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Embrace Your Financial Freedom

Financial Planning

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Financial Planning article in Advisorkhoj - Embrace Your Financial Freedom
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Ask anyone, ‘what financial freedom is?’ they will tell you it is having the financial power and not being answerable to anyone. It is a time when you can say, ‘this is my money and I want to do (anything I wish) with this’ and actually doing that. Individuals go through the ordeal of college, interviews, burning the midnight lamp, working extra hours and sometimes even doing work they do not like for an entire lifetime just to be financially free. It might seem that at some point all the things we have done in our entire lives were driven by this one motive: to be financially free.

It is the mantra we keep humming to us and others and some achieve and some keep striving. However, living in this increasingly complex world and surrounded by the illusion of choice, this freedom often suffers from constrains. You have a six digit salary but you have never invested a single penny. You are in your late forties and do not have a retirement plan. You are paying your credit card debts and that stops you from saving money. Are you financially free then? Freedom is a diabolic word and if you do not take charge of this financial freedom somebody else will and then you will not be free anymore. Hence, this Independence Day let us see how we can be financially free!

Only You Know What is Best

Everybody has an opinion about the best way to lead your life and save your money. If you allow your thoughts to get drowned by other people’s opinions then you will never get what you want and how to achieve it. Hence, you will never be financially free despite the salary credit every month. So decide what do you want to achieve, how do you plan to save and invest, what are your life goals and how do you go about achieving them.

Talk to people who matter and take their advice. Your parents have a large role to play in your life and your spouse will be affected by your financial condition. Hence, it is only wise that you include them in your decisions and take their opinion. Talk to financial advisors and experts and take their opinion too. However, at the end of the day it is your call to make and do it to the best of your knowledge based on facts and not myths.

Know Where You Stand

This is one of the most difficult assessments to make because we either overestimate our abilities or suffer from underestimation of our achievements. However, an honest estimation reveals our financial position and based on that we can predict a financial future. Take an account of your assets and subtract that from your liabilities, this will give you an estimation of your net worth.

The reason experts stress on knowing your future financial worth as well because when you take a loan you borrow from your future income and if you over estimate your future income you will fall in a debt trap. Hence, knowing where you stand will give you an idea about your financial position ensuring you are able to chart your financial progress.

Track Your Spending

You are not free unless you are aware of where your money is going. It often feels like you start the month with a full account and by the end of it you have a relatively empty bank account and you have no idea where all that money went. Hence, you may never have money left to save or fall back during emergency. You might find yourself spending when you do not need to and suffer the lack of money when you desperately need it. This in no way is freedom.

So before it is too late, have a budget for everything; including little things family dinners, outings, shopping and start tracking your spending. This gives you a clear picture of the avenues you spend too much and the areas to cut down upon. Liabilities are small leakages that erode your savings. Hence, seal off the liabilities as soon as possible. Once you start making it a practice you might find money that you save or invest or stash away in an emergency fund. You do not have to deprive yourself to save or invest; you just have to exercise a certain degree of balance between saving and spending.

Do Not Underestimate Small Savings

Underestimating the value of a few thousand rupees is the biggest mistake we make. Unless it is a big amount we do not consider it as saving and investing and it does not cross our mind. Small is powerful and the small amounts you have saved is equally powerful. You may be saving your money in savings account which gives an annual return of 4% or fixed deposits where the return is as high as 10% and that is all. However if you invest this money in Mutual Funds through Systematic Investment Planning then these small pockets of savings have the power to secure your future.


Financial Planning - Returns through Power of Compounding by investing in SIPs


The monthly investment above is small amounts. Amounts we spend every month without much consideration. However, the future value given is proof that a little consideration takes you a long way. Let us assume that you have taken a home loan of 40 lakhs and you pay a monthly EMI of 31,000 and will continue to do so for the next forty years. Hence, by the time you have made the total payment, including interest, you have paid a whooping sum of 1.49 Crores. However, if you look at the table above it will show along with the mortgage payment if you had invested just 500 a month you will have a corpus large enough to cover the entire payment. To calculate the EMI use the Advisorkhoj Home Loan calculator. Hence, by the time you are done with the payments, you have the entire corpus back as well. Hence, if you want to be financial free, start small and watch it grow big.

Get Insured

Nothing shouts financial freedom more than getting insured. You are truly free when you have taken ample measures to reduce the uncertainties and getting insured is a definite way of doing that. Get a term plan based on your earnings which gives you coverage of as long as 70 - 75 years at least. You can get a higher term plan or have a greater coverage in the same term plan once your income increases. If you are switching jobs and your new organization does not provide insurance facilities then you have to increase the coverage or you are becoming an entrepreneur then you must increase your term plan.

Get a health insurance done because nothing speaks of greater freedom than having a healthy body. While you cannot predict health problems you can make sure you get the best facilities. Insurance not only covers you and your health but it also protects your family. Hence, to be financially free, secure yourself and your family.

Plan Your Retirement

Financially free would definitely imply always having the financial power to lead life on your own terms without being dependent. So would you be financially free if you have lived a great life but during your retirement you have little or no savings to fall back on? We can safely assume the answer is no. Retirement savings is stressed upon because for every other life goal you can have the option of borrowing from your future income. However, for retirement you do not have that option of borrowing.

So it is crucial that you maintain your financial freedom in future by investing your present income to fulfill future needs. However, the question still remains how much to invest. While calculating the future value you have to take rising inflation into consideration. Hence, the future value will always be higher than its present counterpart.


Financial Planning - Future Value of various Expenditures and goals


Hence, from the table above you can see the rising cost in the future years and while planning for retirement it is the future value that you have to take into account. One sure shot way to reach this goal is to start early. Start early with small amounts and make the best use of time value of money; the longer you stay invested the higher your returns will be.


Financial Planning - Power of Compounding Through Systematic Investing


Hence, through the table above it is evident that despite the amount, the earlier you start the higher your future value of investment will be. So start planning your retirement early to remain financially independent through the golden years of your life.

Conclusion

We are celebrating the 69th year of our independence. 69 years of living and breathing in a free democratic country where we are the masters of our own life and destiny. However, we often forget to claim our own financial freedom and get trapped in debts and credit card or loans. They are traps that we create for ourselves and go down so deep that we do not know how to get back. To be financially free we have to take charge of our own finances and steer clear of situation where our earning are for payments of debts. Financial freedom simply put is the ability to live life on your own terms and finances without being dependent. This independence day it is time for you to ask how free you are. Happy Independence Day!

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Priyanka Chakrabarty

A literature enthusiast who loves to write. An ardent social worker who dreams of bringing about change and hopes to do so through her writing. A firm believer of the saying pen is mightier than the sword, Priyanka is an English Honours graduate. She also pursed Diploma in Wealth Management Practice from IIFP and is a certified social media expert.

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