Financial freedom: Ways to achieve it.


Most of us depend on some source of income to meet our day to day needs. At times we are unable to cater the needs of the hour and tend to borrow loans at higher rates. A systematic plan and proper insights into our sources of income help us achieve our financial goals and help us with stand financial emergencies. This article provides information about ways to achieve financial freedom in simple and easily executable steps.

What is financial freedom?

Consider a situation where you need money to buy a car or go out for a movie. If you are a student, Then you may have to borrow money from your parents or ask your siblings (Those who are working). Here your plan for buying a car or going out for a movie rests in the hands of your guardians. In the other case, if you are a working individual then you have complete authority over your earnings and your plans rests in your hands. Similarly financial freedom is nothing but a power to plan and execute financial goals without depending on any external source which may or may not help you in achieving your financial goals. In simple terms it can be termed as freedom to take financial decisions without any external factors affecting it. Financial freedom helps people to achieve their financial goals without any obstacles and lead a stress free life at any point of time.

Why do we need financial freedom?

As explained above we need financial freedom to achieve our financial goals. To brief out more let us consider one example. Let us assume you earn 10000 INR per month and you plan to buy a car next year. For one year your total income stands out at 1, 20,000 INR. Let us say you have spent 50,000 INR in that year for your general spends and are left out with 70,000 INR. Now you decide to take loan and buy a car worth 3, 00,000 INR. You pay 70,000 INR in cash and take 2, 30,000 INR as loan. Your EMI stands at 5,750 INR for 5 years at an interest of 10% P.A. Now you spend 57% of your income for your EMI. Even if you want to buy clothes for your birthday or for functions you are restricted by the EMI's you are currently paying. For next five years you completely lose your financial freedom. In the meantime if you lose your job then you have put yourself into great trouble.

But on the other side instead of buying a car if you have invested the money wisely in some good financial instruments (Equites, Mutual funds, Gold bonds etc.) Which returned 10 % P.A and postpone your goal a little longer (Say five years), to achieve financial stability, the same money would have generated you some good lump sum amount about 1, 05,000 INR. A regular monthly investment of 5000 INR for same period would have generated 4, 02,936 INR compounded at 10% annually. After achieving financial stability you could have bought your car without taking loan and at the same time you are left with 2, 00,000 INR in your bank which might have had helped you when you lose your job. In the second case, you have achieved financial freedom where in obstacles like job loss might not affect your dream of buying a car and at the same time you could have slept well without any financial burden haunting you.

How to achieve financial freedom in our day to day life.

Assessing key resources and planning for future are the key principles of achieving financial freedom in our life. Like everything in our life starts with assessment, similarly in financial world it plays a very important role. Like the great thought "Today's action represent tomorrow's result" planning today wisely helps in achieving goals in future without any hassles.

Assessing current sources of income:

Before planning or fixing financial goals one of the most important point to be done is assessing the present source of income. If you are planning for a bigger financial goal then your current source of income should be strong enough to with stand the obstacles in achieving your financial goals. As explained in the example mentioned above, a strong assessment of your current scenario would help you in achieving your goals without ending abruptly, as seen in the first case.

Some of the key points to be considered while assessing your source of income:
1.Current salary.
2.Value of portfolio and expected returns on your holdings.
3.Bank balance.
4.Loans and any kind of debts.
5.Future increments and bonuses.

Once you have prepared a checklist and have an approximate value or net worth of funds in hand you are good to plan and set your financial goals.

Planning and setting financial goals:

After a thorough examination of your key sources of income and debts the next stage is planning. Before starting any plan make sure you consider some of the worst situations like loss of job, medical emergency, unexpected transfer etc. Considering these situations would help you to become more vigilant on your spending and will allow you to have good source of money in times of need. Making a plan simply will not allow you to achieve your financial goals, in fact strictly adhering to the plan at any point of time will actually do.

Guidelines of planning and setting up financial goals:

Financial stability: Unless you are stable in your financial situation never set up any goal. Financial stability is nothing but your ability to withstand financial emergencies during the process of achieving your goals. This forms the first step of planning. At least 20% of your income should be set aside for emergencies. It can be saved in any form. The most important point to be noted is that the amount you are planning and setting aside for emergencies should be liquid and available to you in a short notice. For medical emergencies it is always advisable to take a medical insurance which offers best privilege and is friendly to your wallet.

Need of the hour: Before you start achieving your dreams the most important factor is a question to yourself "Do you need it now or some time in future?" this question will help you save tons of money. As seen in the second case of the above example if you prepared a proper plan and waited for five years before fulfilling your dream, you could have saved lots of money as well as achieve the dream smoothly without affecting your finances badly. Similarly before setting up financial goals a suitable time frame for achieving your goal must be decided. The time frame should be based on your source of income and the amount you are willing to save after you have set aside some money for financial emergencies.

Proper savings: After deciding the time frame and expected amount for your goal it's time to start executing your plan. Savings are not the best option to achieve bigger financial goals. Growing your savings will help you by staying updated with the market parameters like inflation and depleting value of your currency. By growing your money you are actually retaining the value for your money. For example 1000 INR would fetch you groceries for the whole month five years back. But today the same 1000 INR is not sufficient for a week. So always opt for investing in mutual funds , Equity shares or bonds. These financial instruments come with their own risks. Knowing your risk appetite and S.I.P (systematic investment plan) contribution should be evaluated before investing.

Savings is not limited to putting aside some of your income but also cutting down expense. Savings on your electricity bills, phone usage, grocery expenditure, fuel etc. may not drain your pockets instantly. Over a long period of time when you analyze these expenses you will be shocked to see how these have changed your savings pattern. It is difficult to cut down on these expenses but, every difficult task comes with its own reward.

Distributing your savings for various kind of goals is most important. Without knowing proper distribution you could land yourself into tangles and this may disturb your finances. Always your net income should be the base for calculating it. A typical distribution should have 20% for emergencies, 15% should be long term savings, and 10% should be short term savings.

Monitoring your plan: Executing a plan and going forward is not effective enough for achieving your goals. Monitoring them periodically and analyzing the expenses will be effective. Update your plans only when there is an update in your income or once you have achieved your goal. Changing the contribution for emergency fund may be advised only when there is no emergency incurred over a long period as it may have already generated enough corpus for handling the situation.

Follow Warren Buffet's famous quote on savings "Do not save what is left after spending, spend what is left after saving"

Hope you had a good time reading this article. I would always like your comments and feedback. Feel free to ask or post questions and ideas about this article in the comments below.


Comments

Author: Rahul30 Jun 2015 Member Level: Gold   Points : 1

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Author: R. Gautham Shenoy30 Jun 2015 Member Level: Gold   Points : 1

Dear Siva,
I appreciate your comments on Financial freedom. As you said being financially free is not having money, I agree with it. In my article I have explained the same thing, Being financially free means not only having money but having money at the right time and ability to achieve their future goals.
Being different person and having determination is nothing but the ability to analyze the situations and having a strong determination for sticking with the plans drafted.
Hope to hear more from you.

Author: Kailash Kumar06 Jul 2015 Member Level: Platinum   Points : 0

The author has composed a basic article useful for creating awareness among masses about importance of financial planning and savings. Saving is the hallmark of financial freedom. It should be started from the first salary itself.



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