written by khatabook | November 23, 2022

6 Easy Steps to Achieve Financial Independence

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Table of Content


If you are in your 20s or 30s and you wish to retire early, you have to proceed with proper planning of your savings, expenditures and investments. Financial independence retire early, also known as the F.I.R.E. movement is a popular phenomenon, especially among today's millennials. According to this, the goal is to become financially independent and retire at an early age as per your planning.

Did you know? Out of the total population of India, only 7% of people invest in the stock market.

Meaning of Financial Independence

The meaning of financial independence is to live your desired lifestyle without having to work and earn actively. This can be possible by building a strong capital fund that can give you a regular passive income after a planned time frame. To achieve the goal of early retirement you have to estimate your future needs post-retirement. Then plan your investments accordingly to sustain the desired standard of living after retirement. 

Because of the growing competition Indian youth is more inclined to achieve financial independence as early as possible. With proper financial planning and its execution, you can also fulfil your dream of early retirement and can pursue your hobbies before your 60s. In this article, you can find tips for becoming financially independent and the answer to how to retire early.

Also Read: Time Value of Money(TVM) Concepts, Definition and Examples

Steps-by-Step Planning to Achieve Financial Independence and Retire Early

It is difficult but not impossible to retire as per your wish. If you start to earn and invest your money at an early stage you can successfully achieve this goal. Given below are the steps to help you plan your retirement.

1. Analyse the present situation

Analysing your present situation is important to make realistic and achievable financial plans. You should consider the following factors to make an effective retirement plan:

  • Your present earnings - The level of earning, stability of the source of earning and the chances of growth and increment in your earnings.
  • Your present age - The targeted age of retirement directly depends on your age. For example, if you are in your early 20s, you can work for 20 years and decide to retire at 40 years of age.
  • Loans and dues - You should also consider the present outstanding loans. It is better to plan your finances in such a way that you can pay off your debts before retirement.
  • Insurance - You cannot ignore the uncertainty of the future, therefore, you should take adequate insurance covers to reduce the risk of washing off your savings in adverse situations.

2. Current and estimated future expenses

Before deciding your retirement age, you should look into your present and future short-term and long-term financial needs and post-retirement expenses. Apart from the monthly expenses, there are a few important high-value expenses such as marriage, education, buying a home, etc. It is important to estimate the funds and the time when these funds will be required. Other factors that must be taken into consideration while estimating your future financial requirements are:

  • Number of dependants in your family
  • The standard of living that you wish to maintain at present and in future
  • Lifestyle-related expenses such as buying a luxurious car, travelling plans, etc.

3. Examine your investment ability

Your ability to invest depends on your level of income, expenses, source of your income, stability of your earnings and growth prospects. You should prepare and maintain a budget for your expenses so that you can save and invest a part of your income regularly. Planned long-term investments can fetch you good returns and you can accumulate your retirement corpus by the time you reach your targeted age of retirement. Regular and planned investments are necessary for becoming financially independent at a young age. Here are some tips that can help you make planned investments:

  • Maintain a proper expenditure and savings ratio
  • Try to earn passive income by opting for systematic investment plans, recurring deposits, stock market investments, etc.
  • Look for ways to increase your earnings

4. Assess your risk-taking capacity before planning your investments for retirement

It is important to analyse your risk-taking capacity before deciding on your retirement fund. The risk-taking ability differs from person to person. The level of income, expenditures, number of dependents and your financial background are also some important factors that affect your risk-taking ability. Analysing your risk appetite is essential to follow a realistic and safer approach to investing. You risk bearing ability depends on the following:

  • Your present age - If you start to earn and invest at an early age you can take more risk
  • Your financial goals - If you want to build a large retirement corpus, then you have to take higher risk and increase your investments
  • The gap between your present age and targeted age of retirement - If this gap is wide, you can consider entering into risky investment options, however, if this gap is short you should follow a low-risk approach.

5. Create a calculated investment portfolio to build your post-retirement corpus 

After analysing your present situation, present and future expenses and savings, your investment and risk-bearing capacity, you can take a well-thought investment decision. You should allocate your surplus funds to different types of investment options. You can strategically invest your funds in various categories such as fixed-income options, mutual funds, debt instruments, equity investments, etc. Here are some tips to successfully build a strong financial base to achieve your goal of financial independence retire early:

  • Diversify your investment portfolio into risk-free, moderate risk and high-risk investments
  • Consider inflation, time horizon and prevailing market situations 
  • Keep updating your portfolio to avoid or minimise the losses
  • Study macro-economic factors such as the political and economic environment that might affect the market value of your investments
  • Invest in properties to earn a regular rental income or to gain from capital appreciation arising from the increase in the value of the property.
  • Set a realistic and achievable retirement goal and follow a consistent investment policy

Also Read: What is a Financial Planner? How to Choose Financial Planner for Personal Financial Planning

Factors that can Delay your Retirement:

You should keep a track of the following financial factors to avoid hurdles in your journey to financial freedom:

1. Credit score - Availing of a loan facility is inevitable to meet your financial needs. If you maintain a good credit score you can easily take loans from banks. It is therefore important to maintain and keep a track of your credit score and avoid any defaults in repayment. If you have a poor credit score then you have to pay interest at higher rates, which can disrupt your planning. 

2. Pay off your debts before retirement - You should try to pay off all your debts as early as possible so that you can save and invest for your retirement. 

3. Start to invest early - If you want financial independence and retire at a young age, you should start investing as soon as you start to earn. In this way, you have more years to build a good post-retirement fund by your desired age of retirement. You should also consider accumulating funds for your milestone expenditures like marriage, higher education, buying a property, etc. in advance.

4. Take adequate insurance -  It is better to be prepared for unseen circumstances so that you do not have to disturb your savings and investment plans. You should take adequate insurance for your health and properties.

5. Financial independence for women - Financial independence is equally important for women. Women should also consider making personalised investment plans. This can help you to lead a self-dependent life even after your retirement. 

Also Read: How to Earn Passive Income in India - Here Are Some of The Best Passive Income Ideas for You

Conclusion:

Finacial independence retirement concept is a result of financial awareness and literacy among the youth. There is no predefined formula to achieve the goal of financial independence. The more effectively and strategically you plan your investments, the higher the chances of becoming financially independent at an early age. 

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FAQs

Q: What is financial independence vs financial stability?

Ans:

Financial independence means being able to sustain your desired lifestyle without doing a job or working for a regular income whereas, financial stability means actively earning adequate income to meet your expenses.

Q: What factors are essential for becoming financially independent?

Ans:

For becoming financially independent you should take well-planned investment decisions, maintain a healthy credit score and take calculated risks.

Q: What are systematic investment plans?

Ans:

SIP or systematic investment plan is a scheme offered by mutual funds in which you can invest a fixed amount at regular intervals.

Q: How to plan for early retirement?

Ans:

You can plan to retire early by estimating your post-retirement financial needs and then start to invest to create an adequate retirement fund.

Q: What is the importance of financial independence for women?

Ans:

If a woman is financially independent she can take better care of herself and her family. Also, living with financial freedom boosts a woman's morale and self-confidence.

Q: What is the FIRE concept?

Ans:

FIRE concept is financial independence: retire early, it is an idea followed by young millennials for becoming financially independent and retiring at an early age.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.