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How to Become Financially Independent in 2021

05 August 20226 mins read by Angel One
How to Become Financially Independent in 2021
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Adulting isn’t always fun and games, no matter how cool it sounds like a kid. The task of managing finances is one that many of us find challenging. At times, it can seem overwhelming.

Due to the ongoing pandemic, the working class suffered the brunt, losing their jobs or receiving lower wages. To add to the pain of losing loved ones, a number of us were obliged to earn to support our basic needs.

In such a scenario, financial planning plays a pivotal role. The method of financial planning enables you to reach your life goals in a planned and systematic manner, avoiding shocks and surprises.

It is, therefore, crucial to creating a financial plan to hold you accountable as you strive to achieve your financial goals. In addition, it helps you build a contingency fund for unforeseen expenses.

There is no standardized meaning of becoming financially independent as it can differ from person to person. You should start with determining what financial independence means to you. After you have clarified this, you can formulate a plan that will lead you toward financial independence.

The below saying from the book Rich Dad, Poor Dad must be kept in mind while aiming for financial independence:

“It’s not how much money you make. It’s how much money you keep.”

The importance of saving is rightly pointed out as the key to be financially independent. Nevertheless, unsystematic allocation of income while saving will not help you achieve your goal. To determine the allocation strategy that is right for you, you must carefully analyze different saving instruments.

In such a situation, financial planning comes in handy.

Perhaps you are wondering how I should begin my financial planning.

A three-step guide to financial independence is provided here:

  1. Earn Money

It would be best if you considered creating a second income source in addition to your primary salary or business income. A secondary source will help you achieve your financial goals and assist you with your financial planning.

Some examples of creating a secondary source of income are:

  • Starting a side gig

As an alternative means of creating additional income, you may also start a side business. For example, if you enjoy art, you can start an online or offline art/gifting business. You can scale up or down the business as much as your schedule permits if you provide small services on your schedule.

  • Freelancing

One can add to their current income by acting as a freelancer. A freelancer, by definition, does not include any specific service. One can determine their skillsets and accordingly use them to earn extra money. E.g., if you like writing or maintaining a journal, you can act as a freelance content writer.

  • A fixed source of additional income

You can create a fixed source of additional income through the investments you make. For, e.g., Investing in fixed deposits will guarantee interest payments, renting a property will provide rentals, etc.

  1. Spend less than you earn

Increased spending throws individuals into more outstanding debt and more financial uncertainty, even though they may be advancing in their jobs and receiving raises regularly. Thus, it becomes essential to know what your financial limits are. A simple way to find out if you need to save more to meet your financial goals is to compile a list of your salary and expenses. This process is also known as budgeting.

You can allocate your budget according to three sections: necessities, wants, and savings.

It is crucial to realize there is no one right way to budget, just a set of rules to assist you in creating a financially sound budget.

You can follow the ABC criteria to allocate your budget based on your needs, wants, and savings.

  1. Develop your investment strategy

A combination of financial intelligence skills is needed to be successful in the pursuit of wealth. This could be through buying homes, companies, stocks, bonds, precious metals, crypto assets, or the like.

You can’t always see your way to great opportunities.

Following are different types of assets in which you can invest:

  • Equity – The equity market refers to direct investment in the shares of the companies listed on a stock exchange. A person well versed in the trading of securities on the stock market must invest in equity.
  • Mutual funds – Mutual funds help diversify risk by investing in different companies within a scheme. One can take the help of an asset manager to understand the stocks included in the plan.
  • Fixed Income Securities – The most common type is bonds. It promises to make a series of interest payments in fixed amounts and to repay the principal amount at maturity.
  • REITs/Real Estate – Real Estate includes residential or commercial property and real estate backed by debt.
  • Commodities – Investors can own physical commodities or commodity derivatives or equity in commodity-producing firms to gain exposure to changes in commodities prices.
  • Hedge Funds/Private Equity Funds – Using leverage to finance long and short positions, hedge funds use derivatives and invest mostly in illiquid assets. Funds that invest in private equity own equity stakes in companies that are not publicly traded.
  • FDs – Investing in fixed deposits with banks is ideal for investors with less risk appetite.
  • Investment schemes of the government – The Government of India has launched various projects like ULIP, PPF, ELSS, NPS, NSC, etc.
  • Crypto assets – The talk of the town currently is crypto assets. Investors can choose from a range of cryptocurrencies, tokens, etc. However, the crypto market’s volatile nature must take the volatile nature of the crypto market into consideration before investing.

Besides the above steps, one should also monitor the debt one owes and create an emergency fund covering at least 5-6 months of regular expenses.

For you to achieve financial independence, persistence and sacrifice are required, but even the most minor decisions can significantly result.

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