Joydeep Sen
As we hoist the tricolour and celebrate the progress of our economy over the decades, let us pause and mull what financial freedom means for the individual. No complicated theory, no jargon, just how we relate to it. There are unfortunate citizens who are yet to attain financial freedom, who are defined as below poverty line as per the Government definition, the underprivileged. However, they would not be going through this article, they are not privileged enough. The fact that you are reading this article means you have attained the basics of life, most probably you are well off. Let’s discuss whether you are dominated by your finances or you have planned your life, subject to its glorious uncertainties, and dominate your finances.
The function of money is to provide sustenance, and thereafter provide the means to attainment of the financial goals of life i.e. goals that are not emotional and can be defined in terms of money. Abraham Maslow defined the hierarchy of needs in the shape of a pyramid with five slabs. The bottom–most of the slabs represent the most basic of needs called physiological, which may loosely be described as roti-kapda-makaan. The next higher level is called safety, which may be social safety, financial safety or the overall sense of security. The next higher levels are belonging, esteem and self-actualisation, in that sequence. To be noted, the top 3 tiers of the pyramid are non-financial. Once we are satisfied with the attainment of the first two levels, which are financial, we can move to the higher ones.
The phenomenon with most of us is that we keep on elevating our financial goals along with enhancement in earnings. While that is understandable as that is the motivation to work hard and earn more, this itself, in most cases, leads to lack of financial freedom. We put a load on ourselves to earn more to achieve the next higher standard of living.
However, this next ‘higher’ standard of living is, more often than not, is a higher level of roti-kapda-makaan and not the next higher level as defined by Abraham Maslow. In popular parlance, this is referred to as ‘lifestyle’. It could mean a swanky car, a foreign holiday trip, club membership, etc. If it is about travelling from place A to place B, any reasonably good car would suffice. If it is about a holiday, there are so many attractive places in India to visit. We want club membership, but don’t have time to meet old friends.
To clarify, I have nothing against the ‘lifestyle’ referred to above. Point is, it should a natural progression along with rising income. If we allow this ‘lifestyle’ or aspirational lifestyle to dominate us, we are veering towards the path of lack of financial freedom. Freedom means a grasp of income and expenses and deciding expenses proportionate to income. You don’t require ‘x’ income to attain financial freedom, you just need to have a control over expenses. Inflation is not an impediment; with GDP growing at approx 7%, our income levels also are increasing. Problem arises when my income is increasing at 10 percent per year and my ‘lifestyle’ expenses are increasing at 40 percent per year.
The endeavour should be to have a broad vision on income and financial goals that are proportionate, and the aspiration should be to move higher in the pyramid of needs as defined by Abraham Maslow. This is not to discourage consumption; India is largely a consumption-based growth model economy vis-à-vis China which is largely an investment-led growth model. As long as we are working hard in our respective fields, we are contributing towards the growth of our economy. If you are thinking it is easier said than done, because expenses keep on galloping faster than income, then you need to question every single expense. In budgeting, there is a technique called zero based budgeting (ZBB) where the usual process of taking previous year’s budget and making necessary changes is not followed. In ZBB, budgeting starts from scratch so that each and every expense is thought through and justified. When an organization hires an external consultant for cost cutting ideas, the consultant comes and questions every process and system and expenditure, which may not be done by the management as they are used to it. At the individual level, you do not need to do all that. If you are exceeding your budget, just question yourself, whether you need to incur the expenses in our daily life just because you have been doing it. A high credit card outstanding balance puts pressure on you, does not give you happiness. Once you have control on yourself and your expenses, and your finances are thought through and planned, you will attain financial freedom.
(The writer is independent financial planner)
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