You work hard to earn money, you save, you invest, but still you find yourself mired in financial dependence day after day.
This may not be the case with you yet, but there are many who count on credit cards and their next paycheck just to get by.
But by any chance if you are in this situation or even nearing it, itâ€™s time to clean up your finances and start freeing yourself from debt.
So be ready to take these five steps to achieve your financial independence:-
Pay yourself first
This personal finance axiom is one of the wisest, but many people tend to make it a priority only in challenging times. With the rise in consumerism and free availability of credit through credit cards, bank loans and EMIs, savings rate has dropped sharply across the world. In the US, it was less than 1 per cent of income before the stock market crash in 2008. It was still just a modest 4 per cent this May.
So what you do from now on is set aside a portion of every paycheck, preferably automatically, for long-term savings before you pay bills or spend any of it. Start small and add 1 per cent every six months as you adjust to having less spending money. Build up to saving 15 per cent of all income for retirement.
Keep an emergency fund
Save a minimum of three to six monthsâ€™ expenses in a separate interest-earning account. The fund will help you cover expenses in the event of a job loss, car accident or big medical bills, or if you want to switch careers and have a financial cushion while you are doing it. Some financial advisers even advocate building up to a yearâ€™s worth of expenses just in case you face an unfortunate situation of job loss.
â€œWhen you work to provide yourself with a safety net like this, you are truly financially independent,â€ says a certified financial planner. â€œYour decisions are not based on money and you arenâ€™t backed into a corner where a credit card is your best option.â€
Be smart about credit cards
Before you can pay off your debt, you have to stop adding to it. Get into the habit of using credit cards only when you must, and donâ€™t buy non-necessities like TVs or iPods until you can pay cash. Donâ€™t get sucked in by sales. Pay off your card balance monthly. Donâ€™t fall victim to the minimum payment trap, which could keep you on the hook for years and pile thousands of rupees of interest on to what you owe. “Carrying a credit card balance is never a great idea, and you will find yourself going backwards,” says the financial planner.
Live within your means
Or better yet, well beneath them. Youâ€™ll increase your future options. Setting up a budget and sticking to it is one way to help ensure you stay frugal. To really achieve your long-term goals, you may also need to take major cost-cutting actions such as skipping vacation travel for a year, getting rid of a car, moving to a less expensive home or taking the kids out of private school.
Insure yourself adequately
Make sure your medical, home and disability insurance policies are in order, along with life insurance if you have a family. A setback could destroy your best intentions. But donâ€™t buy more insurance than you need. It will slow down your quest for financial independence.