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5 Steps To Become Financially Independent - Outside View by PersonalFN

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5 Steps To Become Financially Independent
Aug 16, 2017

2017 has India celebrating its 70th Independence Day.

Today, freedom has morphed to mean different things for us since 1947.

What does freedom mean to you? Does it just mean being able to exercise your rights as a citizen? Or is it living with the freedom to be whoever you choose to be, doing and experiencing whatever you desire?

Of course, freedom could mean all this and then some. And though the best things in life are free, these days, it can come attached with a price tag.

Which leads us to the question: What is financial freedom?

Does it mean having the moolah to buy, experience, and enjoy anything you could wish for? Or being self-sufficient, independent enough to take care of yourself and your family graciously? Could it mean being debt-free?

Ubiquitously, financial freedom represents the ability to earn a livelihood that enables you to live a comfortable lifestyle. However, the notion of financial freedom is subjective and is not only defined by earning a substantial income.

Let's dig deeper and create the path for you to achieve financial independence:

Many financially savvy individuals understand the need to set financial goals and have a sound financial plan in place. However, only few prudently draw up one that works and execute it. For many, their attention is on picking top performing mutual fund schemes that are in the limelight, rather than how these schemes or products will fit in with their financial plan.

There is no doubt that choosing the right equity fund or debt fund is important, but, it is equally important to understand how much of your savings need to be directed towards these schemes to meet your financial goals and ensure long-term financial wellbeing. This is only possible when you have defined your financial goals S.M.A.R.T.-ly, which means goals that are:

  • Specific,
  • Measurable,
  • Adjustable,
  • Realistic, and
  • Time-based.

As mentioned earlier, the key to your success is in optimal execution.

Here's a simple 5-step program that can help you attain financial freedom:

  1. Quantify Your Financial Goals To Freedom

    Ever heard your parents or grand-parents say, that when they were your age a soft drink costed them 8 annas?

    And you catch yourself thinking, 'I wish you had bought 100 bottles of it and stored them!' Surely, you recognize the effect of inflation @10% per annum, which is the normal rate of inflation for such goods.

    Assess your freedom goals, and consider what it will cost to achieve them. If you aim to provide for your children's education and wedding expenses, consider what it costs today and calculate this cost by the average yearly rate of inflation. Start by knowing how much you want to achieve, and by when you want to achieve it. Do this exercise for each goal, and determine the amount and the year you want to achieve them.
  2. Align Your Savings Towards Your Financial Goals

    If your investments are randomly made without being goal-centric, align your current investments towards your financial goals, viz. buying a dream home, a car, funding for children's education, their wedding expenses, your retirement life, among others. Ad-hoc investments lead to improper asset allocation; ensure all your future investments are done with your financial goals in mind.

    It is ideal to allocate your investible surplus into various asset classes, with due consideration to your age, income & expenses, assets & liabilities, risk profile, investment objectives, and nearness to financial goal horizon. This way investment can be done optimally while managing the risk involved accruing returns. This will provide you with a clear course for your investments, instead of investing in a sporadic manner, and/or in the endeavor to save tax during the financial year by exploring investment avenues under section 80C of the Income-tax Act, 1961.

    Define your long-term goals and invest accordingly. For example, if you are planning to live a blissful retired life, first calculate how much you need to save on a monthly basis. (Use our Retirement Calculator). Though retirement may be a long way off, it is best to start saving as early as possible to benefit from the power of compounding.
  3. Choose The Right Assets

    The next step is to decide an investment mix that includes tax-saving investments as well as avenues to meet top priority life goals. So, don't chase the best performing mutual fund schemes, recognize the nitty-gritties of your financial plan, and choose the investment avenues beneficial to your investment portfolio.

    Based on the ideal asset allocation for you and the investment horizon of your goals, select appropriate investment avenues. For example, if you have a long-term investment horizon of 5-10 years or more, maintain a higher allocation towards equity. To have a fair idea of what your asset allocation should be, use our Asset Allocator.
  4. Remain Focused On Your Goals

    Once you have created an investment plan, keep it on track. Don't be swayed by the exuberance or fear of the short-term aberrations. Stay focused, don't panic with market volatility as long as the long-term funds are in place.

    Jason Zweig, the author of several best-selling books on finance, aptly said, "The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 90 million strangers rule your life with their greed and fear".

    Hence, if you have long-term investment goals, continue your investments irrespective of the short-term market movements, because historically, over the long term, equity has delivered inflation-beating returns (on an average).
  5. Save And Invest Regularly

    To attain financial freedom, above all, you have to be patient. Trust that you will get there. Wealth building is a gradual process. Don't be taken in by the fancy of structured products, the latest mutual fund recommended by your bank's personnel, or the hottest stock your neighbor invested in.

    Your goals are probably looking pretty big once they have been quantified, as they should be. This kind of money takes years to build, and everybody starts small. Stick to your investment plan and within no time you'll be patting yourself on the back for achieving these goals, one at a time.

    If you are unconfident about your financial knowledge, approach a financial planner. In fact, seek out a certified financial guardian who is a mark of trust and respect, who exemplifies high fiduciary standards at all times. A professional who handles your hard-earned money with with an unbiased and an independent approach, where the recommendations are backed by rationale and scientific study, as much as they would manage his/her own personal finances. A fee, however, is the monetary price you must defray for such a service.

Why take our word for it?

PersonalFN is a SEBI registered investment advisor. The fundamentals we firmly believe in are:

  • Client first philosophy
  • Confidentiality of your financial data
  • Handhold you at every step in your financial freedom
  • Provide unbiased recommendation backed by over a decade long research experience
  • Disclose any kind of income we earn from recommendations
  • Aim to establish a long-term relationship with you, not just a financial one

To achieve financial independence, there's no need to fight or struggle for it. All it requires is to have the right knowledge and patience. Approach a certified financial guardian and your money will be in safe hands. Soon, you will achieve the financial independence.

Schedule a call with investment consultant now and start your journey towards financial freedom today!

Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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