How To Be Financially Independent By The Age Of 40: Financial freedom is something everyone dreams of. During the initial years of our lives, we think that retirement planning is something you can put off. In India, the retirement age ranges from 60 to 65 yrs.

Generally, people work all their life, and then finally a day comes when the employer says, “You have worked very hard for us throughout your life. Your services have been terminated henceforth.”

After that, you have no option left, but to live off your savings. Sit back and think- what about your desires, your hobbies, the vacations you’ve been planning?

This is when financial freedom comes into the picture. Most probably you’d be in that part of your life where you are debt-free and you can easily live with the help of your savings.

Now, do you actually think that the money which you have saved by working throughout your life will be enough for your retirement? Will you be able to maintain the same lifestyle post-retirement? Probably not! This is because of inflation.

If the finances are not managed properly, inflation can be a monster that eats up your savings.

In this article, we will walk you through the steps on How To Be Financially Independent By The Age Of 40? Why 40? Because by the forties a lot of citizens have settled into their comfortable life. However, rising responsibilities can deprive you of this comfortable lifestyle.

Here is How to be Financially Independent by the Age of 40!

How to be financially independent

Some points to keep in mind if you want to be financially independent by the age of 40:

1. Investment

The first and foremost thing to do is an investment. Educate yourself and practice investing for the future. Going beyond your means during younger ages can result in financial difficulties in later years.

Prepare an investment plan and prepare yourself for a safer future from a young age. A diverse investment portfolio can help you in facing difficulties. Investment can be of several types- stocks, mutual funds, bonds, government securities, etc.

Make sure you invest by keeping in mind your risk appetite. The earlier you start investing, the better it will be. This is true because you can benefit from the power of compounding. Let us understand with the help of an example.

An investment of INR20,000/month for 30 years giving you a 10% compounded annual return can lead to a sum of INR4.5 crore by the time you reach 60 years of age. However, delaying this by 10 years and enhancing investment to INR30,000/month can lead to only INR2.2 crore.

Note that in both cases the invested amount remains the same i.e., INR72,00,000. The understanding of this simple arithmetic can result in significant advantages. 

2. Eliminate Debt Having Higher Interest Payments

Debt taken to acquire assets can help in creating value. But interest payments can be a huge burden. By the time you reach your 40s, make sure you are done with these big burdens so that you can make a career choice that gives you peace of mind.

Have a look at the costly debt which has been taken and see if this costly debt can be replaced with a lesser interest-bearing instrument. Once this is achieved, monthly budgeting can be achieved and costs can be managed in a disciplined manner.

3. Go for Savings Plan or Life Insurance Plan

By the time you reach your 40s, you’d be accompanied by a range of responsibilities for your family. Some people in their 40s have their children going to school.

Your parents are also about to reach an age where they will be more dependent. Financial planning without considering a savings plan or life insurance policy can be disastrous in case of an unforeseen event. A life insurance policy or a term plan can provide you peace of mind because your family’s needs will be taken care of.

The well-being of your better half and your parents will be safeguarded. Taking sufficient cover for yourself and health cover for your family is very critical and forms a part of financial independence. Without this, an entire financial plan can go in vain.

The cover can fall between 5-6 times your annual income. It is important to take cover for debts like a home loan or an education loan as their interest liability is quite high.

4. Disregarding Inflation Can Cost You More Than You Think

Financial freedom is not being attained by 40-year-olds principally due to miscalculation of the requirements. Most of them ignore inflation while calculating their future requirements. Investing in equities can act as a hedge against inflation if managed properly.

A nominal inflation rate of 7-8% can push up the monthly expenses over the long term and can erode one’s savings in no time. Healthcare costs have gone up by unimaginable levels in the past 5-6 years.

By the time you reach your 50s, most of your savings will go into meeting healthcare costs. Make sure you are prepared and picture inflation while estimating future requirements. 

5. Choosing Right Investments

Wrong investments can result in significant financial losses. Therefore, choosing the right investment option is as critical as making a good financial plan. One can only invest if one saves enough.

Therefore, avoid spending everything you earn on a fancy car or lavish lifestyle. Instead, be practical with the expectations and try and save as much money as you can. Try to act upon the saying “Income minus savings should be equal to expenses.

This means you should prefer savings over expenses. Savings should then be invested in the right investment vehicle. For e.g., if you are in your 20’s, prefer investing inequities. This is because your risk-taking ability is high as compared to someone who is in his 50s.

Investment in equities can also help you get the benefit of compounding. As and when you age, make sure the appropriate amount gets shifted to the investment vehicles having lower risk.

Also Read: How To Plan Financial Goals And Achieve Them?

In Closing

Being financially free by the age of 40 is of utmost importance, and for this, proper financial planning is required. Make sure you diversify your investments so that the risks can be mitigated.

Do consult a financial adviser for your customized financial plan. Do let us know what you think about this article on “How To Be Financially Independent By The Age Of 40?” in the comment section below!

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