Every one aspires and should aspire for being financially independent. Different people have different meaning of this term. For some, it might mean being richer and richer, for some others, it might be having enough so that they do not need to work again. But from financial independent, I mean one should be in a financial position to be able to lead a life style one desires without being worried about finances. One should have enough resources and protection in place which will cover one’s life style.
There are few steps one can take to achieve this. These are-

1. Avoid expensive debt and try to get rid of your debt at your earliest

First of all, the debt should be considered only for those assets which appreciate with time. Notable of these are housing mortgages and student loans. Real estate prices usually go up with time. To live, you need a house in any case. If you are renting, you are contributing towards your landlord’s mortgage. It is better to have own house even though you will have to take a mortgage loan. But always structure your mortgage wisely. What term the loan should be fixed for? How to repay the loan faster etc should be carefully planned. You should buy a house and take a loan only of the amount which is within your repayment capacity over the longer term.
Similarly, education improves your earning capacity and as such taking education loan is recommended if you don’t have funds on your own.
But incurring debt for consumer durables like cars, TVs, consumer electronics should be avoided. By the time, installments are paid off, the values of these items go down.
One should not be tempted to buy expensive houses, expensive cars and other stuff, just for show off to others, in case one wants to achieve financial independence. Always be within your means, spend less than you can and accumulate more wealth for retirement to achieve your goal of financial independence faster.

2. Have adequate insurance to protect your valuables and to protect your income earning capacity

You should insure your valuables adequately. Never miss to insure your house, car and contents. If you own investment property, do not forget to insure for lost rent in case of fire, landlord protection insurance in case of malicious damage to your property. Your personal income earning capacity should also be protected; you should have sufficient disability, trauma, income protection, mortgage protection insurance in place. Never consider insurance premium to be waste of money, you are buying peace of mind and protection from financial loss b y buying insurance. But you should not waste money by being over insured. The increase in amount of ‘excess’ and waiting period in certain policies can significantly reduce your insurance premium, so it should be carefully planned in consultation with a Financial Advisor.

3. Protect your assets by transferring these to suitable entities

Who should own your assets? Are your assets exposed to being lost due to marriage split, to business creditors, to IRD? Do you need a family trust? These aspects should be carefully planned by taking advice from a financial planner and your solicitor. Your financial planner will advise you as to which are the assets that should be held in trust, your lawyer will take care of legal issues.

4. Make maximum use of your Employer and Government sponsored schemes

If your employer is providing free or subsidized insurance or superannuation you should go for it. In New Zealand, we have state sponsored KiwiSaver scheme. Do not think that, it is a long way to go for you to turn 65, why you should contribute? Remember you are to contribute only higher of 2% of your wages or $20 per week in order to gain maximum advantage. With regular contributions and compound returns, you will be able to accumulate a sizable nest for you. Which fund should you choose? Are you a conservative, a balanced or an aggressive investor, who will determine that? Seek the advice of a Financial Advisor. Remember a nominal difference of 1% per year in return on investment can result into sizable loss by the time you will turn 65.

5. Minimize your taxes

Seek the advice of an accountant to see if your affairs can be organised in a more tax efficient manner. Remember, each and every dollar saved will contribute towards your nest.

If you plan your financial journey carefully, your road to financial independence will be smoother. It is a wrong perception that financial planning is only for rich people, it is equally relevant to each and every one.

Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement as required under Securities Act 1988 is freely available on request.