Financial freedom is when you have accumulated a corpus for all your financial goals and inflation-adjusted expenses. This means that you no longer need to generate additional income. It gives you the freedom to pursue your other interests or hobbies outside of work.
One can achieve financial freedom through following easy steps
Set life goals
Mapping out clear and measurable goals is the first and most critical step to achieving financial freedom. These can be short term or long term. Goals can vary from 'children's wedding', 'buying a new house' or 'special holiday' or 'creating a legacy'.
Analyze costs
Creating a budget to understand where your money is going and identifying areas where you can save and invest it is a great option to stay out of debt. It fosters a more responsible financial approach, helps you achieve goals and live within your means. Controlling expenses and monthly installment outgo will allow you to create a proper surplus to set aside for your goals.
Invest wisely
Based on the duration of the objectives, the right mix of assets should be decided to provide the best returns. The ARC formula (Asset Allocation, Regular Investment, Compounding) takes you to your corpus at the desired age. Delaying this implementation can result in missing years of compounding wealth growth and financial independence.
Risk management and emergency fund
An unexpected financial crisis can easily jeopardize financial freedom. Adequate term and health insurance coverage, depending on cash flow and number of family members, respectively, can help manage risk. India faces a severe challenge of underinsurance, one of the major reasons families are losing financial independence
Emergency funds help you navigate periods when you're not generating income. This life stage can occur due to multiple circumstances, such as a layoff, a family emergency, or external issues such as in the case of the coronavirus pandemic. Money for six months' expenses should always be invested in liquid funds.
Periodic tracking and reconstruction
As targets approach, some allocations should be divested from market-linked assets and shifted to less volatile fixed income category. Investors don't track and rebalance frequently, which hurts their long-term planning. The asset allocation made at the time of first execution cannot continue permanently. That is the key message for investors. With this clarity, families are more likely to achieve financial independence sooner than planned in some cases.
Estate planning
While taking all other steps, it is also important to ensure that necessary information about assets and liabilities is compiled and accessible to family members. This saves them from additional anxiety and emotional trauma in case of an unfortunate incident. Clearly listing the correct nominees and beneficiaries is crucial to avoid legal complications and family strife.
Consult a financial advisor
Financial advisors registered with the Securities and Exchange Board of India can help develop a plan and chart the path to achieving the corpus. The current market for advice is highly structured.
