We are living in times of constant innovation. A time where you have to continuously invest in learning on the job otherwise you run the risk of being redundant. Additionally, there is a risk of job loss as a younger and cheaper employee could replace you on the job. Thanks to the improvement in health facilities, the average life span is above 70 and continues to go up.
Hence, planning for a longer retirement becomes extremely essential as one has to sustain themselves for longer periods through alternate sources of income.
Welcome financial freedom
In such times, it becomes essential to focus on becoming financially free as early as possible. But what is financial freedom? It is a stage in one’s personal finances where you do not have to worry about active income. It is a stage where you have accumulated enough money that you can live the rest of your life through investment income without having to worry about tomorrow.
However, getting there takes time and a lot of discipline. While the concept of financial freedom is fairly popular in the west, it is just making its way in India. Let us tell you how to reach financial freedom in India.
Making provision for emergencies
Before starting your journey towards financial freedom, you must ensure that you have taken care of some of the essentials as follows -
- Ensuring that there is an emergency fund that will take care of your expenses during a crisis.
- Ensuring you have adequate health insurance, term insurance, personal accident insurance, and critical illness insurance.
The above two steps are important to ensure that you or your family does not dip into the long-term investments made to achieve financial freedom.
Estimating your goal
Once you have taken care of the risk aspect of your personal finances, the next step is to figure out how much you need for financial freedom. In order to estimate the financial freedom corpus, you need to figure out annual expenses, rate of inflation, age at which you want to attain financial freedom, life expectancy and expected rate of return from equity and debt investments. It is essential to note that you must be conservative with your estimates.
Essentially, you must provide a cushion in your estimate of annual expenses, factor in higher inflation, have lower expectation of returns from equity, and factor in a higher life expectancy. You can use one among the many retirement calculators available online to estimate the financial freedom number. But remember, estimating is only 10% of the job, it’s easy.
Time to start paying yourself
The real work starts now. Once you have figured the amount required to achieve financial freedom, it is time to figure out the vehicles available to meet the requisite goal. For any financial freedom goal, the primary options of investment are employees provident fund, public provident fund, national pension scheme, and equity mutual funds.
The most simple way to invest towards financial freedom would be to max out the investments in debt instruments and invest the surplus in equity mutual funds. It is important to understand your own risk appetite before taking aggressive investment decisions. We recommend speaking to an advisor at this stage.
Other housekeeping items
In this journey towards financial freedom, it is important to take care of a few hygiene items. Some of them are as follows -
- Focus on your career, that’s where the capital to invest will come from.
- Increase your investments in line with the increase in your annual income.
- Do not increase your lifestyle in the same proportion with your annual income.
- Track your progress bi-annually or annually including the adequacy of your insurance covers.
- Focus on savings rate in the initial few years and slowly move your focus on investment returns.
The journey to financial freedom may seem difficult. However, a few years of keeping expenses in check, aggressive investments, continuous focus on increasing primary source of income can help you achieve financial freedom in faster than anticipated time.
Nishant Batra CWM® is Chief Goal Planner of Holistic Prime Wealth.
Disclaimer: The views expressed in this article are of the author, not MintGenie.