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Monday, April 24, 2017

Finance Yourself to Financial independence

   As the name suggest financial independence means freedom from basic financial problems. It means that you don't need to work for basic necessities like food,water or shelter. Your assets will work for you to generate income to achieve basic necessities for you. Thus the work you would like to do is for your luxury.
   This sounds like a good idea,isn't it . Your assets/money working for you to meet your necessities.
But the trick here is how to achieve this financial independence.

   Lets see ..



   The first step here is to set your goals, how much (financial strength) do you need at the end.
Financial independence varies from person to person.It depends on your personal goal. Rich man might have a financial goal of multiplying his current assets whereas for an average worker the goal might be healthy retirement plan. So setting the goal i.e identifying the target is the most important step. There should be 2 types of goals 1 long-term goal which the real goal and the the other is sequence of shot term goals which is required to achieve the long term goal. These are like league matches , you need to have small wins so as to accumulate enough points to win the premiere league Thus short term goals helps us to achieve our long term goal.
Note here all short term goal's planned should be all achievable goals and should not be ambiguous at all.

   Once the goal is set the next step is to formulate a plan to achieve the each goal. Step by step plan for achieving each and every goal planned in previous step (i.e. Goal). Thus each short term goal should have a corresponding short term plan and combing all these short term plan will result in the long term plan.Thus success rate per goal can help us to where we are in long term as it acts as a checkpoint for long term goal. When I said this it means we might have to revisit the plan in regular intervals to know if we are on track and what needs to be done to bring it back on track.
Note commitment to the plan is highly important.

   Now the question is how to plan. For this first we have to take into account our current finances. This includes our income and our expenses. From this we need to understand what we can save which might be the leftovers after all our expenses from our income i.e income - expenses =savings . (So keep in mind we have to save something). This would be just the beginning and slowly we should reach a stage where our finances would be like income - savings = expenses. If you can achieve this immediately that's well and good, even if you achieve this slow and steady that's also fine as you not necessarily know all your expenses when you begin. As and when to try to reach the stage of income - savings = expenses you will know all your expenses plus all your unwanted expenses as you will be budgeting your finances daily . Thus slowly you will be able to get rid of all the unwanted expenses as well. By this time you will also start seeing your saving's getting bigger as well.

Example:
   If you save $500 per month for a span of 40 years then by the end of 40 years it would by $240,000.Similarly for our Indian friends if you save Rs 5000 per month for a span of 40 years then by the end of 40 years it would by Rs 2,400,000. Higher the amount you save higher would be the savings.

   Now the question is where to save it. It would be highly stupid if you save cash in your bedroom. Banking provides you multiple options to save money. And when you save it in bank you you have an add-on benefit in the interest which the banking would be paying you after a particular period thus increasing your money.
   See money making money.
   Banking provides below option to save money

  • Fixed Deposit  FD
  • Recurring Deposit RD

Lets see how much can we save now.
   Adding to above example if we deposit $500 in the form of recurring deposits scheme per month for a span of 40 years for a compound interest of 5% then by the end of 40 years you would have $728,318 which would be $488,318 greater than what we saved above.
Similarly if we deposit Rs 5000 in the form of recurring deposits scheme per month for a span of 40 years for a compound interest of 5% then by the end of 40 years you would have Rs 72,83,180 which would be Rs 48,83,180 greater than what we saved above.

Calculate how much you can earn with whatever you can save from below link
Compound interest calculator

All these steps are basic but important steps to attain financial independence.
For bigger goals you should start investing on assets that can generate more income. Assets are any thing like real estate , equity which includes shares mutual fund etc that can generate money.(Will talk about these options in details in our next posts)
All these commodities can provide can provide good returns

These are some of the options/steps that can be taken to attain financial independence. Note its a must to have a plan with a set target and commitment to the plan. Also its a must to have short term goals which test the achieve-ability of long term plan, where there are always scope for re-visiting and revising of the original plan. If you goal changes you plan needs an obvious revision to adhere to the new plan..
Lets all finance great (Megalofin) and finance smart to achievable financial independence.

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