scorecardresearchHow much money is enough money for financial freedom? Here's the answer

How much money is enough money for financial freedom? Here's the answer

Updated: 26 Nov 2022, 01:45 PM IST

Not everyone defines financial freedom the same way. It has a lot to do with age, income, debt, savings and investments.

Being financially free has different meanings for different age groups.

Being financially free has different meanings for different age groups.

The meaning of ‘financial freedom’ differs from person to person depending on a number of factors. Age is a crucial factor among them and therefore, the amount needed to achieve financial freedom heavily depends on your age.

For the young, financial freedom could essentially mean having enough to spend while middle-aged people generally want to have enough in hand while being able to set aside enough to spend and invest. The old and aged usually want enough to fall back upon and enjoy the golden years of their lives without worrying to earn an extra dime in the future.

Here's viewing financial freedom from the lenses of different age groups to help you understand what you need to do to achieve your goal:

The 20-30-year-old group

Financial freedom in your 20s generally means you are earning enough to take care of your expenses and other obligations like education loan, contribution to family's needs, if any, etc while having some amount for emergency.

Financial freedom in 30s means that you are investing enough and have set aside enough emergency corpus while being comfortable in spending for your expenditure. Another important aspect of financial freedom at this age is a health insurance

Opt for a comprehensive health policy that covers your family members so that you do not have to bear the brunt of medical expenses in case of sudden hospitalisation and subsequent medical treatment. The premiums on health policies bought later in life are more, which is why buying one early really helps. 

If you have family members or nominee(s) dependent on your income, ensure them adequate financial freedom by having a necessary term insurance plan in place. The term policy must have adequate coverage. As a thumb rule, you can opt for coverage equal to 10-12 times your annual earnings. 

In your 40s

At this age generally, one intends to buy a house for which one needs a home loan. Your financial freedom depends on your loan eligibility and whether you have enough to repay the loan(s) even if interest rates rise or you lose your job.

Also, consistency matters as much as your investment tenure. If you are able to pay off your EMIs, invest and spend without incurring any additional debt, you are doing well financially. Some people continue with their additional income sources to fund their investments, thus, ensuring that they have enough money in their account when their next SIPs are due.

In your 50s

If you have repaid all your debts and are still continuing with your investments, it implies that you are financially better off than many. This is important as many people make the mistake of seeking extended loan tenures to reduce the burden of their EMIs. As a result, their overall debt burden increases, as does the liability of continuing to repay loans. 

Hence, financial freedom in your 50s could mean either getting rid of your loans or being well on your path to doing so while taking care of other expenses and investments.

When you are 60

At this age, one is focused on being free from the responsibility of planning finances and investing for future and debt-free.

Reassess your investments and decide which to continue and how much to redeem. This is not the time to take unnecessary risks, which is why you should focus on shifting your earnings away from equity mutual fund investments and towards debt funds and fixed-income instruments such as bank deposits. If you have saved and invested enough, you can always live on the interest income on your earnings. For additional expenses, you can redeem a small portion of your investments while ensuring that the others continue unbridled.

Redefining financial freedom

Talking of financial freedom, we mostly see people aiming to retire at the age of 60. However, you may opt for an early retirement provided you have earned, saved and invested enough. More than how much you earn, what matters is how much you save and invest and then re-invest for a secure financial future.

Your financial goals must not be limited to a figure. They should be defined according to how you view your future depending on your past and present. Apart from that, financial freedom is heavily influenced by your understanding of risk appetite and long-term goals.

These are the investments  to beat inflation 
First Published: 26 Nov 2022, 01:45 PM IST