Focus on your money matters can help you prepare better for the dream of financial freedom.
Financial Freedom has many aspects. One simple way to be financially free is being able to meet financial goals and having passive income greater than active income. You don’t have to be wealthy to be financially free. The way you manage your money is the key. So this may need a radical change in your attitude towards personal finance. Relooking at your money strategy, focusing on asset allocation, building the corpus and having a roadmap can be a good beginning.
Is it all about investments?
No. The vital element here is a holistic planning. There are many reasons other than investments that ensure that individuals do not build wealth. These include financial leakages, lack of discipline, poor risk management, wrong investments, and stagnating career among others. You can figure out where you stand today, identify good and not so good part of your balance sheet, take a progressive approach and systematically achieve your goal of financial freedom.
Two enemies but one friend
Who are the biggest enemies of your money? Taxes and inflation undoubtedly are the top terrorists killing our money, every second. They slowly and substantially erode your wealth. So why not leverage our good old friend, power of compounding, to win this war for wealth? It is so easy and simple that you tend to ignore this. Start as early as possible and stay invested for long, really long.
The passive income
Rental income from second home, dividends from your stocks and mutual funds, interest from your fixed deposits and bonds, regular returns from your financial or business investments are few examples of passive income. They day your passive income exceeds your active income, you may be financially free. That said, avoid excessive reliance on a particular source for passive income. Keep in mind the inflation impact over years. Make sure that passive income is generally stable and can be counted on for long years.
The power of asset allocation
Don’t keep all your eggs in one basket, we all know. Your ability to manage asset allocation is the most critical element that will determine the growth of your portfolio in couple of decades from today. Measure your risk appetite and allocate a good portion of your deployable corpus to growth oriented assets. Keep in mind that your investments should beat inflation and save on taxes. When you structure a recurring income, secure couple of early years of needs through fixed income investments and then you may design a part of the income to come from SWP (systematic withdrawal plan) from your long term investments in equity mutual funds, thus saving on taxes. This is subject to your risk appetite.
Relook at your goals and be realistic, than emotional. Just to give you an example - your child can get an education loan but you won’t get loan to support your retirement. While you build your passive income as you gear up for your financial freedom, also revisit your financial goals and optimize them, if you need to. Map your existing assets to your financial goals and figure out the corpus you still need to build, to be financially free.
Being on your own
Before you go this way, have your math in place. It may take couple of years for you to crack the business model and start taking a respectable income. See if you can take off liabilities before you start your venture. If your spouse continues with regular income, than it may help you to worry less on finances, while you build your passion.
What makes you happy?
What is your definition of happiness. In the pursuit of achieving financial goals, you may like to revisit your purpose. Is ‘$120,000 corpus at current cost for a 2 year MS program in say North Eastern University in Boston in 2032’ for your child is your goal or ‘helping your child with a quality education’ is your goal? We can only be free when we are happy with what we are doing. Financial freedom is only the starting point.
Rohit is CFPCM and SEBI Registered Investment Advisor. Rohit has founded Getting You Rich, a Financial Planning firm