How To Become Financially Independent?
“Financially independence” has become a buzzword among many retail investors. Financial indecency helps us so that, our money works for us rather than we working for money. Everyone wants to save and grow their money for their future needs but only a few achieve it. The reason being it is not because the process is too difficult to implement, the main reason that very few people achieve financial independence is that the process is “very simple”.
Financial Independent – A Very Simple Process
Humans have got a unique ability to take simple things and make it more complex. Human behavior will not allow us to make simple investments decisions that would have higher future pay-off because we want an instant result. One of the ways we can overcome this attitude is to create a proper process so that we are not tempted to act instantly and helps to invest regularly. One of the processes we are going to discuss is known as SIP (Simple Investment Plan).
SIP – Simple Investment Plan
SIP consists of a very simple two-step process, they are
You must have the time horizon of at least 10-15 years.
Invest a certain amount each month regularly for 10-15 years.
Yes, that’s it. we now know the secret sauce for wealth creation. If you think that, “will it work because it is too simple?” Then, I must say that Bruce Lee has got the answer for you….
We just need to practice one kick (SIP) regularly for 1000 times (10-15 years) to achieve success (financial Independence). SIP is a powerful tool in the long run. There may be many ways to make money but SIP is a simple way and one has to invest regularly to get its benefits.
Let us understand the power of SIP in long run through an example, let us consider we decide to invest Rs 6000 each month regularly for 15 years through SIP and we expect 15% CAGR (lets us be more conservative in selecting a rate of return). What would be our return?
We have simulated for 20 years to show the power of long-term investments.
From the above table, we can calculate that at the end of 15 years the total amount invested is Rs 10.8 lakhs (Rs 72000 * 15) and our investments have grown to Rs 46.13 lakhs at the end of 15th year. Now if we extend our time horizon just by only 5 years more, we would be sitting on whooping Rs 98.37 lakhs and our investment would be just Rs 14.4 lakh, this is the power of long-term investments.
Now let’s make more interesting,
Instead of investing only Rs 6000 every month, we might make a simple change by increasing our SIP amount 10% every year. For example, if we invest Rs 100 in the first year then, we must invest Rs110 in the first year and Rs 121 in the second year and so on, in the respective year.
We have again simulated our SIP for 20 years
Just by increasing SIP amount by 10% every we get a corpus of Rs 1.5 crores at the end of 20 years and our initial investments would be Rs 41.23 lakhs.
We should be very careful while reading the above excel sheets because
Every calculation works fantastic in MS Excel but in the real world, it is quite messy. So, we must understand what hinders us from making simple SIP investments in the real world. The major obstacles are
- Our behavior and attitude towards markets.
- We think that we can time the market every time.
How to overcome this?
Just follow the simple process of SIP and invest regularly, without any interruption.
But where to Invest?
There are many options for investments and the most preferred are
Directly investing in equity.
Investing in equity through mutual funds.
Buying government bonds.
Of the above three, the first option may give us a high return but there is also high risk associated with it. The major risks are
Our inability to find fundamentally strong companies.
We may panic if any sudden downtrend happens in the equity market and we would sell all our investments.
Overstimulation and overreaction to noise. Investors are very bad in differentiating between noise and information.
Now we understand that SIP is a weapon of mass wealth creation in a simple way but there are many difficulties in implementing this process.
In the next post, we will be discussing how to overcome these difficulties and how to gain the right mental attitude to invest regularly through SIP.