You are well paid, well off, have a good lifestyle. But can you afford to stop working? If your answer is 'No', then you are just financially stable — as long as you get your monthly cheque — but far from being financially independent. You're also not alone — a large number of people retire without being financially independent.
Financial independence is a state where you are free from all liabilities and have created sufficient wealth that can generate a constant stream of income that allows you to maintain your lifestyle without having to work them.
Getting there requires meticulous planning and disciplined investment. It also means revisiting your portfolio and investment strategy to ensure that your plan is not getting derailed by external factors like market forces and interest rate variables.
Manish Sharma, 33, who works with a multinational firm in New Delhi, is a perfect example of a man moving towards attaining financial independence. Married to Shelly who also works, Sharma feels that he would need Rs 75 lakh for his three-year-old son, Lakshit's higher education, marriage and their own retirement. Manish invests Rs 24,000 per month in a disciplined manner in mutual funds, Public Provident Fund and National Savings Certificate to meet these goals.
To be financially independent you need just six simple steps — finding out how much money you have today, knowing how much you need for tomorrow, getting adequate life cover (through a pure term plan only, do not buy any other insurance product), investing the surplus as per your risk taking ability, and writing a Will (See graphic above).
Home buying tops the priority list of all individuals and also is one of the most important asset that one builds. Also, with the availability of loan, which offers tax benefits, it becomes more beneficial. While experts advise not to take loan for a depreciating asset, they say that individuals should careful while taking a home loan and not over-leverage in a bid to build the asset.
"One should not stretch to buy the house, buy only when the income is sufficient to support the purchase and keep headroom to meet increase in EMI (equated monthly installment)," said Amar Pandit, a Mumbai-based financial planner. The EMI should be such that it offers room for saving.
"Ensure that you save 10-30 per cent of your income after you have paid your EMIs as it will act as a cushion in rainy days and you will be able to pay the EMI from the corpus built," said Lovaii Navlakhi, managing director of the Bengaluru-based financial planning firm International Money Matters.
Once basic needs are covered, it is time to plan for wealth creation. Simple projections show that you do not need millions to make millions. All you need to do is begin investing — and begin early. An investment of Rs 5,000 per month started at age 25 can become Rs 1.6 crore by the age of 50 if invested in an instrument that returns an annual rate of 15 per cent.
But not all can take such a high equity risk. Your investments, therefore, need to be balanced in different baskets — small savings, fixed deposits, equity funds, gold and so on.
"While equity and debt investment will differ individually, as a thumb rule one can allocate 100 minus your age in equity and the rest in debt," said Surya Bhatia, principal consultant at the Delhi-based financial planning firm, Asset Managers. "Gold can also form a part and one can invest 5-10 per cent in it."
With inputs from Sachin Kumar