Yahoo Finance This I-Day, take these 10 steps for financial freedom
Attaining financial freedom is the buzzword among young millennials. You must have heard about the FIRE (Financial Independence, Retire Early) movement. It is a lifestyle movement with the goal of gaining financial independence and retiring early.
What is financial freedom and why is it important? Author Morgan Housel in his book, The Psychology of Money, attempts to answer this question.
“Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”
Financial freedom helps you to have control over your time. And time, my friend, is money. It helps you leave your boring 9 to 5 job much before your retirement age of 60.
Financial freedom includes building funds to meet your milestone goals and a corpus (before retirement) so that you could do what you always wanted, follow your passion.
Early retirement also means that you need to provide for more years. Life expectancy in India currently is 70 years. If you retire at 60, you need to provide for 10 years of expenses, but if you retire by, let’s say, 45, then you need to provide funds for 25 years and not just 10.
Steps to achieve financial freedom
1. Ascertain corpus required
The first step to attain financial freedom is to find out how much corpus you require to meet your lifestyle expenses post retirement. Check out how to calculate this amount here, make necessary tweakings in the calculator.
2. Start early
Since you need to provide for a higher number of years as you have FIRE in your belly, you need to start early. Don't waste time. Start saving from the 1st salary you get. The power of compounding will also help you reach your financial goal.
3. Save regularly
How much should you save? Your savings rate should at least match the national savings rate which is around 30%. You don’t need to face hardships, enjoy your money, but save as much as an average Indian does.
4. Inculcate financial discipline
Discipline plays a key role in attainment of financial goals. Save each month, try not to miss at any cost. Financial discipline rather than intelligence is required to generate wealth. Slow and steady wins the race applies in this case as well.
5. Be frugal
You need to be frugal. I am not saying you become a miser, but you need to curb unnecessary expenditure. Save yourself from compulsive buying disorder, shun consumerism.
6. Have low leverage
A little bit of leverage is good as it helps you purchase long term assets which you cannot afford with equity like housing, passenger vehicles, etc. But living a life beyond your means, borrowing to meet your monthly regular expenses, exhausting credit card limits, these are all signs of stress. You should avoid a debt trap.
7. Be ‘asset light’
Adopt an asset light strategy, don’t buy multiple and specifically avoid owning multiple cars/houses/expensive watches. Adopt minimalism.
8. Make proper asset allocation
Don’t put all your eggs in one basket. Diversify your investments. Make investments across asset classes, equities, bonds, fixed deposits, gold, crypto etc. Asset allocation is key to attain financial freedom.
9. Invest a big chunk in equities
Since you start young, have a higher risk taking ability and a long term horizon, a significant portion of your investments should be in equity. You can invest directly in stocks and for example pick up consistent compounders.
You can also invest in mutual funds, these 5 themes have generated the highest returns in the last decade - index funds, mid cap funds, small cap funds, IT and pharma funds.
10. Take life cover
And last but not the least, financial freedom is not only for yourself but it is also for your family. Protect your family and dependents against any untoward incidents and loss of life, buy a term insurance. How much life cover you should have, check here.
Illustration: Let’s say you save Rs 10,000 per month for 20 years and step it up by 10% per annum as you record an increase in income. After 20 years, you can generate a corpus of Rs 1.73 crore, assuming a return of 10% per annum.
To sum up, chalk out a financial freedom plan this Independence Day.
As Morgan Housel says, “Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
Source: www.advisorkhoj.com
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