One question that all of us grapple with is: How much money would be enough to have a good life? The answer will differ from person to person and would vary from time to time for each. While the more money one has, the merrier, one of the basic things is to have financial freedom through the various stages of one’s life. When you are in the early stages of your life and career financial freedom would entail different parameters compared to what it would mean at the time of retirement.
Financial freedom means having enough earnings, savings and investments to pay for one’s needs and wants and that of their dependents and not having to seek help from others. Ensuring financial freedom requires goal-based financial planning. Here are some elements of the planning process.
You must ensure that all your financial goals are well funded. This is possible when there is a large enough corpus for each of your financial goals, which could be your child’s education, marriage, or your own retirement years. This required proper asset allocation factoring in your risk-taking appetite and financial goals. Asset allocation helps you stay the course even in the worst possible times. It guides you not to go overboard with any one asset class when it is doing well. Do avail of the services of a financial planner if you cannot make a financial plan for yourself.
But asset allocation does not stay constant forever. Market movements can alter the value of allocation to each asset class. Over a period of time, they distort your portfolio’s asset allocation. You should review your asset allocation at least once a year. The purpose is to rebalance your allocation and bring it back as per your plans. Rebalancing helps you book profit in an unemotional manner and invest in line with your asset allocation.
Financial freedom can be achieved by saving and investing in a mix of assets. A good mix of equity, debt and gold will help you maintain good returns on your portfolio through market cycles of each asset class. Relying on one investment product of asset class would expose you to concentration risk and may impact you badly in case of adverse movement. Spreading your investment across asset classes helps escape shocks and provides a steady return.
Though regular savings and investments help you build a corpus, there is always the risk of unforeseen incidents that could bleed your kitty. It could be a medical emergency or the death of an earning member of the family. If you have the right life and health cover you can tide over the situation. You must also buy non-life insurance covers for the property. Though insurance may not be a balm for emotional loss or trauma, it does protect you from financial losses. Your financial goals are not compromised if you have the right insurance covers in place, ensuring financial freedom for you and your family.
Though saving and investing help you achieve financial freedom, your needs might require you to borrow, be it for a house or a car. Be prudent while borrowing. Do not go overboard. More importantly, pay off your loans as per the repayment schedule. It will help you to escape falling into a debt trap. It also helps to keep your credit score in good shape and allows you to lower your cost of borrowing in the future.
Be careful with your credit card spends. Do not be reckless. Always pay your card dues in time otherwise the high-interest rates and charges on late payment will keep piling and destroy your financial plan.
At any point, you should ensure that there is some cash in hand and investment in products that can be liquidated at a short notice to raise cash. This will help you not to rely on others in times of emergency and be financially free. Use a combination of products to acquire interim liquidity. For fixed income allocation fixed deposit and bond funds will provide quick interim liquidity when you need.
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