How to become financially free?
“Financial freedom is freedom from fear.” – Robert Kiyosaki
Path to financial freedom:
- Financial freedom should be the ultimate aim of our life as it gives the freedom to choose what to do, when to do and how to do.
- Financial freedom requires careful planning, unflinching discipline to stick to the plan and enormous patience to reap the fruits of compounding your money.
- Save as much as possible, invest regularly, invest systematically, invest in the right instrument and invest in tax efficient manner, remain invested for long-term is key to achieving financial freedom.
- Read below to know how much you need to achieve financial freedom.
- Persistence is key to achieve financial freedom. On average, aggressive saving habit and prudent investing can help us in achieving financial freedom in less than 20 years.
15th August is India’s Independence Day. I was just talking to some of my friends and they were happy. They have already planned how they are going to spend the independence day. Most of them are happy as a holiday means freedom to decide how to spend your time, without worrying about a deadline or late evening conference call. Now imagine if you were free to decide how to spend your entire life. If every day you are the master of your time, free to decide what to do with it? What if your every decision is not decided by the financial implication of the decision?
Now, most people I meet are working in good companies. They have a nice job with good salaries. They got it after working hard for years. Some are motivated and inspired by the work they do. However, most are working to earn a living. A job they are doing not because they want to but because they need to. A job that is more of a financial necessity. If they were free from financial worries, they might decide to spend their time in a different manner. Freedom to decide how to spend your time without thinking about the financial implication of such a decision is true measure of financial freedom.
“Time is a currency you can only spend once, so be careful how you spend it.” – Harmon Okinyo
Did India achieve freedom in a day?
The answer is “NO”. We as a country strived for decades. We sacrificed a lot to achieve freedom. It did not come easy. It did not come without effort. Same is the case with financial freedom. It won’t be achieved overnight. It will require a good plan and years of diligently following the plan.
What to do to achieve financial freedom?
Achieving financial freedom starts with a plan with focus on key financial goals. Then it requires, tremendous discipline to stick to the plan diligently. A simple way to achieve financial freedom involves:
- Develop a habit of saving significant portion of your monthly income early in your career. The more you save, the earlier you can achieve financial freedom.
- Saving is good but put your money to work by investing it.
- Invest regularly and systematically
- Pick the right investment – for longer term, pick equity mutual fund. Always try to pick investments that deliver more than inflation after taxes.
- Invest in a tax efficient manner – Avoid instruments like fixed deposit who are quite tax inefficient. Don’t cheat on taxes but avoid paying taxes by careful selection of financial instruments.
- Have patience, let your investments compound – Compounding is back loaded. You can be frustrated that after investing regularly, you don’t see much difference in the value of investments in initial years. Don’t lose heart.
How much is enough to achieve financial freedom?
A simple rule of thumb that can be used to get an idea about how much you need to achive financial freedom is simply (Life expectancy – current age)* Annual expenses + buffer for kid’s education/medical expenses etc. It can be refined further but you get the point. For example, if your age is 50 years and expect to be alive until 85 and your monthly expense is 1lacs. Then the minimum amount needed is (85-50)*12= 4.2 crores. Then the present cost of kid’s education, medical expenses is 50 lacs. Then you will need a corpus of 4.7 crore. You can find more info on this here.
Perseverance is key to achieving financial freedom
Finally, achieving financial freedom is difficult. Through various research, it has been established that if there is a time lag between our effort and its fruit is more, it becomes difficult to keep ourselves motivated. For example, everyone knows regular exercise and balanced diet can help us improve our health, reduce weight. Many of us resolve on 1st January to focus on our health. However, after a month or so, when we don’t see big change, we get demotivated and stop altogether. Same is the case with the activity to save and invest. We need to save and invest for years before we see some impact of our saving. The key is to persist, don’t lose patience and keep at it.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
If you liked the above article and would prefer to be notified when we write next, please leave your contact details below: