Have you ever wished that you could retire early without caring about your finances? Have you wanted to just give up the daily grind and chase your dreams? Do you feel like taking a break for a few months and just wander through the blissful climes of the hills? If there is one thing stopping you from chasing these dreams, it is your financial commitments. In short, what you lack today is financial freedom. Why is financial freedom so elusive for most people. The answer is simple, “We just don’t plan for financial freedom”.
The days are gone when you had to be born with a silver spoon to indulge in your dreams. Today, it is possible to plan for financial freedom, provided you start early enough, invest right enough and persist long enough.
Here are 7 important rules to plan your financial freedom.
1. Earlier you start, the better it is
We all have heard this ad nauseam. However, even at the risk of being repetitive, this is where financial freedom begins. Take a simple example. Assume that you start at 45 investing Rs30,000 a month in an equity fund SIP yielding 14% for 10 years till the age of 55. You would have contributed Rs36 lakhs and your corpus would be worth Rs79 lakhs at the age of 55. Instead, had you started at the age of 25 with a SIP of just Rs5,000 per month for 30 years, at the age of 55, you would have contributed Rs18 lakhs, but would be sitting on a corpus of Rs2.80cr. This is not a magic wand, just the power of compounding. When you start early, you compound more often and can hope for real financial freedom.
2. Invest systematically for financial freedom
If you wait for the right market conditions and the right corpus to invest, it will never happen. It is important that you start right away. If you are earning Rs30,000, you must try and set aside Rs5,000 per month to put in a mutual fund SIP. You have seen how much wealth you can create over 30 years by just investing Rs5,000 per month. The reason, systematic investing is important is that it becomes a discipline when you allocate a certain part of your income to investments at an early age. Time will take care of the rest.
3. Don’t get into a debt trap
This may sound hackneyed, but if you are in a debt trap, you can never hope to have financial freedom. Remember, debt is a commitment and ties you down. Get out of debt and especially, get out of high-cost of debt. If you are paying 35% on your credit card or 20% on your personal loan, no investment is potent enough to give you financial freedom.
4. Have an emergency fund in place
Let us spend a moment on this important aspect of financial freedom. Imagine that you are investing in a disciplined way but suddenly get into a financial emergency because you lose your job. Your next step would be to liquidate your investments to take care of the cash crunch. In the process, you are giving up on your financial freedom goals. The answer is to create an emergency fund equivalent to 5-6 months of monthly income. In the event of emergencies, you can fall upon this emergency fund, so that your long-term goals of financial freedom are not jeopardized.
5. Financial freedom requires distributing your risk
What do you understand by distributing risk? In one word, it is called insurance. When you buy insurance, you basically distribute part of you risk to the insurance company. In a way, the insurance policy also works like your emergency fund in that it helps you through tough times. Financial freedom is about not worrying about life, health or your assets, knowing fully well that these are insured.
6. Don’t ignore the humble financial plan
In a way, this is where it all begins. To gain financial freedom, you must plan for it and it must be documented for your financial freedom. A financial plan is a link between your dreams and reality. For financial freedom, you need adequate finances at your disposal and that needs to be planned. The plan has to be organized, systematic and meticulous. Begin your quest for financial freedom with a financial plan.
7. No parent can finance you dreams
Even with wealthy parents, the onus is still on you to achieve financial freedom. Parents can help you finance a lot of things but your long dreams are entirely yours and you need to fund them. That means; you must have the plan in place and the persistence to attain financial freedom.
Remember, there is no rocket science about attaining financial freedom. You just need to start planning for it today. The legendary John Lennon famously said, “In the end everything will be OK, and if it is not OK then it is not the end”. If you have dreams of financial freedom, you cannot live by such ideas. You need to plan your goals and then work your plan!