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Personal Finance

4 Habits That Will Help You Reach Financial Independence

Achieving financial independence means you have enough wealth to live on without having to depend on income from some form of formal employment
4 Habits That Will Help You Reach Financial Independence
Image credit: graphicstock
CEO and Founder, Right Horizons
5 min read
Opinions expressed by Entrepreneur contributors are their own.

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Financial independence and retire early or fire is the new buzzword among millennials across the globe. Everybody wants to achieve the elusive state of complete financial independence. However, imagination and reality are divided by a strait called 'execution'. One thing is for sure: you can't reach this state by spending your way! But are there ways you can get guaranteed results? Yes, there are 4 habits that can help you attain financial independence. Like in any other sphere of work, these habits must become a part of your lifestyle. Patience and persistence are the bulwarks on which the foundation of Financial Independence rests in the perfect balance. Interested? Read to know about these four habits.

1. Say No To High-Cost Loans like credit card

Loans are not all bad. They often help you to tide during cash flow deficits. But, the cost of a loan is important. We live in a world where EMIs have replaced MRPs. That is where the risk lies. No purchase today seems big because there is a financier ready to offer you the same at 'attractive EMIs'. People flash and swipe credit cards with elan, forgetting that such credit cards charge an interest rate of 30-42 per cent annually. Is there any investment where you can get such high returns? No! However, credit card firms can get the same returns by lending money to you. If you pay such a high rate of interest on small and big-ticket loans, you can never attain Financial Independence. This is because your money is working for the credit card company, and not you. So, avoid high-cost loans like the credit card. We know the many advantages of a credit card like the zero-interest period, but it is equally key to side-step paying such a high rate of interest.

2. Save 50 per cent of Income

Assuming you are in the mid-30s or early 40, Financial Independence would mean creating a sufficiently large wealth corpus in the next 10-15 years. If you do work till 60, you will retire. But in a world of automation and cost-cuts, how confident are you about employment till 60? Not many can say with conviction. Hence, you do have to plan everything by early 50s. A simple habit can help Save 50 per cent of your monthly take-home income. If you avoid high-cost loans and spending, saving half of your income will not be a problem. Every penny you save today will become 10 times in the next decade. So, don't fall into the spending trap. Avoid the 'acquisition lifestyle' ie buying things every few years in a bid to upgrade and getting bigger/better things. Once you get your monthly income, immediately save 50 per cent of it. This will leave only 50 per cent of your income to spend. Make this a habit. You must save before you spend.  

3. Increase Investment By 6 per cent Every Year

Many people invest today. They use direct equity route, fixed deposits, mutual funds, unit-linked plans, buy gold etc. The important part is to increase your investments. All your plans today are based on today's inflation rate. But price-rise is happening every year. A motorcycle that cost INR 40,000 in five years costs INR 50,000. This is not just an increase of INR 10,000 in 5 years but actually an inflation rate of 5per cent. In growing economies like India, consumer-level inflation is higher at 6-7per cent. So, your investments must be in step with inflation. If inflation rises by 6per cent, you too should save and invest 6per cent more every year. In this way, the purchasing power of your money stays intact because you are investing as much as the inflation rate. See a simple example: imagine you save INR 5000 per month for 10 years and get a return of 12per cent annually. You could get INR 11.6 lakh by investing INR 6 lakh. But a 6per cent inflation every year would mean your wealth kitty at the end of 10 years is INR 8.2 lakh only. Hence, you need to beat inflation by investing more.

4. Keep Dates With Debt at Minimum

Right from your bank account, insurance investments and provident fund, all such investments focus on fixed income or debt. You may not know it, but fixed income has a great cost: poor inflation-adjusted returns. In fact, fixed income rarely gives more than 7-8 per cent annually over long periods. The cost of guarantee takes away the extra return possibility. Therefore, you must keep dates with debt at a minimum. Financial independence is not impossible, but it can become improbable if your investment returns are low. The only asset that can generate high returns is equity. Yes, there are higher risks, but returns are high to compensate you for the risk you will take. Mutual funds give you a simple and great route to participate in wealth creation. Unless you are 50, you should allocate a lion's share of your money into equities. If equities generate 12-13per cent return over the long term, and they have potential to do that given that equities typically give over 1.5 times the return of GDP growth, all your goals can be met easily.  
Financial Independence is not an impossible dream. If you follow the 4 habits outlined above, you can never fail in your pursuit of Financial Independence. Give it 10-15 years and see the results. You will be richer, mentally happier and confident.

Happy Investing!

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