Financial freedom is not about getting rich-quick. It’s about taking control of your finances and reducing financial stress from your life.
There is no “one-size fits all” formula to achieve financial freedom. For ease of understanding, lets divide our lives into “Earning Age” and “Retirement Age”. In absence of an adequate social security umbrella, retirement is a more serious problem than most people think. Most of the retiree’s finish off their retirement savings quite early and depend on their children or close relatives for financial needs.
During the Earning Age you go through various life events like buying a house, children’s education, family lifestyle maintenance, children’s marriage funds, holidays, pursuing your passion etc. Financial decisions across your life cycle can cause tremendous anxiety and stress either due to insufficient savings or erosion in value of saved money due to inflation. Inflation is like a termite, it eats into your savings and reduces your purchasing power. The solution to all these problems lies in the seeds you sow during your Earning Age.
Hence, it is important to understand the basics of financial planning – understanding your risk profile, defining needs & financial goals and creating an asset allocation strategy suitable to your age and risk taking capacity. This may sound boring but, financial discipline will go a long way to help in your wealth creation journey.
Here are a few finance-related psychological & behavioural mistakes people often make:
- Don’t Save. Excuse – I don’t earn enough, my expenses are high, I am not left with enough to save.
- Don’t have Budget. Excuse – I know my income and expenses, preparing and reviewing budget every month is a futile exercise.
- Postponing Investment. Excuse – My income is limited and investment requires lot of money. I will start investing after settling in life or paying-off my loans etc.
- Trying to time the market. Excuse – Markets are crashing and will go-down further. I will invest when markets bottom-out.
- Seeking Safety. Investing all your money in bank FD’s which give low post-tax returns unable to beat inflation.
- Seeking instant gratification. Looking for fast returns in short-term through excessive speculation – a surefire way to lose money. Avoiding long term planning and investing, as its boring, tiring and less exciting.
You can have excuses or you can have wealth, you can’t have both!! What’s your excuse?
Money is unlimited but time is limited, so becoming financially independent as quickly as possible should be your top priority. Let’s look at some simple yet powerful idea’s to help you reach your financial Mt. Everest faster:
- Have adequate investments in Equity (either directly through equity shares or in-directly through equity mutual funds, PMS based on your preference) to harness the power of compounding. Equity has a potential of giving 12% compounded returns in long term. Check some top performing mutual funds https://www.plindia.com/SampleReports/MUTUALFUND/TopPerformingfunds.pdf
- Start investing in Equity early, from a young age. The magic of compounding can help you build exponential wealth at a much lesser capital. Delaying investments has an opportunity cost (see illustration).
|Start at 25 Yrs||Start at 35 Yrs||Start at 45 Yrs|
|Investment amount per month (Rs.)||5,000||7,000||11,667|
|Total amount invested at 60 years of age (Rs.)||21 Lakh||21 Lakh||21 Lakh|
|Value of retirement corpus at 60 years of age||3.21 Crore||1.31 Crore||0.58 Crore|
|Delay by 10 years would reduce your corpus by||NA||59%||56%|
Data source – HDFC AMC. Calculations are done assuming rate of return of 12% p.a CAGR
- Use SIP (Systematic Investment Plan) to benefit from rupee cost-averaging through staggered investing. SIP’s can help you get started with small investment amounts, build financial discipline and a mindset of long term investing, manage market volatility and overcome emotional and psychological biases mentioned above.
- Diversify your portfolio based on your asset allocation strategy. For example – 60% Equity : 30% Debt : 10% Gold ratio. Within Equity, diversify between Indian equities and international equities. Further diversify between large-cap, mid-cap & small-cap equity based on your return expectations and risk taking capacity. For investing in international equity visit https://pl.vested.co.in
Key points while investing in any asset class is risk, returns, liquidity and taxation. There are so many products in the market that choosing right product suitable to your needs and goals could be overwhelming. Having a good financial advisor can always help.
Insurance is your safety belt harness while climbing the financial Mt. Everest. Adequate health and life insurance are must to help you absorb unexpected shocks. A family floater health policy using base policy + super top-up can save you from expensive hospitalization cost in critical times. A term life cover equal to 10 to 15 times of your annual income along with suitable riders will help you in securing your family’s financial needs in your absence.
We are seeing emergence of alternative assets like VC, PE, Angel Investing and Crypto’s. Family Trust based tax-efficient frameworks for Succession Planning and many other sophisticated vehicles for managing wealth in HNI / Ultra-HNI space are in vogue. These could also be explored and considered in your wealth planning & creation journey.
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