Our nation is embarking on the 75th anniversary of its independence, and we are seeing glorious celebrations of "Azadi ka Amrit Mahotsav” which translates into "the energy of independence", "the inspirations of the freedom fighters" and “the spirit of Atma Nirbharta". As we drive through the lanes of our city, we see flags adorning every house as the nation prepares for ‘Har Ghar Tiranga’.
This truly instils a sense of pride and patriotism and is also an opportune time for us to reflect on the meaning of true freedom and what this means to us. It is also imperative for us to take this time to evaluate and understand financial independence and how we can all work to achieve this goal over the years. We should also assess financial freedom and independence from the point of view of contingency planning and planning to keep our loved ones secure in case of any eventualities.
Financial independence rests on a strong foundation of robust, informed financial planning. It carries a different meaning at various stages of one’s life. For younger individuals who may have just begun their professional journey, it may mean income generation and the beginning of wealth creation.
For individuals who may be at the cusp of retirement, it may mean more of wealth protection i.e., safeguarding the corpus they may have accumulated over a period of time. Hence, the hierarchy of financial needs ranges from income generation, wealth creation to wealth protection. Every stage involves a mix of equity and debt investments based on your risk appetite and investment objective.
Prudent financial planning helps individuals attain financial independence, and the earlier they begin planning, the greater their financial independence will be. We have witnessed the adverse effects of the COVID-19 pandemic both from a health and financial perspective. Increasing costs of medical care and uncertainties about job security have reinforced the need to maintain a strong corpus to meet such financial uncertainties and provide a comfortable financial cushion to face such circumstances.
Planning your finances at an early age ensures that there is sufficient time for your wealth corpus to grow while mitigating the effects of unforeseen contingencies. Time is of utmost essence especially if you want to plan for longer-term goals such as home loan, parents and self-healthcare needs, children’s education, and financial needs for retirement.
For individuals wishing to achieve these long-term goals, such as purchasing their 'first home’ or preparing for healthcare and retirement, a feasible credit solution may be necessary. It is preferable to begin your journey with credit solutions early, to build a strong credit history which in turn helps you build a strong credit score. This barometer is immensely significant in easing the credit approval process. Strong credit history and score enable you to access credit at better rates since it is proof of the fact that you are a responsible borrower.
Apart from mere credit approval, lending institutions also tend to offer more relaxed EMIs over a longer tenure for younger individuals thereby reducing monetary pressure. Moreover, lending institutions prefer younger borrowers, as their income is bound to increase as they progress in their careers, therefore, making them more eligible for loans.
Younger individuals also are sufficiently justified in wanting to purchase a home loan, car loan, or personal loan as this is the natural next step in their professional and personal growth. At this stage in their lives, younger individuals are not necessarily perceived to be ‘credit hungry’ by lending institutions – hence they have a higher chance of credit approval bringing them a step closer to owning their dream home or car as compared to those who have an adverse or no credit history.
However, planning for credit cannot be an ad-hoc process. Individuals must opt for a structured approach to begin this journey by following some key steps:
Budgeting: Examine your monthly budget by considering all expenses – both essential and non-essential. Maintain a monthly record to ensure you keep track. Compare expenses month-on-month to note any visible trends for you to correct in the future
Be mindful: Reduce your non-essential or frivolous expenditure to keep liquidity intact. It is best to avoid having multiple debts at the same time to keep your financial health in check
Allocation: Begin allocating a budget to credit, savings and investments and learn to adhere to the limits you have set. Remember saving is as important as investing. Investing even smaller amounts from an early stage will ensure you have enough financial strength to face contingencies to keep your savings intact.
Plan for EMIs: You may feel the need to access credit in order to purchase your first home or first car. Calculate the amount you can keep aside for your regular EMIs. This will help you decide on the loan tenure and help you negotiate better with the lending institution. A healthy credit score reflects good credit behaviour and is your stepping-stone to achieving many milestones in your life.
Protect self and family: In addition to planning for EMIs, take care of yourself and your family by investing in health insurance and having a life insurance policy to avoid dependency in case of any unforeseen events.
The inculcation of financial prudence at an early age helps meet financial goals with ease. It also gives you a head start in building a good corpus of wealth, ensuring that you are not dependent on anyone else for your expenses – discretionary or otherwise. An early start to financial planning also helps individuals understand financial allocation among various investment vehicles as per their risk appetite. Financial discipline is the key to financial independence. Begin your journey today to secure your tomorrow.
Navin Chandani is the Regional Managing Director, India & South Asia at CRIF.