Imagine a scenario where you have the liberty to live your present the way you want, and have enough for potential contingencies and planned expenses. For example, you have the luxury to buy iPhones, hang out with your friends on the beaches of Goa, and meet unforeseen medical emergencies without having to break the bank. Life becomes easy all of a sudden! Hope it turns out in everyone’s case with astute financial planning. So that you live up to the financial independence meaning in the truest sense.
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The idea is to have enough at all times to enjoy the present while being able to deal with potential contingencies smoothly. So, you have to be calculative, meticulous and flexible. Let’s see how these traits can help you achieve financial independence at 40 or 50, assuming your current age to be 22.
If anything can take you from rags to riches quickly, it’s stocks. Their ability to multiply your investments to an astronomical figure makes them the go-to option for wealth creation. But before you go crazy, be mindful of the ups and downs crashing your investment in between. That is the time when your investment aptitude and resilience are tested to the core. If you choose the right stocks for wealth creation, the mini-collapse should not bother you. Capital markets all over the world witness the same. But quality stocks recover the lost ground and become top gainers over time.
Also, stock investments work wonders over the long term. So, don’t have a short-term vision when investing in stocks. You could either witness a bull or bear run over the short term. That balance will always be missing for short-term stock investors. Prepare yourself for a long haul in stock investments to reap the rewards. The return rate here is not certain but can so easily be in double or triple digits over the long term. Easier said than done, you need to constantly monitor your investments and track national and global developments impacting stock markets around the world. You need immense market expertise to nail the art of wealth creation when investing directly in stocks.
Mutual funds, a pool of investments collected from various investors with the same investment objective, are meant to ensure financial independence for women as well as men if planned smartly. You should choose the best-performing equity mutual funds that invest in stocks to power your investments to glorious heights using the expertise of fund managers. Yes, fund managers play those smart investment hacks on your behalf using all their market expertise. You are in safe hands! Yes, the money won’t rise the way as direct investments in stocks. But the fall won’t be that steep either. That balance lets your money grow big through SIPs or lump sums, the two modes for mutual fund investments.
Systematic Investment Plans (SIPs) allow you to invest in mutual funds at regular intervals – monthly, quarterly, half-yearly or annual. SIPs come with the gift of power of compounding and rupee cost averaging. The power of compounding lets your investments multiply exponentially over the long term. Whereas rupee cost averaging lowers your average investment costs by buying more units at lower prices during market downturns and buying less at greater prices during market upswings.
Lump sum investments are like investing the capital all at once or at different times. However, it does not bring the investment discipline as is the case with SIP investments.
The brutal reality of life is that you will have friends and well-wishers in your days but literally no one when you go through financial or mental turmoil. Sad! More so for your family members in case of your unfortunate death. That’s where a carefully chosen term life insurance offering enhanced coverage will come to their rescue. Don’t let your procrastination become a bane for your family later. Buy the best term insurance plan offering coverage of INR 1 crore or so for a premium you can easily afford in your salary. The fact that you can choose from different premium payment frequencies makes term insurance financially viable. One more thing, premiums don’t change once fixed by the insurer. So, if you lock the term insurance deal in your 20s, the premium would be less than half the amount when taking a plan in your 40s.
The crux is that if you die during the policy term, the insurance company will hand your family the sum assured amount you choose while buying the policy. Choose the amount by factoring in 7-8% inflation every year. You can easily grab a higher sum assured for a lower premium online. Compare the offers on insurance marketplaces to grab the best deal. Financial protection is one form of financial independence only.
Health is Wealth! So, no compromise on it. Many people don’t visit the hospital for consultations regarding medical issues they face. Their resistance has a lot to do with the high treatment expenses. However, ignoring health under that impression doesn’t help you either. More so when you can buy the best health insurance plan to deal with such expenses and undergo treatment. And hopefully recover from the ailment, much to the delight of your loved ones. Just pay premiums, which remain low when taking the health insurance policy early in your life, on time. It will pay you back by covering your medical expenses should you or any of your family members face a health emergency.
With no health insurance, you will be forced to go for a medical loan, which is not feasible financially. The interest payment on the loan at expected rates of 10-25% per annum does not keep you in the right financial state. So, it’s clear that, in health insurance vs medical loan, the former is better than the latter.
Tax Bonanza! Term insurance plans offer you tax deductions of up to INR 1.5 lakh in a financial year under Section 80C of the Income Tax Act. Whereas tax deductions on health insurance amount to up to 25,000-1 lakh, depending on the policy type and the number of members insured with the same.
The four pillars discussed above will work only if you do your homework properly. Research in-depth to find the best stocks, mutual funds, term insurance and health insurance. Also, maintain a strong financial discipline by saying NO to credit card splurges that can potentially run into a severe debt trap. Don’t take unnecessary loans so that you are on top of your finances at all times. Achieving financial independence requires discipline, flexibility and an eye for detail. Display these traits and you will be home!
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