today in real life, to escape the rat race.

Change #1 – Have a ‘Real’ Goal

Having a real goal is very important. The reason for this is that unless you know your destination, you will never know what route to take, how much fuel to put in car’s tank, how frequently you need to stop for checkups, etc. In this case, you should have a goal like ‘being financially independent by the age of 45’.

Change #2 – Reprioritize Spendings

Remember you need to save (and invest) if you want to achieve your goal. So managing money like the ‘red’ formula below won’t work:

Income – Expenses = Savings

Instead, you need to control your expenses a bit. You need to start saving and investing first and then consider spending. So the formula for you should look like this:

Income – Savings = Expenses

Change #3 – Manage the Risk Triangle

While you are on your way to financial freedom, you don’t want anything to derail your plans or put your family in trouble. Isn't it? So you need to put financial fortifications in places. And it is extremely easy to do.

• Slowly build an emergency fund
• Take an adequate health insurance cover for yourself and your family
• Purchase a large life insurance cover (for heaven’s sake, go for simple term plans and not endowment/moneyback policies - not convinced? read The Hard Truth about Life Insurance plans)

Having these 3 things in place will give you mental freedom from fear of unforeseen circumstances. And that is an important aspect of achieving financial independence.

Change #4 – Start Investing Correctly

Start investing as early as possible and as much as possible. The more money you invest, the harder your money works (as your employee earning more money) and helps you achieve your goal.

The common wisdom is that your investments should be a good mix of equity and debt, based on your risk-taking capacity and to achieve diversification.

Know More about Equities: How to grow your wealth by Investing in Equity

But if you are aiming for early financial independence (say by the time you are 45), then you also need to invest according to the asset allocation (risk-profile) necessary for the goal and not just according to how comfortable you feel about taking risk.

Change #5 – Achieve Zero Debt

More dreams of financial independence have been killed by the overdose of loans than anything else. You cannot be free unless you have zero debts. Plain and simple.

So with time, as you take up loans (for house, car), aggressively work towards clearing them off. Also, remember that lesser money you have to pay in loan EMIs, more money you will have to put towards your financial freedom.

Learn More: The Dilemma of Loan Repayment or Investment

Now all this may sound overwhelming at first. But it's not that difficult once you think about it carefully. It only requires you to make small changes. They say that ‘simplicity changes behavior’.

So make your action plan simple and part of a habit.

Like as simple as - ‘When I pour my morning coffee, I will wipe the counter.’

So your action plan can be – ‘When I get my paycheque, I will automatically invest 20% towards my financial freedom.’

Sounds workable?

If not 20%, start at 10%.

If 10% is tough, start with 5%.

It is important to start.

The result at the end of all your efforts is too beautiful to ignore - Being the rightful owner of every hour of the day without having to slog in office for someone else.

Now isn't that beautiful?

And don’t worry if you feel overwhelmed every now & then and get that feeling ‘to leave everything and retire on a beach’. Remember that this frustration is preparing you to appreciate the joy of financial independence later on.

Don’t let this frustration go waste. Channelize it. Make small changes in your life starting from point #1 to #5. It will work. If not immediately, then eventually.

During India’s Independence Day weekend, celebrate life, freedom and create your own action plan for your future (Financial) Independence Day.