On 12th May, 2020 PM Modi announced “Atmanirbhar India Mission” The mission is getting praise from all across including the world bank. This also provokes thought on how do one become Atmanirbhar (Self dependent) for personal finance. If you are already thinking about your debt and credit cards due, becoming self dependent (Atmanirbhar) for personal finance needs basic efforts like plan for it and stick to the plan. Below are few points to consider in your journey to become Atmanirbhar for your personal finance:
1) Start with your financial goal: Everyone’s definition of financial independence is different depending on one’s needs, age, current income and expenses. Start with your various financial goals, timeline and specific amount to achieve each goal. Below are few points you need to consider:
- Money you need for your retirement life
- Finance requirement for major life event like marriage in family, children’s education
- Any big purchase to plan like house or car along with its timeline and approx cost.
- Current debt (If any) and in how much time it can be paid off
Once you know your requirement along with timeline, it becomes easier to plan for it and achieve the same.
2) Monthly Budget: Becoming financially Atmanirbhar starts with budgeting. Traditional way of budgeting is measuring your income, projecting expanses and arriving at difference amount as your saving. This processed is generally followed by where to put your saving based on your financial goal.
Old formula for monthly budget: Income – Expenses = Saving.
New way of budgeting to accelerate goal achievement: Reversing the old process will magically accelerate your goal achievement. First decide how much you need to save based on your financial goal and its timeline. Once you know the saving amount, reduce it from your monthly income and keep difference amount for expanses. This will help you to revisit your expenses if they are more and come up with ways to reduce them.
New formula for monthly budget: Income – Saving = Expenses
3) Eliminate debt first: You will generally pay more interest on your debt than you will earn on your savings. Once you start saving, next step is to utilize it to eliminate your debts. If you have multiple debts, start with the debt with higher interest rates. For example Credit card dues are one of the most costly debts. Pay them first before you start repaying any loan. If you have a home loan and a personal loan, first repay the personal loan as it generally has higher interest rates. Eliminating debe will have double positive impact. First it will save your outgoing interest cost. Second it will also free up your monthly amount which you end-up paying as EMI. The same EMI amount can be utilized effectively towards saving once it gets free.
4) Smarter emergency net: Traditional way to manage emergencies is to create a liquid fund with cash to deal with emergency requirement of funds. This involves keeping aside money for situation like impact on job or health or emergency repair of assets like home or car.
Old formula: Create emergency liquid fund to cover all emergencies
Modern way is to create a smarter emergency net which is combination of emergency fund plus insurance. One should compare Insurance premium v/s how much money insurance can make free from emergency fund based on how much cover insurance provide for such situation.
Modern formula: Smarter emergency net = reduced emergency liquid fund + Insurance
Example: If your emergency fund requirement is Rs 5 lac divided into Rs 2 Lac for impact on job + Rs 2 lac against health emergencies + Rs 1 lac for emergency repair of assets. You can calculate how much insurance premium you need to pay which can cover health emergencies or repair of assets or even impact on job and accordingly make money free from traditional requirement of 5 lac emergency fund which can be now invested for other financial goals.
5) Consider expanding your income sources: If you find yourself far behind your financial goals, consider developing more than one income source. If you are a full time employee, consider consulting or freelancing as per your skills and time availability. You may also consider enhancing your skills to get better paying job. Even consider starting a side business. If you have a business, consider diversifying your business to various source of income.
6) Commit to stay within your means: Lastly if there is any single measure you ask me to choose to become financial independence, this is the one. Unless you completely commit to this, following any other step will not be sufficient to achieve your financial goals. This step will not only provide you with cash available for saving, it will also keep you free from debt. This might make you uncomfortable by possibility of downsizing your expanses or lifestyle but larger benefits from this makes it worth following.
To conclude financial independence does take discipline. Following this discipline comes with larger rewards of becoming “Atmanirbhar”.
Atmanirbhar self will make Atmanirbhar India.
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