Every person wants to be financially free, and yet when you ask what “Financial Freedom” means, the answer varies drastically. For some it is getting out of debt, for others it is the freedom to do what they want and like.
Real financial freedom, though, isn’t just about getting out of debt, doing what you want or reaching an amount. It is the number of days you can survive without you or any family member doing physical work, and still maintaining your standard of living.
For instance, if your monthly expense is Rs 50,000 and you have Rs 6 lakhs in your savings, you can live for approximately 180 days without impacting your current lifestyle. But, if your monthly expense is Rs 50,000 and you have investments that provide Rs 50,000 a month, you are truly financially free. Remember wealth is never measured in Rupees, it’s measured in time.
Here is how you can become financial free in six steps.
Step 1: Sell all your unwanted junk, asap and gather one month’s expense as emergency funds. Junk means any extra tablet lying idle in house that no one has used in years, old books gathering dust, that old bike which you never once took outdoors. The idea here is to get rid of all junk and gather enough money to meet a month’s expenses. This money will be used as emergency fund 1, which goes towards smaller emergencies such as household repairs. Put this in a liquid mutual fund, for some returns and easy access.
Step 2: Start paying all debt, apart from housing loan, one by one. If you have extra money gathered in step one, pay off debt with that.
Step 3: Make emergency fund 2, which will have 6 months’ worth of monthly expenses or 4 months worth of salary, set aside for larger emergencies. Like an unexpected doctor bill, or job loss.
Save for Other financial goals; goals like buying a car or going on vacation in a few years. Or medium-term goals, like child’s education. Many mutual funds have various categories of schemes that work well, for short term goals. For very short-term goals (6 months- 1 years), choose a liquid fund or ultra-short fund.
Step 4: Invest for retirement: Retirement is a long-term goal. A portfolio of good equity mutual funds via a SIP route, will help you gather wealth over time. Move to debt funds as you get closer to your goal. Monitor and rebalance your portfolio from time to time.
Step 5: Save for Other financial goals; goals like buying a car or going on vacation in a few years. Or medium-term goals, like child’s education. Many mutual funds have various categories of schemes that work well, for short term goals. For very short-term goals (6 months- 1 years), choose a liquid fund or ultra-short fund.
Step 6: Even as you build your long-term retirement corpus, and meet your short to medium term needs, try to pay a little extra over the EMI on home loan. The sooner the house is paid off, the sooner you will be able to be really financially free.
Most will stop at step 6.
After all, emergency funds are taken care off, retirement is set, you are on your way to pay off the only debt you have-the house. Wants and needs are allocated funds via short and medium-term investments. But this is where wealth creation starts, have a separate kitty for wealth creation. Here invest via SIP in large cap oriented multi cap funds which have been around for a while, and have given benchmark beating returns over the long term.
In short, a step by step method will make you really financial free.