Nobody likes to be caged. Everyone wants to live their life on their own terms and conditions. To live life fully, it’s important that you are financially independent. There are several benefits to being financially independence. Firstly, it gives you a sense of much-needed freedom and confidence. Secondly, you are not dependent on anyone even when things go haywire. There are several other benefits of being financially independent. Let’s understand how you can create a financial plan to make your financially independent. Here are five steps to help you plan for your financial Independence Day.

Step 1 – Have a clear understanding on how you want your lifestyle

Take some time and analyse how you want your life to be. Where would you live? How do you picture yourself living? Before you go all unrealistic and crazy with your daydreaming, keep in mind that the more profligate lifestyle you envision for yourself, the difficult it’s going to be for you to afford that lifestyle. So the more minimal your lifestyle, the more easier it would be for you to be financially independent.

Step 2 – Have an estimate about your living expenses

To have a clear picture about your living expenses, it is recommended that you track your past year’s expenses including your credit card and bank expenses and tabulate them in a worksheet. Understand how these expenses will have to change to accommodate your new lifestyle. For instance, if you wish to move to an area that accommodates a lower cost of living, then you might consider spending less on housing. On the other hand, other expenses such as hobbies, healthcare, travel might go up.

Step 3 – Calculate how much you would need to save to reach your financial milestones

Investing a part of your income in different types of investment is a good way to make your money work for you and help you reach your financial milestones. Mutual funds are a good investment option for investors new to the world of investing. Several fund houses or AMCs (asset management company) offer mutual fund return calculator to help you evaluate the amount needed to invest in mutual funds to reach a specific corpus after a period of time.

Step 4 – Use tax-saving investments to your advantage

You must not let go of the tax aspect. Tax is something you cannot avoid or get rid of. Taxes also have the potential to eat a huge chunk of your take home returns if not planned properly. To avoid this, you might use several tax-saving investments available to investors. Right from tax-saving mutual funds – ELSS funds to tax-saving fixed deposits (FD) to Unit-Linked Insurance Plan (ULIP) to National Savings Certificate (NSC) to Post Office Monthly Income Service (POMIS), etc. an investor cannot fall short of tax-saving investments. Basis your financial goals, risk profile, investment horizon, and other factors choose the tax-saving investment that best aligns with your portfolio.

Step 5 – Make sure that your portfolio is properly diversified

Lastly, you must make efforts to ensure that your investment portfolio is properly diversified. Diversifying your investment portfolio would ensure that any loss arising from one type of investment could be off-set by other profit generating investments.

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