6 steps to financial independence: Beginners Guide
There is no one who would guarantee you the security, financial independence, and the lifestyle you want, except yourself.
We all are independent but are we financially independent? We have always heard from our elders to be financially independent.
Personal finance is not only for finance background or non-finance background it is for all the background a tea seller, a grocery shop owner, or a professional. Everyone requires financial independence.
We all understand the meaning of financial independence but we did not know how to become financially independent? You also got confused with what actually is the first step to financial independence? Some say it start saving some say reduce expenses and some say have a goal.
But I will save only when I earn. How should I earn? I am just a college student; how can I earn without having any job or any experience.
Let us understand what is earning… do you know you started earning when you were born? Isn’t it surprising? What is actually earning?
Earning is something you gain or get in return for the work you have done. I am sure you all would have touched your elders’ feet and got some money in return. What is this money? This money is your earning and you put that money in your piggy bank, this is your saving. Do you remember we use to get pocket money and in our birthday month we avoid expenses that we did in other months?
What is this? This is reducing your expenses so that you can buy your favorite things.
We always did financial planning since childhood but we did not know what it was called. But now we know so let’s enhance this knowledge of us by studying some more ways to become financially independent.
Let’s begin with financial independence meaning, a person is said to be financially independent when his passive income that is other income exceeds his active income.
In order to be financially independent, one needs to be financially literate that you should know everything about your finances that is how many investments you have, how much debt you have, how many bank accounts you have, one must everything about finances. One cannot be financially independent unless you don’t know where you are.
The next step is to allocate your income that is one should follow 50 30 20 rule, where 50% of income is used to meet your needs, 30% to meet your wants, and 20% savings. But if you want to achieve financial independence at an early age you must save 50% and 20 30 to rest.
Don't save what is left after spending; spend what is left after saving. Whenever you are asked to save always save first and spend later. Remember income – saving should be your expenditure.
Trouble doesn’t always come knocking at the door. You never know when problems arrive, one must be always ready to face problems and for that you need funds. Always keep contingency funds or emergency funds so that whenever you need them you can utilize them same. Your emergency fund must be 6 times your expenses that is if you are spending10000 a month you must have 10000*6= 60000 as your emergency fund.
The next step is never making decisions in hurry especially where it requires lots and lots of funds to be blocked. For instance, buying a car or buying a house which requires lots of funds you need to do proper planning before making any decision. You need to calculate your income, your saving, your expenses, and several other factors.
One must not only depend on one income; people must diversify their earning. You should invest in a mutual fund, stocks, fixed deposits, gold, etc. Your portfolio must consist of all types of funds liquid fund, equity fund, and growth fund. Individuals must have income other than their active income. The investment should be diversified the whole amount should not be invested in one source only. If you are investing in the stock market you must carry proper fundamental analysis of the stock you are to invest in. Investing in FD review its interest and return. Remember one thing over-diversification is a hedge for ignorance. So over-diversification is also not good.
These simple easy steps will lead you to financial independence. Just remember financial independence can make you do things for yourself and financial freedom is available to those who learn about it and work for it.
S. Vishwa is a web marketing analyst at Finology Ventures. With 5+ years of web marketing experience, joined a Fintech company to help people to learn and earn more.