Financial freedom is a term that has been frequently used recently. It can have many different meanings for different people, whether that is a relaxed retirement, building wealth, or being debt-free. It could mean having enough wealth to maintain your lifestyle without worrying about finances.
If you want to start your journey to financial freedom, there is no better time than now. In this article, we will explore financial freedom and some steps you can take this Independence Day to start the process.
What is financial freedom?
The traditional definition of financial freedom, or financial independence, refers to a state where an individual or household has saved enough financial resources to cover living expenses. It no longer needs to work to earn money to maintain its lifestyle.
However, financial freedom can mean different things to different people. Many dream of living without the anxiety of worrying about the next paycheck. For some, financial freedom means having enough financial resources to cover an emergency without going into debt or supporting their families without worrying about affordability. Thus, economic freedom can combine any of these aspects, depending on your goals and values.
How can you achieve financial freedom?
However you choose to view financial freedom, it is a goal that requires a lot of strategy and perseverance. Like India’s freedom fighters knew independence could not be achieved without strategy and work, financial freedom requires a lot of planning and dedication.
Here are steps you can take to put you on the path to achieving financial independence:
1. Differentiate between wealth and income
Contrary to popular belief, creating wealth does not always mean having a high-income job. While income does play a massive role in creating wealth, it does not account for your entire net worth. Wealth is the amount of your income that is left after deducting your liabilities from your assets.
For example, imagine your monthly salary is Rs. 50,000, and your monthly expenses, including loan EMIs, amount to Rs. 25,000. Out of the remaining Rs. 25,000, whatever you invest towards your financial goals and asset building is what is referred to as “wealth.”
2. Determine your financial goals
To take action toward financial freedom, you must first have a clear picture of what that looks like. Economic objectives are unique to everyone. You must decide if financial freedom is freedom from working, supplemental passive income, or something else. This also includes determining your lifestyle- whether you will continue working, pursue new hobbies, or travel.
Other factors that should be considered include age, income, and what age you want to retire. Those in their 20s and 30s can take on more risks and have more time to achieve their goals. Financial objectives for those in their 50s and 60s will be centred around retirement and savings.
3. Keeping track of your expenses
Proper financial planning involves considering current and future expenses. Create lists for different needs, such as necessities, rent, loan EMIs, and leisure spending, such as entertainment and travel. This allows you to know what expenses you can cut down on and what are non-negotiables. It is also important to take inflation into account.
4. Emergency funds and investments
To gain financial freedom, passive income created through investments is a must. Investing in assets, bonds, national pension schemes, stocks, mutual funds, or real estate can help compound your finances.
Additionally, it is crucial to have proper savings and protect yourself from financial uncertainty. Countless unpredictable problems, such as illnesses, job loss, auto repairs, etc., could hurt you financially.
Being completely unprepared for these emergencies could prevent you from gaining financial freedom. Saving 3-6 months’ worth of expenses is a good benchmark. These funds can be used for medical, economic, or other emergencies.
5. Planning for retirement
Most people’s ultimate goal is retirement, whether at the standard retirement age or earlier. Investing thoughtfully for retirement means creating investments that work for you even when you stop working. Several retirement investment plans are available in India, with a wide variety of features. These include:
– Immediate Annuity Plans
This investment plan offers a regular monthly payment after retirement and is recommended for people close to retirement.
– National Pension Scheme
This is a higher-risk retirement plan that can be availed at any age. It offers tax benefits of up to Rs. 2 lakhs every financial year. This pension scheme allows investors to invest in equities, bonds, and alternative investment funds.
– Senior Citizens Savings Scheme
This is a government-backed scheme which provides regular monthly income after retirement. It can be availed between the ages of 55-60 years.
– Deferred Annuity Plans
With this plan, investors can choose the period in which they receive annuity payouts. The investor makes continuous small payments to the plan, during which the investments grow and create a corpus for retirement.
6. Buying sufficient insurance cover
While preparing for emergencies with savings is essential, major problems like illness or injury can quickly drain your savings. This is why ensuring you have another safety net in the form of insurance is crucial. Investing in health insurance, car insurance, and others gives you a backup plan in case you run out of savings.
A term life insurance policy is also essential for those who support their families. This can ensure that loved ones are cared for in the event of the primary breadwinner’s passing.
The bottom line
Financial freedom is a popular goal amongst many today. While it takes dedication, planning, and rigorous discipline, it is more than possible for you to achieve your goals and live a life free of anxiety surrounding finances.
While the above six steps are necessary to attain financial independence, another aspect must be considered. This is the financial institution you choose to manage your wealth. If you want to start planning for economic freedom, you can count on Tata Capital to expertly guide you through these steps.
Tata Capital Wealth is a reliable institution with over 150 years of experience. Our experts will ensure that your funds are safe and that you reach your financial goals as best as possible. Visit the Tata Capital Wealth website today to learn more!
13 August 2024
6 mins read
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