The greater the gap between earnings and spending, the faster the net worth grows.
Financial independence refers to being in possession of sufficient money to sustain the current lifestyle for indefinite longevity. The first step towards attaining financial independence starts with assessing one’s net worth or current financial position.
To be sure, list down all your assets like bank accounts, investments, house and property, valuables, and your liabilities. The difference between what you owe from what you own is your net worth.
To achieve financial independence the net worth should always grow. A financial plan having lifetime goals or short-term goals will help achieve this. There are two basic principles: spend less and earn more. The greater the gap between earnings and spending the faster the net worth grows.
Financial independence is misrepresented with higher income. The more we save the easier is the path to financial independence.
Takeaways on financial independence:
- It is always advisable to save at least 10% of your gross income. It will always keep a buffer available;
- Keep monitoring your savings percentage periodically to investigate the shortfall;
- Be aware of the avenues where the money saved by you can be invested;
- Differentiate between long-term and short-term money requirements and save accordingly using different financial instruments.
- Take debt but understand the difference between good and bad debt. Good debt is one where assets outlive the debt like a loan for a house. Spending an exorbitant amount on vacation or dinner or clothes by taking debt and repaying it later for an extended period is not good debt. It can be avoided;
- Invest what you save but be a balanced investor. Diversify between asset classes like real estate, equity, or fixed income instruments. Real estate provides protection against inflation while fixed income securities provide capital protection. Choosing the appropriate mix provides benefits of diversification;
- Planning for retirement is always the priority. You can always take a loan to buy a house or car, but you will not get a loan to fund your retirement. Prioritize retirement;
- As life transitions from college to the first job to marriage, children, kid’s education to retirement, financial needs change. Reworking finances and achieving financial independence at each of these critical stages are equally important.
The journey towards financial independence starts now because the best time to start saving and investing is always right now.