In this article we will see what financial security is, why it should be your first priority and how to achieve it. So it is important that you first know what the heck financial security is.
In the simplest of terms it achieved when you have assets that provide you with basic need for your life without any work from your part. Like if you have Rs. 20000 as your monthly expenses (i.e. food, shelter, transportation & basic entertainment). So you should have assets that will provide Rs. 20000 per month of return. It can be a second house with a rent of Rs. 20000 or you have fixed deposit that generates the same return etc.
It do not matter which method you follow to generate that extra income but it should be passive (i.e. No work need or very little work on your part).
All your focus should be on your saving rate (percentage of income you save on monthly basis) you can make a chart of it follow along. Your money or your life has explained it in great detail and there are some other cool things that will help you. In the start it will be small Rs. 10 but as the time goes on you get better at saving it will increase to Rs. 100, 200, 1000, 2000 etc.
If you want to achieve financial security fast then there is one things that you should do reduce your monthly expenses it will increase your saving rate and now you have to save less to get to the amount of saving needed to generate the second income because your monthly expenses are also low.
Let’s take an example a person earns Rs. 50000 per month and spends Rs. 45,000. So he saves Rs.5000 per month which is 10% of his income which is great if you want to retire at 60. He will need 77, 20,000 of capital on which he will make 7% per year to generate Rs. 45,000 per month.
But if the same person lives on Rs. 25000 per month not only he will need less capital but he also is able accumulate it much faster because of higher saving rate. Now the capital needed to generate Rs. 25000 per month will be 42, 85,000.
For sake of simple calculation we will use fix saving of Rs. 5,000 and Rs. 25000 and how much time will it take to accumulate the total amount. In the first case you will need 128 year and in second case 14 years.
It just for sake of calculation because your income will increase with time but as you can see if you save 10% you will have to work most of your life and if you save 50% of your income you can retire at 14 year make but you will be able to do it even before that if you invest the money you save.
You may be thinking that it is not possible but if you think about it and plan for it you can make it happen. A lot of people have done it and are living the life right now. If you want the proof then you should search in Google “early retirement”. You can start small with 5% at first. What you need to do is calculate 5% of your current monthly income. Now set up a sip for the amount that got so that the money is deducted from your account every month. You do not even have to think about it, it will happen automatically.
After sometime you will see that it is not such a big deal you are now able to live on 95% of your income without even trying. After few months add one more sip in different mutual fund of same amount and now you are saving 10% of your income without even trying.
Real Estate Holy Grail of Wealth Creation
After you have done that for 6 month now you are comfortable to live on 90% of your income but we have to push forward if we want financial independence. So now what is the next step you ask? If you do not have a real estate investment then you are in big disadvantage. So look for property that you can buy with the EMI of 10% of your income.
Maybe you cannot find the property in the city that live in so what expend your search it is an investment you do not need to live there it will give to long term capital appreciation and you can rent it in the meantime.
If you do not have the down payment amount for the property and you are not earning that much money right now so you simply start a government bond mutual fund investment with the same amount invest in dividend reinvestment option.
Living on Less Then What You Earn
So if you have followed all the above advice now you are living on 80% of your income which is great but the sweet spot is at 60% if you live on that money then you will be able to become financially secure within 10 to 15 years depending on how your investments do in that period.
Keep adding 5% sip in different funds till you reach the goal of saving rate of 40%. Last but not least you should invest at least 5% of income on precious metals investments like gold and silver.
Set a Side 3 to 6 Month of Living Expense
You should have 3 months of living expenses in your saving with MOD. So that if any emergency come you can take care of it. Have a medical insurance because it can be big expense if you get sick.
Never Have All Your Eggs in One Basket
Do not invest more than 5% of your income on one thing. Have at least two different saving account one for sole purpose of saving and other for daily needs. You can transfer 5% of you income on monthly basis to this different account. So in the above plan you will have a real estate, index fund, government bond fund, second saving account and precious metal investment. This plan will give you the most possible return with the least risk possible.
I know that there are a lot of things that you need to do. But if you pay close attention you do not have to do all of it at once it is a step by step process.
Once the system is set up it all be automatic you do not even have to think about it or do anything on your part. So if you have reached 40% saving rate so now what your investment will look like your home EMI will be cut from your salary account as everything else you do not have to do anything on your part.
Just work as hard as you can so that you can earn more and invest more so that you can be financial independent in no time. If you have any more questions about anything you want to know you can comment below.