6 MinsAug 15, 2022
The true meaning of financial independence is to live a life free of financial insecurity by embracing financial freedom and extending the gift of financial freedom to your loved ones. This year, India is celebrating ‘Azadi Ka Amrit Mahotsav’
to mark 75 years of independence. For investors, this is as good a time as any to give a thought to their financial freedom as well. Let us see what steps you can take to ensure you remain free from financial worries and curate a bright financial
future for yourself and your loved ones.
1. Look for multiple sources of Income:
At an age where uncertainty looms large in our financial lives, especially given the continuous increase in the prices of commodities, you cannot rely on a single source of income to
meet all your present and future needs. If you lose your job tomorrow or don’t do well in your chosen business or profession, it may imperil your financial well-being.To strengthen your monthly earnings and finances, explore multiple
sources of income. With a little bit of training and effort, you can convert your passion or hobby into a profession or business. For example, you could be a social media influencer, earning money from clicks, views, likes, and subscriptions
to your posts; or you could take on freelance writing, photography, or teaching assignments.
2. Save and invest:
Pay yourself first. What this essentially means is that you must control frivolous expenses, particularly those that are on credit. However, saving alone does not make anyone wealthy. The investible surplus,
that is the monthly earnings minus the monthly savings, needs to be deployed in productive asset classes and investment avenues therein, whereby, it potentially earns efficient returns for you (a source of income) and counters inflation.That
said, investing in an ad hoc manner or merely following your friends or neighbours will not help. Recognize your risk profile, broader investment objectives (whether capital appreciation or capital preservation), financial goals to address
and time available to achieve those goals while investing. This shall help you align your investment activity with your needs or financial goals.
The financial goals you set must be S.M.A.R.T, i.e., Specific, Measurable, Adjustable, Realistic
and Time-bound -- not ambiguous -- plus, they need to be categorised as short-term, medium-term and long-term. While there may be several investment avenues that can help you achieve your desired goal, choose the one that is best for you.
Mutual Funds: Say you are a risk taker and have long-term financial goal/s to achieve (such as building a sizeable corpus for your child’s future -- his/her higher education -- plus your retirement), consider enrolling for
SIPs (Systematic Investment Plans) in some of the worthy and appropriate equity mutual fund schemes. Ideally, you make your payday
your SIP Day so that it facilitates saving and investing for these vital financial goals first. Also, increase your SIP amount so that you can benefit from the power of compounding and reach your desired corpus faster.
Power of Step-up Mutual Fund SIPs
|% Annual increase in SIP||Amount invested (Rs)||Corpus after 10 years (Rs)|
|15||2,436,446 ||3,744,872 |
|20||3,115,042 ||4,633,591 |
Returns assumed at 10% p.a. compounded annualised over a SIP tenure of 10 years(The table above is for illustration purposes only)
Fixed Income Instruments: To earn steady and secured returns (not market-linked) -- in the form of interest -- consider investing in bank fixed deposits, and small
saving schemes such as Public Provident Fund (PPF), Kisan Vikas Patra (KVP) among others,
as per your best-suited asset allocation.
Gold: Allocate around 10-15% of your entire portfolio to gold with a long-term view (of over 5 to 10 years) by assuming moderately high risk. Gold may prove to be a haven, a store of value, a hedge and an effective portfolio diversifier.
Instead of buying physical gold (in the form of coins, bars, and/or jewellery), consider buying Gold ETFs, Gold Saving Funds, and/or Sovereign Gold Bonds. This way,
you don’t have to worry about its safety and holding cost.
Holding a judicious mix of asset classes and investment avenues is the basic tenet of sensible investing and is essential from a diversification standpoint.
[Also Read:10 New Year resolutions for a healthier financial life]
3. Have an optimal insurance cover:
Complete freedom from worries of all kinds may seem unattainable. But you should take steps to address the potential risks that you may face in life. Thus, along with prudent saving and
investments, do not overlook the need to have optimal insurance ––for both, life and health.
If you are the breadwinner of your family, make sure you have an optimal life insurance cover considering your human life value. This shall offer financial security to those dependent on you when you pass away.
Similarly, given the kind of lifestyle many of us live today and the stress we are exposed to, it makes us vulnerable
to some or other medical conditions. If you do not hold an adequate health insurance cover and if you land up in the hospital, it may exhaust your savings and investment assigned for other goals. Hence, the higher your health insurance coverage,
the better it is (given the fact that inflation in healthcare is higher than the headline inflation).
4. Control your debt:
Borrowing money is not a bad thing as long as you are comfortably within your means of repaying it. Certain loans such as Home Loan,
Car Loan, etc. may help you realise your dreams or aspirations sooner. When you are availing of loans, take care to ensure that your debt-to-income ratio does not exceed 40%-50%.
For example, if your
monthly income is Rs. 2 lakh per month from all sources, but you have to repay loans and other debt to the tune of Rs. 95,000, your Debt-to-Income ratio is 45%. This is reasonable. But if it is higher, you need to reduce the debt obligations
before it becomes a burden on your finance
With freedom comes responsibility. This holds true for financial freedom as well. With proper financial planning and by following a disciplined approach to investing, you can ensure a secure
financial future for yourself.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.