Financial Freedom: 7 easy steps to build a secure future

Analyse cash flows

Creating a budget to understand where your money is going and identifying the areas where it can be saved and invested is the best option to stay away from incurring debts. It fosters a more responsible financial approach helps in achieving the goals and also helps you live within your means. Control over expenses and monthly instalment outgo will allow you to create the right surplus that needs to be allocated for your goals.

Invest wisely

Based on the tenure of the goals, a proper mix of assets should be decided to yield best returns. The ARC formula (asset allocation, regular investing, compounding) takes you to your FIRE number at the desired age. Delaying this execution can result in several years of missing the compounding to grow wealth and achieving financial independence.

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Risk management and emergency fund

An unforeseen financial crisis can easily jeopardise financial freedom. An adequate term and health insurance cover depending on the cash flows and number of family members, respectively, can help manage the risk. India is facing an acute challenge of underinsurance, one of the big reasons for families missing out on financial freedom.

Emergency funds help you navigate the periods where you are not generating income. This life stage can occur due to multiple situations like layoffs, family emergency or externalities like in the case of the coronavirus pandemic. Money to meet six months' expenses should always be parked in liquid funds.

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Periodic tracking and restructuring

Growth in inflows should be directly proportional to the investment amount. There are two key reasons why periodic tracking and rebalancing is required—one is how the market dynamics are playing out, and the other is how well you are on track to achieve goals. Additionally, a strategy should be defined to top-up the investments to take advantage of dips along with regular investments.

With the goals nearing, one needs to decouple certain allocations from market-linked assets and move towards the fixed-income category, which is less volatile. Investors often don’t track and rebalance periodically, which hurts their long-term planning. The asset allocation done at the time of first execution can’t remain static. That’s the key message for investors.

With this clarity, families will be more likely to achieve financial freedom, sooner than planned in some cases.

Estate planning

With every other step being taken, it is also important to make sure that the necessary information about assets and liabilities are compiled and made accessible to family members. This saves them from additional anxiety and emotional toll in the case of an unfortunate event. Clearly listing the right nominees and beneficiaries is crucial to avoid legal complications and family feuds.

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Get a financial advisor

Financial advisors registered with the Securities and Exchange Board of India can help develop a plan to achieve the FIRE number and chart a path towards it. The current market for advice is quite organised. One needs more discretion to recognise those intermediaries who may not be qualified to provide advice.

On this Independence Day, we urge everyone to take concrete steps towards achieving financial freedom in a systematic manner.