Earning, saving, and investing wisely at each life stage are essential to achieving financial independence and maintaining control over your finances.
Financial independence can be defined as having enough resources at every stage of your life and being in control of your finances. Earning, saving and investing are three main components to become financially independent. Although each one of these have an important role to play in this process, the order of importance will change depending on what stage of life you are and your personal situation.
We all understand the importance of earning and working hard to improve our ability to earn more. However, despite doing well, many of us don’t consider it necessary to save, thinking that there will always be enough money available to take care of our future needs.
Remember, your ability to save depends upon how financially responsible you are. To put it in perspective, being financially responsible doesn’t mean living below your means. It requires you to avoid buying things that you don’t really need. You must learn to avoid impulsive buying as well as make an effort to save as much as you can. Remember, if you spend 100 % of your income, financial independence will remain a distant dream.
Many of us often fail to understand the difference between saving and investing. Saving is what you keep aside out of your income and investing is when you put your money to work in a manner that your real rate of return, that is, gross returns minus capital gains taxes and inflation is positive. Remember, the more you invest, the faster you become financially independent.
Now that you know the role of earning, saving and investing in making you financially independent, it is equally important to understand the process that can allow you to do these in an efficient manner and make you financially independent. Here’s is what you need to do.
Plan your investments:
An important step in achieving financial independence is to have an investment plan in place. Don’t make the mistake of initiating your investment process without establishing your investment objectives, asset allocation, and having an investment strategy in place. Simply put, your focus should be on developing a long-term investment policy that will guide you over your defined time horizon.
Remember, there will always be bull and bear markets during your defined time horizon. Besides, it is nearly impossible to predict the economic scenario just round the corner as well as its impact on the stock market. It can, therefore, be challenging to develop a strategy that not only withstands the turmoil but also helps you in achieving varied goals over defined time horizon. An investment strategy that can keep your investment process on track amidst the vagaries of the market and bring order to an uncertain investment environment is asset allocation. The principles behind asset allocation are simple and they can help you control the risk, match your portfolio with specific financial goals, and increase the predictability of returns.
As is evident, your risk tolerance, time horizon and investment objectives should be the dominant factors while deciding what percentage of your investments should be put into each of the asset classes i.e. debt, equity and gold.
Participate in decision-making process:
It’s a proven fact that working with a professional can help you navigate the maze of investing in market-linked products. However, it is important to know that you would still have an important role to play in the decision-making process. Active participation in the decision-making process can help you understand nuances of investing and have a better understanding of ever-expanding investment universe. While an advisor can help you in terms of determining the course of action and selection of funds, you have a big role to play in defining the parameters.
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