Financial freedom may sound like a dream come true. However, it is not the case. Follow these simple tips and you are home.
Financial Freedom or Financial Independence as the word suggests is a situation when an individual is free to spend his or her time on things that he or she likes rather than working purely for money to make a living. Basically, a way to have enough passive income from your investments that let you lead a comfortable life without the worry to get a salary to meet the expenses. This topic is very dear to me as I personally subscribe to this concept and my family and friends will vouch for that! Though, it sounds like a dream come true, in reality it is achievable if we follow some basic set of rules in our early years of professional life.
Spend less than what you make
In early years of your career, it is tempting to splurge on unimportant things as there are nothing like responsibilities being unmarried, expenditure on children, housing loans and other related expenses when you start a family. That new iPhone or laptop may not be essential if you already have one. I have often witnessed young professionals buying such items purely to impress their colleagues or friends. Often, they choose the very-friendly EMI route that keeps digging their pockets every month. Hence, it is prudent to wisely budget your expenses and invest the surplus to keep up with the rising expenses once you start a family. Keep your credit card expenses low and ensure to pay the entire due amount before the due date. Avoid personal loans or any other form of loans unless it is a desperate need. Work and earn for yourself and not for your bank. Invest first and spend what is left after the investment.
Plan for your retirement
Early you plan for your retirement, earlier can you retire! It is wise to set aside your retirement corpus right from your first pay check. Why is provident fund (PF) compulsory at most companies? It is nothing more than retirement planning. Though, there may be better options to invest than PF, point is that retirement planning should be made as early as possible. While setting aside your surplus funds, part of it must be for retirement.
Don’t be conservative
Being conservative with your investments is inversely correlated with your age. So, younger you are less conservative should you be. Plan you asset allocation wisely by consulting a professional financial consultant. It pays to get the right advice. Nothing in life is free! Set your goals with the help of your asset allocation and follow them religiously. Higher allocation to equities earlier in life and gradually reducing it as you move closer to retirement should be the way to go. Remember, with rise in income your investments need to be raised too. Future planning with today’s value of money is incorrect. Always account for inflation when planning your goals. You will be surprised how the value of money depreciates over a period of time.
Teach you family, the power of investing
It is ideal that your family understands and supports you in your vision and investing plan. How frequently do we hear, “My spouse takes care of the finances” OR “Investments are Greek and Latin to me”. These statements are nothing but a lax attitude of not bothering about the hard earned money that you, your spouse or your parents make. Understanding your investments is as important as daily meals. If your advisor is unable to explain the investments or uses high-flying financial jargons that do not gel with you, PLEASE CHANGE YOUR ADVISOR. It is as good as taking a ’second opinion' from your doctor. Your financial advisor is no different than a ‘Financial Doctor’. Hence, understand your investments and explain the same to your family. Earlier your children understand the value of money and investing, better will be their life. Most realistically, it is also important that your family stays financially independent just as you plan to do in the event you are not around. Hence, YOU are the best person to teach your family the power of investing and its related benefits.
Safeguard your loved ones
Life as we know is uncertain. Unfortunate incidents can cause major distress to a family. Could be unexpected health expenses or even loss of life. Though, nothing can replace the emotional loss but financial loss can cause a long term pain for the family. You can save the family from the latter. Insure your life adequately. 8-10 times of your annual income must be insured by way of term plans. Adequate medical insurance is also a must.
There is no benchmark for greed. It is always good to have ‘More’. Keep your focus on achieving the goals that you have planned. Greed will not only make you lose focus but, will make you do things that may not be required to be done. I am not suggesting that one must not take risks but, take calculated risks so that it does not dent you financially.
All of the above can easily be achieved as long as you are advised well. Essentially, consistent discipline is a key to success. The feeling of financial freedom will not only keep you financially happy but also healthy. Remember, Health is Wealth!Author is managing director of investonline.in, a mutual fund distribution entity.