It translates into an ability to earn money and judiciously spend it, to make investments that can meet your short-term and long-term goals
We live in the age of Artificial Intelligence and robot advisors where every kind of information is just a click away. Most of us have freedom to choose our careers, life partners and financial plans. However, just because we have the freedom to choose our investments does not mean we are financially independent.
What does financial independence mean? Does it mean having the ability to fund your purchases or saving for your retirement? Broadly speaking, financial independence equates to financial empowerment. It translates into an ability to earn money and judiciously spend it, to make investments that can meet your short-term and long-term goals.
So, how do we become financially independent? The key is to have a robust financial plan in place. Below are some essential components of the same.
Budget your expenses: The first step in budgeting is to make a consolidated list of all sources of income as well as fixed and variable expenses, in a month. An individual should ensure his income sufficiently covers all of his fixed expenses and intermittently meet his variable expenses. EMIs should not exceed 40% of monthly paycheque – EMIs are paid when an individual purchases an asset with the help of a loan. This is a mandatory obligation and hence should assume high importance in an individuals’ budget. One must ensure the EMI amount is within 40% of monthly paycheque.
Create an emergency fund equal to three-month salary: Life can be uncertain and it is not really possible to be prepared for all eventualities. There can be points of time in life when we can go through a loss in income or see a sudden spurt in expenses. An emergency fund helps us tide over such roadblocks.
Pursue goal-based investing and stick to it: We invest to achieve our short term and long term goals. Hence, at the time of creating an investment strategy, it would be advisable to have a clear picture of our goals and then choose investments that are able to meet individual goals.
Review your financial plan at least once in a year: circumstances can change during the course of a year. Incomes and expenses can change while goals can shift. Your financial plan should be reviewed atleast once a year to reflect these changes.
The writer is CEO, Edelweiss Asset Management Ltd
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