This Independence Day Learn How to Unlock Your Financial Freedom

Some individuals have a misconception that if you are earning a decent amount, you are financially independent or you have attained financial freedom. That's not true. These two terms may look similar but there is a slight difference.

Financial independence is the capability to be self-reliant and debt-free. It gives you the power to achieve your envisioned financial goals and allows you to make decisions without any financial constraints.

Whereas financial freedom is subjective; it cannot be defined or quantified specifically because the sense of financial freedom depends on an individual and their financial circumstances. It reflects in one's ideologies about life, money, and/or an ability to enjoy the lifestyle one desires. In addition, the definition of financial freedom differs with age.

For the older generation financial freedom is consider as retirement, a worry-free phase of life. But for the millennials, financial freedom may refer to living a desired life that may be even before their retirement. Where they can fulfil their goals or focus on their passion, without worrying about money.

Now that you have understood the difference between these two terms, you may also have realized that financial independence paves the way for financial freedom. "Financial freedom is available to those who learn about it and work for it" - Robert Kiyosaki.

If you are wondering... How will I achieve financial independence?

Let me help you with that.

The road to achieve financial independence drives through effective financial planning. It assists you to have a step-by-step approach towards achieving your financial independence.

Here are the few steps you must follow which can help you attain financial independence:

1. Define your financial goals

The first level to start your journey of financial independence is to determine your financial goals. Your financial objectives are unique. It will be influenced based on your age and financial requirements. Set financial goals that are S.M.A.R.T. (Specific, Measurable, Adjustable, Realistic, and Time-bound).

Classify your financial goals as short-term, medium-term, and long-term with a time frame, say three years, this will provide you a sense of direction.

2. Plan for an emergency fund

Given the grassroot uncertainties and current financial difficulties amid the pandemic, constructing an emergency fund as a safety net to protect you from financial crisis is a crucial task.

This pandemic has emphasised having a rainy day or emergency fund with 12-24 months of living expenses including loan EMIs to survive any unforeseeable events.

3. Maintain a debt-free life

To attain financial independence, you must stop living paycheque to paycheque. Ensure to reduce or pay your pending debts as soon as possible. Avoid borrowing loans or frequent usage of credit cards to fulfil your short-term requirements, which can derail your financial well-being.

4. Start Investing early

You must start investing at an early age to benefit from the power of compounding. Consider investing from your first pay cheque or the next one and adopt the good financial habit of investing regularly.

If you are worried about investing large amounts, you can simply start investing in mutual funds through SIPs that allows small investments as low as Rs 500 per month. Ensure to choose worthy investment avenues based on suitability criteria such as, your risk tolerance, investment horizon and financial objectives.

5. Construct a robust investment portfolio

Constructing a robust investment portfolio begins with investing in effective investment instruments in a way that helps mitigate the overall portfolio risk and generates optimal returns. It should be well diversified across asset classes, as no two asset classes will perform in same direction. This will help your portfolio to survive various market cycles.

Mr John C Bogle, a pioneer in the world of index investing, advocates for diversification of your investment portfolio to achieve your envisioned financial goals. It is important to conduct a periodic review of your portfolio to monitor and enhance its performance, switch or eliminate the underperforming assets after assessing their quantitative and qualitative parameters.

6. Ensure an insurance cover

Contrary to popular belief, insurance is a vital aspect of financial planning. You must have an adequate insurance cover to indemnify risk to life and health. An insurance cover for life safeguards your family's financial requirements in your absence (untimely demise), whereas a health insurance cover assists you in highly expensive medical treatments.

With the COVID-19 uncertainties and medical emergencies that many families went through in the past one year, holding optimal insurance cover for both life and health is essential for your financial independence.

7. Invest in financial literacy

Last but not the least, this step of investing in yourself to enhance your financial knowledge will help you attain financial independence in a sustainable manner. The lack of financial knowledge is the primary reason many individuals delay their financial independence. They are unaware about the nuances of financial planning.

Advance your financial knowledge to effectively implement the above-mentioned steps towards achieving your financial independence. Mr Warren Buffet encourages to focus on your personal learning and boost your financial knowledge. He said, "One can best prepare themselves for the economic future by investing in your own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future" .

India is a developing country with a sunrise economy that is learning and evolving with these tumultuous times. Similarly, you should concentrate on improving your financial literacy because it will enable you to achieve financial independence and your long-term financial goals. Once you attain financial independence, you could be able to unlock your financial freedom.

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Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management. It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details.

So, if you wish to improve your financial knowledge and even select worthy mutual fund schemes, enrol to "Certified Family Guardian" course today!

Frequently Asked Questions (FAQs)

1. What is the definition of financial independence?

The definition of financial independence is the capability to be self-reliant and debt-free. It gives you the power to achieve your envisioned financial goals and eliminates any financial constraints. It is basically the state of being where you do not worry about money.

2. Is financial freedom different from financial independence?

Yes, financial freedom is a different concept it is subjective and unquantified because the sense of financial freedom depends on an individual and their financial circumstances. It reflects in one's ideologies about life, money, and/or an ability to enjoy the lifestyle one desires. However, financial independence paves the way for financial freedom.

3. How do I achieve financial independence?

Financial independence is crucial for an individual to lead a secure financial future. To attain financial independence, you must consider effective financial planning. One can achieve financial independence by following the systematic approach of financial planning.

4. What is financial planning?

Financial planning is an ongoing process that empowers an individual to make measured and sensible decisions about their finances. It aids in the management of your income, the mitigation of risks, and the establishment of a sense of direction in order to accomplish your desired financial objectives and financial independence.

5. Do I need to review the financial plan?

The financial plan is made with a long-term perspective in mind. You may want to schedule an annual assessment of your financial plan, taking into account the future possibilities. If you have a substantial change in your financial profile, such as a job loss, a financial crisis, or an accident, then you may reassess your plan in the middle of the year.

Happy Independence Day!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst

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