How to Become Financially Independent?

Financial independence is extremely important for all of us these days. It empowers you with the ability to maintain and improve your lifestyle. You have the freedom to achieve materialistic goals in your life once you become financially secure. Let us take a detailed look at the concept of financial independence.

 

Through this article, you will learn how to become financially free with different methods of savings and investments.

Table of Contents

• About Financial Independence
• How to become financially independent?
  • Savings
  • Budgeting
  • Passive Income
  • Investments
  • Insurance
  • Gain More Knowledge
• Benefits of Becoming Financially Independent

What is financial independence?

It refers to the freedom of living the desired lifestyle without relying on work to achieve that lifestyle. It means that have sufficient wealth to fulfill your requirements. This makes you financially secure with enough funds for emergencies, every day as well as future requirements. It also means that you do not secure your finance by going into debt. 

People who are financially independent retire early due to their smart planning. Once you achieve financial freedom, you will be able to lead a lifestyle that you desired after your retirement. It allows you to do things your own way without being insecure about the money. 

Those who successfully implement this concept make money work for them instead of working for the money. Since you have understood the concept of financial independence, let us learn the ways to achieve it.

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How To Be Financially Independent?

First, open an account in the bank. Create a budget and accordingly plan your financial journey. Start building your credit score to ensure that you have credibility in front of lenders. Make safe as well as high-return investments. Create sources of passive income for yourself.

The following methods can help you in achieving financial independence:

1. Save 50 Per Cent of Your Income

This seems like a radical idea that does not sound practically possible. Even then, some people are following this concept of saving half of their after-tax income. These people invest these savings in building emergency funds, repaying debts, and early retirement planning. This super-saving plan allows you to repay your debts much earlier before reaching retirement age without paying add-on interest. 

To practically apply this concept, you can do either of the ones:

1. Use lower income set for living: This one is applicable for two or more earning members. Whether you are a couple, roommate, or partners, you can implement this strategy to maximize saved money. You can plan your finances in a manner that your expenses are equivalent to the income of the less-earning member. Initially, you can start by either living on the higher income and then gradually shifting to the lower income lifestyle. 
2. Maximize your income: This is the same as its name says. You need to find ways to maximize your income or simply lower your living expenses. However, living expenses can only be limited to a certain point since utility bills, groceries and gas cannot be avoided. 

2. Learn Budgeting to Become Financially Independent

The concept of budgeting complements the habit of saving. Budgeting maximizes your savings by allowing you to identify activities on which you can save money. Through proper budgeting, you can even save more money while still doing things that you enjoy. 50-30-20 budgeting rule can be practised for leading a financially stable lifestyle. 

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3. Passive Income

Passive income is a type of income that you earn automatically with little effort to maintain. This is one of the most progressive ways if you want to become financially independent. It can be earned through various means of income including rental property, the stock market, and being a part of the company. Since these jobs do not require your complete investment, you can still focus on active income while making money through both sources. Some of the potential sources of passive income include the following: 

1. Freelancing: You can offer services as a freelancer. This allows you the freedom to work on your own terms and convenience. You can serve multiple clients at the same time which can help you earn way more than a 9-to-5 job. In the long run, you can also demand your own prices for the services that you offer.
2. Affiliate marketing: It can help you earn money by promoting products and gaining a certain amount of commission on the purchase of the products. You can enter into contracts with sellers who allow you to earn through affiliate marketing.
3. Blogging: Through blogging, you can attract traffic to your website. You can link your account to ad sense, add affiliate products or sell your own products on the website. This will act as a continuous source of income since your old blogs will also help in earning money.
4. Rental property: You can rent out your properties to earn rent money on them. This will generate regular income without putting in any effort. You will only have to do a one-time investment in buying the property. Later on, it will reap you with returns on regular basis.
5. Vlogging: These days, people have started earning well through vlogging. They shoot content in video format and share it with people. Based on the views and partnerships they get, people start earning

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4. Investments

Investments are one of the major factors that contribute to financial independence. If you build a proper investment portfolio, you can multiply your money much faster than any source. Investments work on the power of compounding which can build you a large amount of financial corpus. There are various types of investments that can reap positive returns on investments. Let us discuss the different types: 

