Financial Independence means merely to have money to pay for all the expenses throughout the future. This comes not just by saving, but another important thing is to make investments and generate financial independence and generate wealth generating ideas and follow them. The essential step to do so is by saving some real money rather than having credits. Taking a debt is not the right way to get independent as if one has a credit card, it does mean that they are financially independent since credit cards are debt with high interest. This factor in itself is opposite to the true nature of financial independence. The central concept of financial independence is to be understood clearly and only then one can deduce the methods. The best way to achieve financial independence is to spend less than one earns and paying all the expenses and debts, if any beforehand. This is also known as budget and making a budget is in itself a first step to securing financial independence. Keeping a list of the amount to be received and taking out the personal expenses first can be done, and this will undoubtedly lead to independence.
Though financial independence may sound to be a simple concept yet, there are many perspectives which are attached to the same. Two of the main categories include asset accumulation and reduction of expenditure. Asset accumulation means to collect assets which can be used to gain and earn money even in the future which will make life easy and secure. Asset accumulation can be accomplished only with substantial assets like property, pension, etc. which can make life easy and secure. Some techniques which could help in accumulating assets include getting certificate bonds, getting a fixed income, making private investments, getting equity investments and much more.
On the other hand, reduction of expenditure means to reduce day to day expenses and making a saving which in turn automatically relates to savings. Expenditure is twofold either by a reduction in the assets available or increase in the set of liabilities. There are some ways through which expenses can be reduced, and they include credit transactions, reducing travel costs, settle the mortgage, etc. These methods help one to reduce costs and save something for the future, a way to achieve financial independence.
Financial independence can be achieved only if one has a way to get income. Only if the income comes, people can save money, and there are a wide variety of opportunities through which income can be sourced, and financial independence can be calculated upon. There are three different types of incomes, namely earned income, portfolio income, and passive income. Earned income is everything one person earns through his/her business or employment. It is calculated by always reducing the taxes to be paid to the Government. Portfolio income is the income earned from different sorts of savings like capital gains, investments like fixed deposits and interest upon them. Mostly the taxes laid upon the portfolio income is between 10 to 30% except for the medical and socially backward groups. Passive income is the one which is generated from owned properties. Passive income may seem passive as the title suggests but is one of the easiest ways to wealth accumulation and does not require the owner to participate or contribute. Even in matters of tax, the best way to achieve financial independence, passive income is quite favorable and opted by economists for the same.
Achieving financial independence is possible through the following elements, namely cash flow planning, retirement planning, investment planning, income tax planning, and insurance planning. These different varieties of planning are based on different parameters, including cash flows, total earning, enhanced health care costs, taxations, etc. There are many stages to reach financial independence, and one has to pass through different stages, namely poor zone, comfort zone, preparation stage, asset building and freedom. Other than the stages, another critical factor is the three elements which are useful for progress and are essential for progress. The three elements are Automatic income, higher income than expenditure, and low poverty threshold. Automatic income is something which comes automatically and must secure the future. However, this creates a negative impact, and the person becomes reluctant to work when automatic income is generated. Having a higher income than the expenditure is yet another important factor and at no place should the expenditure go more than income as it may shatter all the hopes of achieving financial independence. Further, learning to live with the most basic requirements should be the goal of life and must be learnt and followed by all. It would increase the hopes of being independent.
Without financial independence, no person can achieve actual happiness. Always being dependent on others for income can be misleading and planning less. If one retires, there must always be income to fulfill all the desires without having to depend on anyone to get basic needs like medicine, food, clothing, etc. Further, diseases can hit any person at any time and during these days, only being financially independent can help people come out of the situation. There are many parameters which govern the independence of people, and all of them have been briefly covered in the chapters above. One must always remember that earning forever is not possible, but making provisions to get income from some source is possible, and the same is wholly based upon people and the methods they choose to adopt. Financial security is of primary importance undoubtedly, and the same is guaranteed only by becoming financially independent, and one must always look for ways to build the same.
Would you like to read more about this topic? This book might interest you: Financial Independence.