Build Your Financial Constitution This Republic Day
Over seven decades ago, India laid down the framework for the country's social, political, and economic functioning in its very first Constitution. Without that document, our country would have never been able to transition from the clutches of colonial power to the vibrant democracy it is today. If you want to break away from the shackles of poor money management and move towards financial freedom, you should also be working on your own Financial Constitution. On the 73rd Republic Day of India, vow to clean up your finances.
What is Financial Freedom?
Financial freedom or financial independence is a state of complete autonomy in your finances wherein you have sufficient funds to pay for your lifestyle without having to depend on someone else. This can be achieved by building passive income sources, accumulating wealth, and investing in a manner that makes your money work for you.
Building a Financial Constitution, or a holy grail plan for your money, is an excellent start to achieving financial independence. A Financial Constitution may look different for different people. The underlying principle is to create rules that help you manage your money and build a pool of wealth that will see you through your financial goals.
How to Build Your Own Financial Constitution?
Ensuring your financial well-being has numerous advantages. It will ensure you are never dependent on anyone else for money, have peace of mind, lead the life you want, and even contribute to nation-building!
Here's how you can embark on the journey of financial freedom through intelligent saving, investing and planning:
1. Understand Your Financial Situation
The first step to cleaning up your finances is taking stock of your current situation. You can only build a plan with knowledge about where you stand. Spend time to understand what your various sources of income are, your expenses, your liabilities and your assets. Once you map this out, you will be better positioned to create a plan to optimize your money.
2. Plot Your Financial Goals
You can only go on a journey if you have an idea of the destination. A financial plan with financial goals is valuable. Think about what your top five financial goals are. These could be anything – clearing off debt, accumulating wealth, saving for a house, saving for retirement, etc. You can then bucket these into short-term, mid-term and long-term goals. Once you have the goals, you can decide how much money you want to accumulate for each goal. This will make it simpler to draw up an investment plan.
3. Create a Budget
Based on your current income and expenses, make a monthly budget. Having a budget will help you cut unnecessary expenditures and keep track of where your money is going. This can be the building block for deciding your savings and investing plan. As a rule of thumb, you should set aside at least 20% of your monthly income for savings and investments. To ensure that you stick to your saving and investing plan, make it a habit to pay yourself first at the beginning of the month.
4. Build an Emergency Fund
Just as a national Constitution has plans for emergencies, so should your Financial Constitution. Even before you start investing, build an emergency fund. This will come in handy during financial emergencies. Your emergency fund should have about three to six months' worth of expenses. Invest this in liquid instruments such as liquid mutual funds, money market mutual funds or even fixed deposits so that it is easily accessible. If you dip into your emergency fund, you should replenish it immediately.
5. Plan Your Investments
Now comes the most important part of achieving financial freedom – how to begin investing. Remember the financial goals you had drawn up? Bring that to the table. Your investment plan should be in line with your goals. Diversify your investments among different asset classes. Your investments should give you inflation-beating returns. To build wealth, you should invest in equities and equity mutual funds to make the most returns.
6. Do Tax Planning
Planning your taxes can be a great way to save extra money. Making certain investments or purchases can help you save tax. When you reduce your tax liability, you can invest excess money. Many tax-saving instruments can help you meet long-term goals as well. For instance, if you invest in Public Provident Fund, you can claim up to Rs. 1,50,000 as a deduction from your taxable income every year while also building a retirement corpus.
7. Get a Passive Income
If you want to build wealth and financial freedom, more is needed to have a single source of income. You should be working on multiple streams of money. You could take on another job, build a business, or make smart investments that pay you regular returns. For instance, investing in dividend stocks or mutual funds will give you regular dividend income.
It's always the right time to start planning your finances and paving the path to financial freedom. If you want some inspiration, use this Republic Day as a starting point for your journey. Plan how you want to start investing, manage your debt and do everything you can to make your money work for you.
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