India will celebrate its 73rd Republic Day on January 26. The Indian Constitution became operative on January 26, 1950, three years after India gained independence from the British. As the nation prepares to celebrate the 73rd Republic Day and as India, a country brimming with new investing trends, celebrates the same, this might be a chance for you to formulate your financial goals.
Financial freedom may mean various things to different people. Some people may define financial independence as never having to second-guess a purchase or a bill payment after receiving a certain service. Financial freedom provides additional advantages than stress-free spending. A more straightforward definition of financial independence may be having enough money saved up to live stress-free even in the face of unforeseen circumstances.
Financial Freedom is about control i.e. control over your own finances. So, one of the better ways to define financial freedom is to have enough residual income that allows you to live the life you want, without any worries about how you will pay your bills or manage a sudden expense.
In other words, financial freedom is not always about being rich and having a lot of money. Instead, it is more about having control over your financial present and your financial future. To give you the context, there are 8 different levels of financial freedom. These levels range from someone not having to live paycheck to paycheck to having more money than what a person will need in his lifetime.
How to Achieve Financial Freedom?
1. Recognize where you are right now financially
Knowing where you are right now is the first step toward financial independence. This entails having a clear understanding of your debt load, savings balance, monthly costs, income, etc.
To put it another way, you must be familiar with your personal financial statement and have a reasonable understanding of your income, spending, assets, and obligations. Once you have these figures, you may continue on to step 2 of your road toward financial independence, which is putting down your objectives.
2. Aggressively Save
In addition to starting early, you must save a sizable sum each month to amass a sum large enough to set you free. According to a 2012 Putnam Research Institute research, the amount of saved had a greater influence on the final portfolio than fund selection, asset allocation, and portfolio rebalancing. Those concentrate a bit too much about which funds to pick and how to fine-tune their portfolios. An investor who just increased the amount of his savings each year would have a larger corpus than investors who got into the top performing funds or altered their asset allocation annually. It would be preferable to use that same effort to increase the size of those savings instead.
3. Asset Diversification
Each asset type responds to diverse situations in its own distinctive way. Due to market conditions, one asset may perform exceptionally well while another may not offer high returns. By maintaining a broad portfolio, investors may travel more comfortably and won’t be startled by an asset’s subpar performance.
4. Monitor Your Spending
Spending monitoring is a crucial next step on the path to financial freedom. This may be done in a variety of ways, for as utilising an excel spreadsheet or a notepad. The software records and classifies your costs for things like travel, shopping, eating out, etc. automatically.
This spending tracking strengthens your accountability and is a crucial step on the road to financial independence. Additionally, it displays several unnecessary purchases you make just as a result of an impulsive buy. An impulsive purchase, if anything, symbolises relinquishing control and puts a roadblock on your way of achieving financial independence. You should thus strictly watch your expenditures to maintain control.
5. Regularly review your Investing Plans
Investors make judgments based on specific circumstances and market conditions when they first conceive of a strategy. However, the economic climate might alter over time. Investors must continually assess their strategy and make adjustments as necessary. Having flexible strategies can help investors remain on track and get the most out of their investments.
6. Never ignore Inflation
The underestimation of needs is one of the major barriers to financial independence. This is a common error made by do-it-yourself investors when estimating future demands. Over time, even a modest 6% inflation rate might cause monthly costs to rise to unfathomable heights. In 2051, a household that currently spends Rs. 50,000 a month would require Rs. 2.87 lakh. A piece of bread that costs Rs 35 today will cost Rs 200, while milk that is currently priced at Rs 50 a litre will be close to Rs 300.
Other costs might increase much further. The cost of healthcare is rising quickly (12–14%) and will gradually eat up more of your budget. According to experts, the majority of savings are allocated to healthcare during a person’s final ten years of life. Without adequate financial planning, a person won’t be able to afford high-quality medical care when he or she most needs it.
7. Retirement Plans
A critical part of planning is to provide for retirement. Often, it gets ignored as we go along the flow and comes as a nasty surprise when we hit our golden years. It depends situation to situation but on an average, last 10 years of work life should actively contribute towards retirement corpus.
Sometimes, calculating the actual money required post retirement could be difficult as there are various factors into play like inflation. It is advisable to take professional help of financial advisors to ascertain the desired amount and investment avenues to achieve it.