1. Fixed Deposits: This is one of the safest and most traditional methods of investment. You need to fix the lump sum amount for a certain period of time till maturity. Once the period of maturity arrives, you will receive the principal and interest amount after tax deductions (if any). Savings rate of interest are low and FD offers a higher rate of interest. This is why rather than putting money in a savings account, you should fix money in FD.
2. Recurring deposits: This is similar to fixed deposits since most financial institutions offer the same rate of interest on both FD and RD. However, this is more convenient for those who are incapable of fixing the lump sum amount in a single go. They can instead fix a specific amount of money on regular basis with a maturity date. Salaried people often opt for RD. 
3. Mutual Funds and SIPs: You can put your money in mutual funds and SIP since these are extremely safe instruments of investment. Fund managers use their expertise to invest their money in different securities after calculating and balancing the risk. This ensures that you earn a certain amount of interest on your investments. All you need to do is invest money on regular basis. 
4. Unit Linked Insurance Products: These plans play both parts. A part of the premium that you have paid goes towards life cover and the rest is invested. These are subject to capital market risk. It is very important for you to assess your risk tolerance and capacity before investing in ULIPs.

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What is financial independence?

5. Become Financially Independent With Insurance

Insurance helps in becoming financially independent in the following ways:

• Protection against Large Expenses: If, unfortunately, someone suffers from accidents, health issues or property damage, insurance can save you. You can claim the expenses to secure yourself financially. Even if you do not get back 100% of your amount, you can still recover some amount. This will reduce the financial burden on you.
• Term Insurance: This type of insurance financially secures the family in case of the death of the policyholder during the term. In case the person outlives the term, no amount is paid.
• Life Insurance: It is a better alternative to term insurance since the amount is paid after the death of the policyholder regardless of the fact that the term is over. 

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6. Gain More Knowledge

If you want to successfully apply these methods, you need to have complete knowledge about this concept. 

1. Books

To do so, you can read books by experts such as the following:

1. Your Money or Your Life:  This is a book on the FIRE movement that is coauthored by Vicki Robin and Joe Dominguez. The book covers tools to track finances, passive index fund investing, budgeting, and building healthy financial habits. 
2. Skip the Line: James Altucher is an entrepreneur who has authored this book. It helps you learn ways to start a new business, gain financial freedom, change your career or learn a new skill. This book teaches its readers the ways to lead a life of their own choice.
3. The 4-Hour Work Week: This is a book by Tim Ferriss that teaches you to earn more even if you work for fewer hours in a week. The book is a step-by-step guide that lets you rethink how you perceive time and how it impacts your productivity. 

2. Courses

You can also enroll in online courses that can teach you investment, saving money, or budgeting. These online courses can help you in learning these concepts in detail and with clarity. Some of the useful courses include:

1. Finance Fundamentals: Financial Planning and Budgeting: Do check out this course if you want to learn different aspects of your behavior that can affect your financial decisions. Through this online course, you will be able to build and manage your household budget in an optimum way.
2. MBA in Financial Services and Financial Planning: This is an MBA specialization in financial planning. Those who want to learn how to become financially independent must enrol in this course to become financial sound. 
3. Securing Investment Returns in the Long Run: This free investment course teaches you how you can utilize the returns on investment. You will also learn about risk-adjusted returns and the expected performance of various investment vehicles.
4. Saving Money for the Future: This free online course is suitable for those who want to save money in the future while compounding it. You will learn to save money while considering retirement goals, future purchases, and handling unexpected expenses in the future. You will also learn to prepare for emergencies. 
5. Mutual Funds: A Beginner’s Module: This is a self-paced course offered by the NSE for beginners who want to learn about mutual funds from scratch. You will be able to understand the regulatory and tax issues that are associated with mutual funds. As you go through the course, you will also learn about investment plans. 

Benefits of Becoming Financially Independent

You have already understood the meaning of financial independence. Now, let us discuss the benefits of achieving this financial freedom:

1. Backup for emergencies: It makes you ready for financial emergencies in the future. You do not have to worry about seeking outside help in case of any unfortunate circumstances. You can use your emergency funds to safely get out of the situation.

2. Become more disciplined: Once you have the savings and investments, you build discipline in life. You spend less on unnecessary things which allows you to value what you own.

3. Live as you want to: You can live life on your terms since you have the choice to either stop working completely or take a break from other things in life. It makes you enjoy your life. 

Conclusion

Hope that this article has been able to help you learn how to become financially independent. Do remember that it is a way of life that can provide you with financial security. Once you successfully achieve this independence, you can give time to other meaningful endeavours in life.