For those, who don't belong to wealthy families, becoming financially independent needs meticulous financial planning and proper execution of the plan.
Everybody wants to become wealthy and financially independent. Financial independence liberates a person from spending time for earning and lets the person enjoy life by pursuing what he/she aspires to do.
For those, who don’t belong to wealthy families, becoming financially independent needs meticulous financial planning and proper execution of the plan.
The journey to become wealthy involves the following steps:
The first step is saving by spending less money than the amount of earning. To save more, a person needs to maximise the earning and minimise the spending.
To earn more, one has to enhance his/her skill sets and pursue a career that generates maximum possible income.
To spend less, a person has to control his/her spending instinct. One must avoid falling into a debt trap by taking loans or buying things on EMI that result in an obligation to pay from future earnings for the current consumption.
Most important is inculcating the habit of saving from the first day of starting earnings.
Mere saving is not enough as money saved would lose its purchasing power if kept idle. So, after saving, money should be invested so that it grows at a higher pace than the rate of rising prices or the rate of inflation.
While the capital invested in fixed-return instruments is considered safe, the returns generated are not enough to beat the inflation in the long run. So, fixed-return instruments like fixed deposit (FD), bonds etc are appropriate for short-term investments, but to create wealth, an investor has to take some calculated risks and invest in equities.
Equities are capital investment and are subject to market risks. So, equity investors face capital risk as the value of investment fluctuates in tandem with market fluctuations. So, a person should never invest in equity the money needed at a short notice or the emergency money. Only that money may be invested in equities that may be spared for the long term and the investor may wait patiently for the market to rise and the money to grow.
As equities provide superior return than other financial instruments in the long run, they are the ideal financial instrument for wealth creation.
However, to maximise investments, if a person invests all his/her savings without following the financial basics, the journey to become wealthy may get interrupted and the dream of becoming financially independent may get shattered.
Following the financial basics is needed to build a foundation to begin the journey of wealth creation without any interruption.
The financial basics are –
Building an Emergency Fund
Anybody may face an unforeseen emergency situation that demands immediate spending. So, before starting investing, an emergency fund must be created out of the money saved. For this, some liquid cash may be kept at home, some money in savings bank accounts and some in short-term instruments from which money may be readily taken out. One must keep enough money in an emergency fund that supports at least six months’ expenditures.
By taking insurance, one may reduce the uncertainty of spending by shifting the insurable risks to insurance companies by paying a premium, the amount of which is predictable or certain. One must take cover against unpredictable medical expenditure in case of medical emergency and hospitalisation by taking a health insurance cover. Similarly, one must protect the persons financially dependent on him/her by taking a cover against premature death through term life insurance.