How much money do you actually need?

A growing economy and technological innovations and revolution have led to people experimenting and finding success with unconventional career choices. Be it freelance content writing, online coaching, social media influencing, personal fitness training or travel planning, nothing is off-limits for the adventurous millennial who is eager to challenge the established norms of society.

One common underlying philosophy of this generation is to achieve financial independence as early as possible.

How much money is too much?

You need to practically assess your capital requirements. Your corpus should be enough to sustain your basic needs and allow you to follow your dreams and passions. Moreover, your retirement corpus should outlive you.

Key aspects of financial planning

Whether you want to retire early, travel the world or simply upgrade your lifestyle, the roadmap to financial stability starts with proper financial planning.

While financial planning is a wide topic covering various money management measures and financial instruments, it is important to have a holistic awareness based on three key aspects of financial planning.

Saving and investing

People tend to consider saving and investing as synonymous. Nothing can be further from the truth. We save money to build a corpus that can be helpful to meet sudden or urgent expenses.

While saving is necessary, it is unlikely to help you substantially grow your wealth in the long run because of inflation.

For example, consider that your annual savings of Rs. 1,00,000 grow at an interest of 3% while the inflation grows at 6%. After a year, although your value of savings will be Rs. 1,03,000, your actual purchasing power after adjusting the inflation rate would reduce to Rs. 97,000.

Investing, on the other hand, will grow your money through financial instruments such as stocks and mutual funds. The goal of investing is to create wealth by generating returns that could beat the rate of inflation.

Generating passive income

No one can work indefinitely. You need to develop sources of passive income so that you keep earning money even after you stop working. Earning royalty from books, dividends from stock, a monthly pension from mutual funds, etc. are some examples of passive income.

Tax planning

Without proper awareness, you may end up paying a significant portion of your investments in taxes.

For example, as of August 2021, the long-term capital gains tax on an equity mutual fund is 10%, while the short-term capital gains tax is 15.60%.

You will end up paying short-term capital gains tax if you withdraw funds from your equity fund after 11 months. On the contrary, you can save a significant amount on taxes by withdrawing the same amount of money after waiting out one more month, as your income will now come under the purview of long-term capital gains tax.

Nothing is impossible to achieve. All you need is proper money management strategies. You can start your financial planning right from your first salary credit. Starting early can help you to realize the power of compounding and, in turn, set you on the path of financial independence and early retirement.