This independence day take a step towards achieving your financial azaadi
It is a state of having sufficient personal wealth to live, without having to work actively for basic necessities.
On the eve of our 70th Independence day, one might pause to ask oneself about the state of one's personal, financial independence. Have we, as individuals, won our financial azaadi? If not, then do we plan to win it and how?
Financial independence is a much bandied word and seems to mean several things to people. In fact whenever I have discussed this concept with my friends and clients, I have wondered if people are clear about what they mean by financial independence:
• It also means the freedom to switch jobs without stressing finances at home
• While to some means having enough money to survive without a regular pay cheque
• While to some others it means having enough money to lead a good life and chase whatever endeavors you like without further income
A plethora of literature available on the subject seems to define it as a state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income and/or cash flow from dipping into the assets that is at least as great as their expenses. However I believe that what matters is what financial independence means to you.
What does it mean to you? What are your financial goals? Define them, set your financial goals and then strategize to achieve them, attaining Financial Moksha. Achieving those defined goals is not easy. It is hard work. It is a war. A war you have to wage to make what's in your head and heart, real for you and your family.
Who is the enemy and what are my weapons, you might ask. Well, the answer is simple. The enemy is you and the weapon you have is knowledge.
You have to change your habits and before that, you have to equip yourself with a thorough understanding of your personal finances, accept your financial capabilities and limitations. More knowledge you build about yourself, better you will come up with financially wise judgments.
5 smart steps to financial independence:
1. Define your financial goals: Sit with your spouse and I shall appreciate if you involve your kids too in defining the financial goals. This process should involve the family and will spell out what do you want from life and give a purpose to your efforts in building a business or career. Don't forget to ask your kids about their aspirations and needs. Jot them down and involve them in this process. Trust me when I say that it goes a long way in instilling a sense of value for money and curbing spend thrift habits.
2. Examine how many goals looks achievable: Involve an expert financial planner to first work on your income, expenses; flag expenses that can be pruned. The financial planner will help you understand how many goals can be achieved based on savings.
Hiring the right financial planner is crucial and you should verify his/her work experiences, number of clients, certification courses done and whether s/he sell any financial product too. Stay away from financial planners wear the two hats of financial planning and selling financial products. You should not mind paying a small fee rather than getting into buying inappropriate financial products that could erode your capital.
3. Start working towards achieving your goals: A plan is good only if it is executed well. Start following the rules defined by you with your planner to achieve your goals and then invest in right financial instruments. Do not hesitate to discuss and debate the appropriateness of the product being purchased. This is where your understanding of personal finance will be reinforced. While investing don't forget to define nominees for each investment and insurance.
• Avoid consumer debt. Consumer debt is enemy number one of financial independence. If you use credit cards to buy consumable goods and carry a balance, then you are enriching the banks and not yourself. The first step toward financial independence is to get rid of high interest debts and free your money to work for you instead of the banks.
• Ignore the peer pressure and do not compete with your friends. One of the many reasons we spend so much money on stuff is to keep up with our friends and neighbors. Is accumulating stuff really the reason we get up every morning to go to work? Ignore the burning desire to own all those things that your neighbor owns. Build up your finances instead.
• Spend much less than you earn. The real key to financial independence is to spend less than you earn. Avoiding consumer debt and ignoring the social pressures to spend on avoidable lifestyle will get you most of the way there, but it takes a lot of diligence to spend much less than you earn. First, you need to track your expenses and see what you spend money on. Then you can cut the things you don’t need and keep lifestyle inflation to a minimum. Of course, it’s equally as important to generate more income. Remember to work both sides of the equation to widen the gap between spending and income.
• Pay yourself first. This might sound rude, but to reach financial independence you will need to put yourself first. You need to prioritize saving ahead of everything else. Save before you pay the utility bills, buy groceries or even pay the rent. Paying yourself first encourages you to live on a smaller budget and it’s a powerful saving habit. Living with what’s left after paying yourself is a great way to build wealth.
• Keep investing. It’s equally important to keep investing over the long term. You have to invest in the stock market through the good and bad years. It can be difficult to buy stocks when the price is going down, but if you don’t, then you will probably miss out on the recovery. It’s much easier to keep buying no matter what the market is doing. Invest through mutual funds, accumulating wealth over the long haul. As you near retirement, then you will need to adjust your asset allocation to reduce risk and volatility.
• Be flexible. Be flexible and adjust your spending accordingly. Some years are bound to be more financially difficult than others, and you need to be able to deal with them. Being flexible means you’ll always land on your feet and live a less stressful life.
• Plan & review. As you know nothing is permanent in this world. Please review your financial plan at regular intervals and take appropriate measures in consultation with your financial planner as your needs, income sources and aspirations evolve.
4. Get organised and ensure your family is aware: Now we reach the last mile of achieving your financial independence. This is one of the most neglected steps in the journey to winning financial independence. Most forget the purpose of investing & buying insurance. In my long career, I have seen many instances where personal documents and investment papers are scattered around the house, lost in files and forgotten in bank lockers or even buried in email inboxes. I recommend that you must get all physical documents filed systematically and then digitized to be uploaded to an e-vault so that you and your family members can access them on a single click.
Do not worry about the security of these documents. There are enough measures taken to make them hack resistant. Make your partner aware about the location of all the financial papers and the e-vault. Don't forget to store all your digital passwords at a safe place and not keeping it a secret from your partner. I assure you this step won't take more than 15 minutes a week it shall give you peace of mind.
Having adequate wealth to meet needs and aspirations is often the least of worries for those in quest of financial independence. Evolving your financial plan and staying focused to achieving the end goal over many years is the real challenge. The war to win financial independence will be hard fought but is tougher to keep the freedom.Happy Independence day.