Follow these 7 tips to achieve financial freedom this Independence Day
Know how to achieve financial freedom (pic – istock)
- Financial freedom means having enough money to live your life.
- To achieve financial freedom, discipline, consistency and patience are needed.
- Mentioned here will consider some of the important things that will make it possible to achieve financial independence.
The meaning of freedom is different for everyone. For example, financial freedom is the situation when you have solved your problems related to money. This means that you have enough money to meet your current and future expenses. This can also be a situation when you have no liabilities and have enough capital to live life with all facilities. Financial independence also means being able to manage any money-related emergency like job loss or loss of income. But, achieving financial freedom requires discipline, consistency and patience. There can be no one method or mantra to achieve this. But, with a number of factors combined, you can achieve your goal of financial independence. In this article, we will look at some of the important things that will make it possible for you to achieve financial freedom.
Budgeting and Understanding the Value of Savings
Budgeting is the first step towards financial independence. This not only gives you an idea about your spending pattern vis–vis your income but also helps you maintain discipline regarding your finances. This helps you differentiate between wants and needs. The right approach to dealing with budgeting is to segregate your essential expenses, set aside funds for them and save the balance. While doing so, non-essential expenses should be cut. A 50:30:20 ratio is recommended when budgeting, which means 50% of your income should be spent on essentials, 30% for desires, and the remaining 20% should be saved and invested.
set your goal
The second important step, which may be necessary for financial independence, is setting goals. These goals are specifically related to your life and family, such as getting married, planning finances for children’s education and their weddings, buying a house, etc. When you have set your goals, set a time frame for when you want to achieve them. While doing so, stick to the ground reality. For example, you might want to get married or buy a car in 5-7 years. Similarly, you can have a timeframe of 20-25 years for your children’s education and marriage. Once you have identified your financial goals, work towards meeting them. You can start investing in time according to your goals. This will give you plenty of time to accumulate substantial capital through investment tools with compounding benefits. Decide on an amount to invest every month. Whenever your income increases or you have surplus money, increase that amount.
Invest more in a growth-oriented plan
Once you start saving, the next step is to invest in those instruments that can give you the desired results. When doing this, consider your age and risk appetite. This is where investing in good properties matters the most. This means don’t invest all your money in one place but diversify it. You can consider diverting your money to growth-oriented investment schemes. Risk takers can opt for equity linked instruments so that they can save tax along with growth. This is where equity mutual funds can prove useful. Individuals with low risk appetite can invest their funds in equity and debt financial products. It will be suitable and it is advised to invest up to 70% in equities. Debt instruments give 7-9% CAGR in the long run, whereas equity instruments can give returns of 15% or more. For example, a monthly SIP of Rs 1,000/- in a Growth Oriented Fund for 20 years with 15% CAGR will give you a total amount of around Rs 13.29 lakh on a cumulative investment of Rs 2.4 lakh.
Get insurance protection for yourself
The COVID-19 crisis has proved that there is no guarantee of life and emergencies can arise at any time. Insurance provides the necessary protection to meet financial emergencies due to illness or death. If you want financial freedom, you should consider adequate insurance cover- both term and health. A term insurance plan will give your family a financial shield in the event of your absence, and a health insurance plan will allow you to take care of your expenses in case of sudden hospitalization. Your term insurance should ideally be 20 times your annual income. If you earn Rs 10 lakh per annum, then a term insurance of Rs 2 crore will suffice. At present, for health insurance, you should get a medical cover of at least Rs 10-15 lakhs – this should include your entire family – spouse and children. Get comprehensive health insurance even if your office has provided you with a health plan.
prepare an emergency fund
Emergency funds are prepared for a crisis like Kovid-19. Emergency funds keep money with you for times when, for example, you are unable to earn an income or a medical crisis arises. An ideal emergency fund should be equal to at least 3-6 months of your income or ideally 6-12 months and it should be enough to meet your important financial commitments like home loan EMIs etc. With this fund you will be able to remain financially free till your regular income resumes.
Money can help you earn more money. Keep your career on a trajectory, and you can do this by changing your job profile or job. You can add other legitimate sources of income if possible. If you have more than one house, you can rent out the other property so that you will get cash money as monthly rent. If part time jobs are available (they must be permitted by your current employer), you can do those too. If you have extra surplus, say 5-20 lakhs, then don’t keep it in your savings account. Instead, invest in a place where you can get regular income when you retire or become financially independent. For example, bluechip stocks which, in addition to increasing your capital, also provide useful dividends on a regular basis.
Take a loan for the right purpose and repay it as soon as possible
No matter how disciplined you are, there comes a time when you have to rely on loans. You have to make sure that you are taking the loan for the right purposes, like a home loan, and not for meeting the demands of your lifestyle like buying a phone. To be financially independent, it is important to pay off your debt as soon as possible. This will reduce your financial burden and you will also have more money to use. You can invest this amount to secure your financial future. For example, you can use the annual bonus to prepay the housing loan.
At the end
Knowing yourself- It is also important to know your abilities, strengths, weaknesses, interests and the things that make you happy. This will help you to keep your bad financial habits in check and help you to prepare a plan to attain financial freedom.
(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)
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