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5 steps to financial freedom

Small incremental changes is what is needed to achieve financial freedom.

Raise your hand if you want to be financial free? I hope you did raise your hand, because this article is all about how to be financial free. Financial freedom is just about having enough. Here are 5 simple steps that can help you in achieving financial freedom.   

Understand your emotional relationship with money: 

The first step towards financial freedom is understanding your emotional relationship with money. It is because managing money and personal finance is more about emotions than maths. Achieving financial freedom becomes easy if you can identify what drives your purchases or how you react under different situations. For e.g. you may want to order food or go for shoe shopping whenever you are upset. You may also have the urge to have bigger and better things than your neighbour just to show them. Hence, it is important to plug these leakages before undertaking your financial freedom journey. The point is to have a rational and mature outlook towards money and finances.

Be debt free:

No one can be free with a ton of debts piling on their back. It is important to understand that debt comes in two sizes: good and bad. Good debt helps you to create assets while bad debt is just a liability. Bad debt tends to drain your income month on month as a sizeable share of your incomes goes in paying debt. Hence, it is important to get rid of debt as soon as possible. You can start getting rid of your debt by paying off the loan with the highest interest rate and then move to the next loan. You can be debt free if you stick to a budget and reduce your spending. And that leads us to the next point which is creating a budget.

Budget:

Creating a budget is one of the important things in this journey towards financial freedom. The 50-30-20 rule is taken as the thumb rule of budgeting. This means that 50% of your income should be used to purchase essential goods such as food, 30% of your income should be earmarked for your wants which can going to the movies, eating out and the rest 20% goes into saving. Following this rule can greatly help in putting your finances in place. Also, with time, you can increase the percentage of saving and reduce the allocation towards wants. However, it may not be possible to follow the budget religiously every time. There will be days that would require us to shell more money. One way to offset the higher spending is to have no-spend days where you will be spending minimal or no money at all. Think of it as cheat days in dieting but the other way around.

However, the 50-30-20 rule is a basic thumb rule. E.g. if your salary is Rs.1 lakh a month, you may be spending less than 50% on essentials. Hence, it is important to adjust the proportion based on your income.

Decrease your spending:

If you are a big spender, applying the 50-30-20 rule may be bit challenging. Cutting your expenditures can easily help you to do that.  Try to figure out the unnecessary things that you buy on a regular basis. It can be as simple as hitting the pub every Friday or buying clothes. Look for cheaper alternatives. For e.g. inviting friends over to your house is much cheaper than drinking in a pub or renting furniture, jewellery and clothes rather than buying. You can ask yourself whether the product that you are buying will add value to your life. If yes, then there is no harm in buying it.

Save/Invest:

Investing is the art of making money work for you even while you are sleeping. To attain financial freedom, it is important that you invest in high yielding instruments that have the potential to generate higher returns. However, it would be better to first asses your risk taking capabilities before investing in any asset class. It is because the high yielding instruments also come with high risk and it gives attractive returns in the long run. Equities is one such asset class  that has the potential to give high returns. If you have the time and resources to study individual stocks, you can invest directly in stocks. On the other hand, if you don’t want to invest in stocks directly and want to leave the stock picking decision to an expert, you can go for an equity mutual fund. There are different types of equity mutual funds that cater to different needs of the individuals. Talk to your financial advisor if you want clarity on the equity mutual funds and to select the best mutual fund for you.

Financial freedom is not a battle that you can win in one day. It is a journey and it can be achieved by small steps that you take on a regular basis, day in and day out.

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