Economic discipline for Financial Freedom

Mutual Funds

16-05-2018

“Money Speaks only one language – You save me today, I will save you tomorrow”

Some people are born rich and some are not, if someone is born poor, it is not their mistake, but if they continue to live poor or die poor it is their mistake and partially people like me who advise people on managing wealth . We could not reach out to them.

Every individual has necessities, needs, dreams, aspirations etc.. and on top of all these there is retirement and life after retirement. One has to plan well, ensure economic discipline to ensure that they achieve financial freedom to meet the above.

Let us understand what “financial freedom” is: Not depending on active income for regular expenses or for any of the financial requirements is financial freedom or financial independence.

There are two types of income and they are Active and Passive.

Active Income: Is income which one generates by contributing their time and with active involvement to earn money for ex. Employment etc.

Passive Income: Is income which one generates by investing their money to get income out of it for ex. FD Interest, Income from House / property or dividends / returns by investing in stocks etc.

Seven steps to achieve financial freedom.

Budget

Many times the money which is earned from active income is spent on things which we don’t even remember, this happens mostly because we end up buying things which we may not require because of lack of planning. If we keep budget for expenditures and strictly adhere to the same, we will end up buying which is most essential and buy what is required for us. Budgeting will help in spending money on buying essential things. The key to building a good plan is to keep track of where and why you spend your money. One should keep track of their cash flows to assess if they are cash surplus or cash deficit at the end of the month. If you are cash deficit a lot unwanted things are coming in. Have control.

Savings

General human tendency is to use their money for expenditures first and if any amount is left at the end of all expenditures than consider the same towards savings. In wealth creation journey we recommend you to reverse the approach, save first and spend what is left over. By doing so you will have control or discipline over your expenses and this will be the first step towards your financial freedom.

Freedom from Debt

In pursuit to buy assets many times we end up owning liabilities i.e we buy properties, automobile etc by raising loans. Availing loans for properties is still understandable but for any other asset which is likely to depreciate over time is not advised. One should avoid having debt or in other words have limited liability that can be managed even in bad times.

Life Goals

Human wants are unlimited and at different stages of life there would be different requirements/aspirations. Financial freedom is to use your passive income to fulfil your requirements and meet goals. By proper financial planning the same can be achieved.

Risk Cover

More often than not, what impacts the plan is uncertainty or unexpected. All these are unplanned expenditure, could be for health reasons, or some accident in the family or due to burglary or something else. One needs to be protected against the unexpected and hence having adequate insurance cover for the following is recommended.

  • Life Insurance
  • Health Insurance
  • Critical Illness cover
  • Motor Insurance
  • Property Insurance etc

Corpus Required

A question which is very difficult to find answer is how much is the cost of a specific goal in future, prices do not remain constant. The best way to get an answer is to ascertain the goal and the current cost of the goal and what would be the inflation in future for the same. One can expect consumer price inflation to be in the range of 5 to 6%, however health and education can be at higher inflation. Historically health and education have inflated in double digits. Considering the above inflation numbers and considering the time to achieve goal we can arrive at future cost to the same. Once you know how much is required the next question is how to achieve the required. Simply by planning and investing.

Investing

Money saved has to be judicially invested to ensure that it generates good return with minimum risk to achieve goals. Investment is like a journey from the bottom of the mountain to the top of the mountain one needs to plan and navigate through a lot of ups and downs (Price fluctuations in equity/gold/real estate, interest rate fluctuations in Debt) and similarly one needs to make the right choice of vehicle (Equity, Debt, Gold, Real estate etc.) to reach ones objectives / goals. If one selects the right kind of asset class and remain invested through different kind of market environments they are certain to reach their goals thus achieving financial freedom. Historical evidence prove that equities are one of the best income generating asset class in the long term and debt investments are considered more safer in the short term. Getting the right mix of asset considering investors goals, risk taking capacity and duration to the goal is very important.

ARTHAYOG (Economic Discipline) is the key for Financial Freedom

About The Autor

I KV Vardhan (KV). I have over 20 years of experience in BFSI (Banking and Financial Services) sector.

I have worked in Banks, Mutual Funds, Stock Broking and Wealth Management industry. I am truly passionate and determined about providing quality bespoke financial offerings to investors.

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