We often use the term rich and wealthy interchangeably. But do they actually mean the same. If one gets hundred rupees now as gift we say he is richer by hundred rupees, however we do not use the term that he is wealthier by hundred rupees.
We often use the term rich and wealthy interchangeably. But do they actually mean the same. If one gets hundred rupees now as gift we say he is richer by hundred rupees, however we do not use the term that he is wealthier by hundred rupees. The term Wealthy is defined as abundance of material wealth. However when we talk about this under the financial planning aegis, we could imply as someone who is financially free. Now when we say that someone is financially free the question is when can we really call ourselves as financially free? Is there a benchmark figure or number which can term us, as one who has achieved financial freedom. The answer lies in us going through the following points which can help us decide if we indeed have reached financial independence.
1) Do I have a loan:-
Today having an outstanding loan is a very common phenomenon. We have seen cases of people with huge credit card outstanding and still wanting to invest in instruments rather than settling the outstanding balance, knowing very well that on one hand the cash outflow towards credit card is about 36 percent whereas the investments might not be able to generate that kind of returns. When we were children we were taught in school that in a number line zero is bigger than minus five. So one thing which is of crucial importance is that as soon as possible keeping our goals and overall financial position in mind we need to become debt free as it not just helps us reaching our financial goals faster but also take us closer to financial freedom.
2) Cash flows:-
We have often noticed that people know about their fixed outflows but not variable outflows. The fact however is that in many cases variable outflow can really affect your networth in the long run. Today it is not just expenses that have increased but even the avenues to spend have gone up significantly. We had not seen people spending money on mobile phone applications in the past or go to malls so frequently but today it has become a very normal way of life.
3) Health insurance cover :-
This is one area if not paid attention to can reduce our wealth substantially in an unforeseen situation. Many of us salaried employees do not take a health insurance as we feel that we have a company cover. The question however is what if the person leaves the company and the new company does not have such provisions or what if the existing company changes its policies next year. Medical expenses today are very high and it can take away a substantial portion of your savings if there is no adequate cover.
4) Adequate life cover:-
Life insurance is needed to cover financial loss caused by death of an earning member. So it is important that we gauge what could be our family’s financial loss and is our cover is commensurate with the same. In the event of buying insurance products with returns we tend to ignore the importance of term insurance plans which is very crucial to secure the financial health of you're loved ones incase of any unforeseen events.
5) Financial commitments towards ones goals:-
Finally it is important that we give clarity to our financial goals and start working towards them. Postponing implementation of a plan would just lead to situation where things which are important become urgent, and most of the times things done in haste need not yield the desired result. So it is important to take the first step as soon as possible and reach our financial goals at the earliest.
Mukund Seshadri is a partner at MSVentures Financial Planners.