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Wealth Guide: How to achieve financial independence to retire early? Expert shows the way | April 11, 2022
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“Financial independence primarily hinges on three legs a) Savings, b) Insurance, and c) Investments. Hence, one needs to create a financial plan and follow the necessary eight steps to achieve financial independence." 

Everyone wishes to achieve financial independence and retire early. Financial independence or freedom represents the ability to earn or generate a livelihood that enables one to live a comfortable lifestyle and not worry where one’s next paycheck will come from.

Financial independence is being financially capable, self-sufficient, and debt-free with an ascertained plan to achieve financial goals. These goals may cover owning a house, buying a dream car, travelling to exotic destinations, providing for children’s education, saving for their wedding expenses and a well-provided retirement. These goals may evolve as we age. Jaslene Bawa, Assistant Professor – Finance & Accounting, FLAME University, shares her knowledge on how to achieve financial independence so as to retire early?

“Financial independence primarily hinges on three legs a) Savings, b) Insurance, and c) Investments. Hence, one needs to create a financial plan and follow the necessary eight steps to achieve financial independence,” Jaslene Bawa suggested.

1 Set SMART Goals:

“The first step in a financial plan is to set smart goals, i.e. specific, measurable, achievable, realistic and time-bound. Goal setting is the most crucial step in financial independence. For example, I want to have a corpus of INR 30 crores at the end of 40 years. This goal has a time frame and a measurable component, such as 30 crores. The next step in financial independence is to clear all debt,” Bawa said.

2 Debt-free:

“It is essential on one’s journey to financial independence that all debts are cleared as they can deter one from achieving the goals. These debts can be credit card loans, car loans, housing loans and personal loans.


If one is spending more than 30% of the credit limit on a credit card, it is a warning signal.

While dealing with credit cards, it is imperative to repay dues when the bill becomes due and not use revolving credit as this form of debt attracts a very high-interest rate, i.e. 24-36% p.a.

If one has multiple debts, one can begin by repaying the smallest debt first, as it positively impacts the borrowers’ psychology and gives a sense of achievement.”

3 Save first and spend later:

“It is essential that one practice delayed gratification. This is the ability to postpone an immediate purchase or consumption in favour of a later purchase or consumption. Warren Buffet, the quote goes, “Don't save what is left after spending; spend what is left after saving”. Once you receive your salary, make it a habit to pay yourself first and spend later. E.g. If you earn a salary of INR 1 lac, make it a habit to save a minimum of 30% and spend the remainder. This percentage can increase as your budgeting skills improve.”

4 Make a budget and track your expenses:

“When moving towards ones’ financial independence, one should make a budget of their expenses. This helps one understand the broad expenses and navigate the money outflow. E.g. Make a budget that covers your monthly expenses such as rent, groceries, vegetables, house help charges, maintenance costs, travel, etc. Keep track of these monthly expenses and identify where one can reduce wastage. Spend on necessities and save a sizable portion."

5 Let savings earn for you; begin small, save via SIPs, and take risks when youth is on your side.

“When saving, an essential aspect is to deploy them in a suitable investment avenue such that it starts generating money, i.e. money earns money. Investment avenues range from mutual funds to small cases to direct stock market investments to fixed deposits to recurring deposits. One should choose the investment option based on one's risk appetite, financial goal, time horizon, and knowledge.

E.g. Stocks are very risky, whereas fixed deposits are less risky.

a) If ones’ goal is to achieve 30 crores in 40 years, and is risk-taking and wishes to invest 26,000 per month. One can consider direct stock investment or Equity mutual funds that give a return of 12% p.a. This means that if one systematically invests 26,000 per month from their salary for 40 years, this money will compound every month over a horizon of 40 years and result into 30 crores.

b) However, if one wants to achieve 30 crores in 40 years and is risk-averse. This person will have the option to invest in debt, i.e. fixed deposits that may return a 5%-6% p.a. This person will have to invest 150,000 per month to achieve the same 30 crores goal. So one needs to decide what risk and return mix they would wish to consider, i.e. higher risk, higher return.

When one is younger, one can take more risks. So one can begin with Equity oriented mutual funds and invest small sums via the Systematic Investment Plan (SIP) route every month. As age progresses, the mix of investments options also needs to change to your evolving needs. The usual age-related rule for investment is (100 minus Current Age = Equity percentage). Begin to invest with small amounts, gradually increase the amount to be invested, and regularly invest because that helps you remain disciplined and boosts money compounding.”

6 Diversify your portfolio, periodically rebalance and monitor it

“When you invest, make sure you don’t keep all eggs in one basket. Diversify your investment across different asset classes such as equity, debt, commodities, real estate etc. Each asset class carries a different risk and return. One should diversify their investments across sectors and geographies because each of these reacts differently to other economic conditions. The most cost-effective way to build a diversified portfolio is through mutual funds or small cases, i.e. one may have access to 30-40 stocks without incurring the high expenses related to the transactions. These options do not require one to have a minimum investment ticket size. This helps reduce the investment exposure to a single asset class, sector and geography. After a portfolio is created, one should regularly review and track the performance of the investments. If an investment is underperforming, one can replace them with better-performing investments. This helps one monitor and track whether ones’ assets are helping one move towards their financial goals.”

7 Buy Life and health insurance.

“Life insurance is essential to hold once you have dependents in one’s life. It provides monetary safety to one’s family if the bread earning member dies. However, one must not confuse investment plus life cover. One should focus on a pure life cover.

Health insurance provides coverage for medical expenses and hospitalisation. One should go through the medical policies available in the market and select the one appropriate to one’s need, gradually increasing the cover as age increases is a good idea.”

8 Create an emergency fund

“One never thinks that anything can go wrong with us. However, man proposes, and God disposes. So, one should always keep 6-12 months of living expenses as a cash reserve to meet unforeseen events.”

These eight steps if followed diligently will pave the way to one’s financial independence,” she concluded.

- By Prof. Jaslene Bawa, Faculty of Finance