Financial independence is crucial to live a quality life. It allows you to live life on your terms while not stressing about daily expenses.
That said, the question of how to become financially independent varies from person to person.
People define financial independence in their own way. In this article, we will help you learn more about financial independence.
What is Financial Independence?
Financial independence means having enough wealth to live the life you want without a monthly income or debt.
The ones who are financially free have a corpus of wealth to support their lifestyle.
Working for a salary becomes obsolete, but the key to financial independence is accumulating wealth.
This is where most individuals falter. Money is a complex concept and most people have a stressful relationship with it.
That shouldn’t be the case as viewing money as a positive force or your companion is key to achieving financial independence.
The path to financial freedom involves regular savings and investments built on the back of smart financial planning.
7 Steps for Achieving Financial Independence
The following steps will answer how to become financially free. Each step involves a methodical approach towards your end goal.
1. Set Clear Financial Goals
Having clear financial goals is the first step to fulfilling financial independence.
Achieving financial independence without clear financial goals is simply not possible.
You can have different goals as per the stage of your life and the needs you have.
These goals can be buying a car, buying a house, retirement planning, and such.
Having clear goals helps you do proper financial planning.
Your investments and savings can be aligned with these goals. You can start a SIP or invest in stocks to achieve your goals.
2. Develop a Positive Relationship with Money
View money as a means to success for fostering a positive relationship (not a means for greed).
Discuss your finances with your family or any group that is rooting for your financial well-being.
Keep on reviewing your current financial situation and spending habits. Avoid getting into a debt trap by delaying payments of credit card bills and utility bills.
3. Create a Budget and Savings Plan
Budgeting can help you greatly in having control over your money and savings.
Based on your monthly expenditure, prepare a proper budget. You could use the 50 30 20 budget rule to get started.
As per this rule, you need to allocate your income in 3 parts. 50% of your income to fulfill your needs like utility bills, food, grocery, insurance, and others.
30% of your income shall be spent on wants i.e. leisure travel, movie outings, hobbies, etc., and the remaining 20% shall be invested.
Either way, try to restrict your expenses as per budget. It may be tough at first but with regular practice, you will set yourself up for success. Have a well-structured savings plan.
Decide a fixed amount you want to save every month. This will further help create a positive relationship with your income and money, in general.
4. Invest for Passive Income
Passive income ideas are very important if you want to be financially independent.
Likely, your main income may not be enough to become financially free (unless you’re a millionaire already).
Thus, it is important to have a few passive income sources that can make your money work for you.
There are various types of investments you can choose from. For example, investing in high-dividend stocks can fetch you recurring income and a relatively predictable capital appreciation.
5. Eliminate Debt
It’s impossible to achieve financial freedom if you have debts in your name. This makes it important to be debt-free.
Prepare a proper plan to clear debts. If you have multiple loans then you can consolidate all these loans into one single loan and pay a single EMI. Check that out with our EMI calculator.
However, if you want to pay the debts one by one then pay the high interest debts first. This will reduce your interest burden.
6. Build Multiple Income Streams
Having multiple income sources is necessary to be financially independent. There are various ways to earn side income in India.
The first is to create a side hustle during your working years, such as taking up a freelance gig.
Apart from these, other realistic passive income sources in India can include earning royalties from intellectual property.
You could also generate income from a well-maintained portfolio of assets such as mutual funds, ETFs, fixed deposits, or bonds.
7. Track Progress for Becoming Financially Independent
From setting clear goals to paying off debts, you are doing everything to achieve financial freedom.
However, all your efforts can go in vain if you lack tracking. You need to monitor your investments and income stream regularly to see where you stand in achieving financial independence.
Assess whether all your steps are giving the required outcome or not. Make changes as needed.
Throughout this article, you must’ve figured out the foundational steps required to become financially independent.
Financial independence helps build a secure future and steady lifestyle. You can live life on your terms. You don’t have to work anymore for money.
Achieving financial independence is an easy task. It isn’t an impossible feat either. You just need to have healthy money habits.