Imagine, we all work from the time we graduate till the time we retire, for five days a week. And after giving so much of yourself in making a living, it is almost criminal if the money doesn't take care of you after you retire. While the theory of financial freedom seems unattainable and complex even, it could not be far from the truth. In just 10 simple steps you too can make sure that you become free from money-worry and save up for a comfortable future post retirement life.
#1. Pay Off Debts and Clear Loans Quickly
What's done in the past is done. To make a fresh start know where your current finances stand at. Add up your loans and get a grip around your expenses. Prioritize the loans that need to be cleared upfront and cut down on unnecessary expenses. The loans should be prioritized based on the interest rates. So the credit card debt should be cleared first, since it attracts the highest amount of interest. Once you know the exact amount you need to clear, make monthly provisions to clear them on priority. You can't be building wealth for your future if your current loans eat into your earnings in the form of high interests.
#2. Set clear goals
It is a natural instinct for us to run after something if we can see it or understand it. Similarly, when you think of financial freedom you must understand what your goals are. This will help you in making sure you save enough for it but will also keep you motivated in your journey. What is also crucial is that you assign a timeline to each of your goals. If you wish to buy a house, set a tentative time-frame to it. If you wish to go on a world travel, set a timeline by when you want that goal being achieved. If you wish to save for a big expense, tell yourself by when you want the goal achieved.
#3. Check your expenses
You can't achieve financial freedom without first being disciplined in your spending habits. Once you start tracking your expenses you will realize where you are overspending and when are you can possibly cut down your expenses. This is often an extremely underrated exercise but one that is hugely helpful. So, be mindful of where your money goes. Don't spend more than you need to.
#4. Put yourself first
This may sound selfish, but it is a lesson that must be etched in your mind for good reason. Before you spend your money on anyone or anywhere, first take a certain portion of it for yourself – your future self. Before you pay your bills or think of buying new things for immediate gratification, keep aside money that you must invest or save. Your expense should come second in line of this priority.
#5. Create additional sources of income
If you feel that you don't have enough left for your additional expenses post saving and investing, you should think of getting additional sources of income and not take a cut from your savings.
#6. Invest in your future
This is a very broad subject. When we say invest in your future, it begins with the simple step of committing to save at least 20 percent of your salary every month. This is not an impossible task if you are mindful of the above points and put financial freedom as your objective above any unnecessary expenses. It may not seem like much to you but with little savings every month you build up on the power of compounding which will give you solid returns by the time you reach retirement.
#7. Start Small and Move to Bigger Goals
The beauty of this journey of securing your financial freedom is that every small step does its bit to grow your wealth. Start investing with small sums in mutual funds through the Systematic Investment Plan (SIP). SIP doesn't just allow you to start investing with small sums, but more importantly helps create a sense of discipline as well. Like mentioned earlier, SIPs work wonders with the power of compounding incorporated in the wealth growth process.
#8. Know your risks
Now that you know that small sums set aside and invested every month can help you claim your financial freedom, it is vital you understand just how much risk you can take with your finances to build wealth. Investing in mutual funds is a great way to boost up your wealth building efforts as the returns are much higher than most traditional forms of investment avenues. This however comes with a caveat. The higher the possibility of returns, the higher is the risk involved. It is important you assess your risk tolerance levels before you invest. There are investment options for every risk level to build wealth, so make sure you choose what suits you best.
#9. Have a balanced portfolio
While you know that equities give you the highest returns, make sure you manage your risk by having a diversified portfolio. Have a mix of debt and equity. Equities are known to deliver higher returns in shorter spans of time with proportionate risk involved while debt funds give you moderate returns with the proportionate levels of risk. Have a healthy portion of equity in your portfolio. Starting early is always the key when investing in equities as it allows you to stay invested for longer to even out the risk through market cycles.
#10. Keep a track of Investments
Once you have invested, you must also take into account regular review of your money. Once or twice a year, review your investment. Check the progress of your portfolio in accordance with your goals and targets and make adjustments if need be. But refrain from making constant changes to your investments as this will defeat the purpose of staying invested for longer for maximum gains.
Independence is achieved through the consistent and dedicated pursuit of a single goal. The same applies to our financial investments and our pursuit of financial independence. The guidelines suggested here are for you to get started on your journey to build and accumulate wealth for your future.
(By Harsh Jain, Co-founder & COO of Groww)