How to get Financially Independent or as I like to say “Licence to do whatever the Fu*k you want” (Of course legal stuff)

Intro-: These are some simple, no BS, to the point steps for a young Indian and if you follow them with discipline then in the long term (Exact time depends on your earning capacity and lifestyle expenses) you are bound to be financially independent.

I personally followed them and was able to become Financially Independent shortly before my 30th Birthday last year. I cannot imagine a better gift than this to myself.

You become free to follow your passion, start that business you always wanted, be creative, do social work, or do nothing at all, YES you get that choice. You get both the power & confidence to say NO to things you don't want to do

Step Zero-: Payback all your Debt right now, whether it’s any kind of loan (credit card, Personal, car, home, etc.) STOP all your savings, SIPs, lower your PF contribution to the minimum, and use the proceeds to pay back whatever amount you owe in the shortest possible time.

If you bought something with a loan and can’t pay back in a short period, sell it and pay the loan back. It could be painful to sell that shiny car you bought but trust me it will be worth it, after doing this only you can start from zero and it’s a great feeling to be Debt free.

Step 1-: RENT RENT RENT!!! Start renting stuff instead of buying, whether it’s a place to live, transportation, furniture, etc. You have got all the options these days (Uber, Rentomojo, etc.). If you can rent it then don’t buy it PERIOD, it’s that simple.

Step 2-: Don’t try to save in places which end up consuming your time and energy which in turn dwarf any saving if any you do, for e.g. Hire a maid to do household chores (yes in India you have this privilege at low cost), order groceries online, etc.

Utilize this saved time and energy somewhr which increases earnings,The more you earn the early you can achieve your goal of FI,Learn new income skills, start a side hustle, do whatever it takes to max your income. A laptop and Internet gives you a whole universe of opportunities

Step 3-: Budget all your monthly expenses to fit them in a maximum of 50% of your monthly income. If you can do with less even better. You may require to undergo some lifestyle changes but it will be worth the sacrifice.

Step 4-: Start saving the rest of the 50% (or more) to make a corpus that covers all your expenses for at least 6 months. Keep it in a bank saving account (SBI/HDFC Recommended)

The corpus created is not to be used for any purpose other than any emergencies and vacation is not an emergency but Job/Income loss is. If used then fill it up again ASAP.

Step 5-: Start a health insurance policy of adequate cover(Rs 1-2 million in India) for you and whoever you would be willing to pay the medical bills with your life savings in case they get sick (Spouse, children, parents , siblings, etc.).

Alternatively, you can encourage them to buy the same for themselves if you want to save on the premium cost. Don’t depend on your employer’s health plan and the earlier you buy the lesser you pay in premium.

Step 6-: Now you are ready to make investments. Use the rest of your 50% (or more) monthly income after Step 4 & 5 to invest. Always go for the following rational.
1. Buy equity in private companies. (75%)
2. Buy debt from Govt. or its entities. (25%)
Never the other way round

Govt companies (PSU/Banks) are highly inefficient they were started to give employment and providing value has not been their prime objective which makes them wealth destroyer in most cases.

Private debt is dangerous with risk of default even by major players so always go for Govt debt which is the least likely of all to Default.

The aim with debt is to get returns enough to beat inflation with capital preservation being a priority and for higher returns, we are any way investing in Equities

Step-6 (Cont.)-: Here is what’s bound to work in the long term. Start a SIP in the following-:
1. NIFTY 50 Index ETF/Mutual Fund (50% of the amount allocated for equities)
2. NIFTY NEXT 50 Index ETF/Mutual Fund (25% of the amount allocated for equities)

3. NASDAQ 100 Index ETF/Mutual Fund (25% of the amount allocated for equities)
4. Govt. securities ETF/Mutual fund (50% of the amount allocated for Debt)
5. PSU and Banks Debt ETF/Mutual fund (50% of the amount allocated for Debt)

All SIP in Direct-Growth option if investing in Mutual Fund. Also, choose the one with the lowest expense ratio.

The above plan provides you all the diversification you need in the world. You are betting on the economy of India which is most likely to grow in the long term at a good pace

and the Investment in the US-based fund gives you geographical diversification, currency diversification, chance to invest in top tech companies like Google, Microsoft, etc, which you don’t get investment exposure in India but you use them on a daily basis.

Also, the majority operate globally which provides an additional layer of geographical diversification. Don’t go for Fixed Deposit etc. as they are not tax efficient.

If you have any large amount of savings left after the first five steps, use them to systematically transfer them into the above, in the same proportion over a period of 18 months. Don’t do it all at once. Do the same for any large Bonus or income you get from somewhere.

BAMM!!! Now you have CEOs and other awesome employees of top Indian & multinational companies including Mukesh Ambani, Sundar Pichai, Jeff Bezos, etc. working day & night to make you wealthy while you sleep away to GLORY!!!

STEP-7-: As your income grows with time, keep increasing the Investment amount in the same proportion, and keep doing it until all your annual expenses < 4% of your whole portfolio. The day you achieve it you can consider yourself Financially Independent!!!

For those who understand, the logic behind this is, we are expecting around 10-11% CAGR returns on the portfolio and average inflation in India has been and expected to be around 5-6%.

So your real returns (Average 4-5%) post LTCG TAX (Indexation benefit in case of debt & US-based fund) will be able to meet your annual expenses, and if you get lucky and LTCG is once again abolished (like it was in past) then more returns for you.

Caution-: If your financial goals are influenced by old and outdated norms of society like owning a house, your kid’s marriage, etc. then this path may not be for you.

However, if you keep working even after becoming FI then you can achieve these goals as well by keeping up the investment process separate for these goals as well. So decide on your priorities first and then follow. It may take more time but you will get there.

Also I have not included term insurance policy (cover= 10-15x your annual income) along with health insurance, you can take it only if you have dependents (at step 5) alternatively you can just make a nomination in all your investments in the name of your dependents.

Few things you need to avoid at all costs if you embark on this path are Jail, Divorce, trading (especially F&O), stock tips, insurance cum investment products (ULIP), any get rich quick scheme.

And above all avoid various kinds of addictions like alcohol, drugs, sugar, trans-fat, porn, betting, etc. If done then only in moderation.

Some good habits that will help are exercise regularly, meditate daily & learn-unlearn-relearn to enhance knowledge.

Always weigh your options financially not just emotionally whenever taking on any kind of responsibility like marriage/having kids etc. (your spouse/partner needs to be comfortable with your lifestyle choices and has to participate in the journey as well for it to work)

99% of financial advisers will give you the same plan with little changes here and there, after you pay them but remember the plans they make may not always align with your goals as they get a commission on selling all kinds of financial products.

So try to learn the basics and do everything yourself, it’s very easy, with just a few clicks you can do it nowadays.

Once you become financially independent the goal of the majority I have seen is not to retire from active working but to do something you were always passionate about or enjoyed doing.

In some cases one can find new passion as well, you can only find them once you have the option to try and once you do something which you love, doing it doesn’t feel like work anymore it becomes fun and entertaining.

It can also reap in huge financial rewards in some cases which will be cherry on the cake. So start your journey to Financial Independence today, All THE BEST!!!