Financial freedom, it can sound like a fantasy theory. But the truth is, it is possible for everyone to achieve. By everyone, I mean even the students who have lakhs of education-related debt can also achieve financial freedom. No matter what financial troubles you have today, there is always a way to get back on track. In the following article, we will look into ways to achieve financial freedom and share some rational financial tips.
Financial freedom is all about taking ownership of all your financial requirements. When an individual is dependable on his/her guardian, steady cash flows allow you to live a life you want.
You don’t worry about education fee, sudden expenses or substantial phone bills. Therefore, financial freedom is about recognizing that you need to fund for all your requirements. It is also about achieving your long term financial goals by actively saving and investing.
The definition of financial freedom varies across individuals for some. It could be sending their child to an excellent private school while for others it could be going on a family holiday once every four months.
Here’s what you need to do to achieve financial freedom-
The first step is to establish a financial goal. Like most people, you already might be having a financial goal, but one blunder that people usually make is that they don’t assess their current financial position. It is nearly impossible to chalk out a path until you know how to make both ends meet, where to start and where to end. You need to identify what is that thing that will make you work hard to achieve it. It might be a sports car for an individual while a house for another.
Once you have a financial goal in your mind, work out a budget to calculate and estimate your expenses and check how efficient you are with a budget. By making a budget, you will know where your money is going. Ideally you should maintain a ratio of 50:30:20. The budget can be broken into: 50% of your income for your needs, 30% for your wants and the 20% towards your investment. It is just a thumb rule. If you are currently spending 90% and saving 10%, then you should aspire to save 20%. On the other hand, if you want to invest 40-50% of your salary, you can do that as well. We understand that one figure may not resonate with everyone and hence you can do trial and error method before arriving at the optimum percentage.
It is always better to cut down on unnecessary spending. Cutting down on useless subscription is a good idea as they cost a decent share of your wallet.
It is a good practice to contribute to your savings account. Contribution in a savings account is better than keeping your savings in cash. You might lose out on interest if you tend to keep savings in cash. Banks like Kotak Mahindra offers rates up to 6% on a savings account. A simple step to inculcate a savings habit would be to open a recurring account and start saving a fixed sum of money every month. Later you can open a fixed deposit.
If you are willing to take little risks, then you can start investing in quality stocks or take the mutual fund route. If you want to invest in mutual funds, you can take the systematic investment plan (SIP) route. This will help you to automate your investments. One of the main benefits of automating your investments is that you don’t have to take an active investment call every time. You also remain agnostic of the current market levels.
For most of people, debt is the biggest obstacle in the path for financial freedom. Debt payments should be incorporated into your budget. It is better to start repaying off the debt that does not carry any tax benefits. Also, you can start paying off your debt with the lowest principal amount and continue in that order.
An emergency fund is an amount you keep aside to maintain a contingency reserve. We recommend you to formulate a reserve equivalent to at least three to six months of expenditure. The emergency fund is a contingency reserve should be kept in highly liquid account. A thumb rule states a ratio of 20:20:60, that means 20% should be kept in cash, 20% should be kept in a savings account, and another 60% should be invested in liquid funds. In this manner, you won’t have to break your long term investments.
Financial freedom is about being self-sufficient with your fund requirements. It could sound like a theory that is good on paper, but by following the steps listed above, even you might get financially independent. Financial independence may mean different things to different people. But whatever is your difference make sure that you achieve your financial freedom.
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