This Independence Day, Here Are 5 Tips To Help You Become Financially Independent

Aug 14, 2018 | 3 months ago | Read Time: 4 minutes | By iKnowledge Team

Are you truly independent when it comes to your finances? One of the best ways to lead a stress-free life is becoming financially independent early on in life. Financial instruments such as stocks, bonds, retirement policies and mutual funds are some of the many options available to maximise your wealth.

On India’s 72nd Independence Day, we share 5 tips to help you become financially independent:  

1. Invest early in a retirement policy

The compounding impact of money is a powerful one. Instead of waiting till your 40s to think about retirement planning, try to begin in your 20s. While the middle class of the previous generation relied largely on government jobs, which came with secure pensions attached. The aspirational workers of today are largely employed by the private sector, where company sponsored pension plans are a rarity.

Therefore, take matters into your own hands and invest in an equity linked pension plan that can provide the right mix of stability for your money while also providing returns that can beat inflation over the long run. At the beginning of your career, it is possible that the amount of money available for investment may be lower. However, you can still consider a plan such as Aegon’s Life iInvest which allows you to start with an investment of as little . If you start investing from the time you are 30 years, the sum assured you will receive on maturity will be Rs. 5,00,000 after 20 years.

The plan allows you to choose between 6 different funds, so you have the flexibility of choosing one that works best with your risk-return profile. Moreover, tax exemption under Section 80C sweetens the deal as well.

2. Stay away from consumer debt 

As per CEIC statistics, India’s Household Debt has increased from 80 billion USD in 2007 to 233 billion USD in 2017[1]. The Household Debt consists of spending on different kinds of personal loans, housing, and consumer durables. One of the most common reasons for financial troubles is debt.

While a housing or education load is a form of debt that can lead to the creation of assets or income streams, there are other forms of debt that are more harmful. While personal loans can come with exorbitant interest rates, one must be especially wary of credit card debt, which can be accompanied by interest rates of as high as 36% per annum. Keeping credit card debt low is crucial.

3. Don’t be too conservative

It is essential to understand the role of inflation. Inflation can lead to an erosion in your wealth. Let us understand more with an example. Let us assume you earn 10 lacs in a year. Through a tight control on your expenditure and a focused financial discipline, you manage to save Rs 4 lacs.

However, you leave these in your bank account where it gathers a paltry interest rate of between 3 and 4% while inflation rears its ugly head at 5 or 6%. Over the course of the year, your precious savings would have ended up losing value. Especially when you are young, you may consider investing in assets that have a higher risk-return profile.

Consider diversifying your portfolio to give adequate exposure to equities, which are traditionally known to provide higher returns than instruments such as fixed deposits. If you do not have the time to invest directly in equity markets, consider investing in mutual funds instead.

Whatever you do, ensure that your savings are beating inflation so that your wealth continues growing over time.

4. Truly understand the tax code

To begin with, understand that income above Rs 10 lacs is taxed at 30%. Any income that you can bring under tax deduction results in a direct 30% saving for yourself. There is no investment scheme or vehicle that can provide a risk-free 30% return.

Therefore, your priority in each year must be to ensure that you are understanding the Income Tax Act and the several legal ways it provides to reduce your tax burden.

The most well-known of the sections in the act is the 80C, which provide tax deduction for investing money in designated areas. These include contribution to Provident Fund, contribution to Public Provident Fund, National Savings Certificate, Life Insurance Premiums and other areas.

5. Emergency fund

To become truly independent, it is essential that you can support yourself even in case of emergencies. Most experts recommend creating an emergency fund to support monthly expenses for a minimum of 3 months, with a recommendation of keeping a reserve of up to 6 months.

The emergency fund must ideally be in a liquid asset such as a bank account or in an instrument that can be liquidated quickly.

To Sum Up

The biggest enemy to financial independence is apathy. If you are getting a stable salary each month, it is easy to forget about investments and tax savings and let your money lie around in low yield instruments while you pay high taxes.

The advances in India’s financial sector since 1991 have opened a plethora of investment opportunities for individuals across the income spectrum. Moreover, India’s equity markets are among the best performing in the world [2].

Plan for retirement, don’t fall into a debt trap, understand the tax code, don’t be too conservative and be sure to create an emergency fund. Follow these 5 simple steps and you’ll be on the way to financial independence, just as our great nation celebrates its 72nd Independence Day.

Citations

[1] https://www.ceicdata.com/en/indicator/india/household-debt

[2]https://timesofindia.indiatimes.com/business/india-business/indian-market-is-best-performer-in-2018/articleshow/65265805.cms

Advt. no.: II/Aug 2018/4338


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