If I had a dime for every bad financial decision I made during my initial years of adulthood, I’d probably have spent that money too on an unnecessary purchase or a bad investment. With time, through a series of trial-and-error decisions and the repercussions that followed, I learned to manage money, albeit the hard way. Looking back, I wish someone had taught me about financial freedom — a state of being financially self-sufficient and stress-free. Attaining financial freedom is a systematic and gradual process. It requires discipline and can be quite tricky if you shoot in the dark. With that in mind, here are the vital measures you need to undertake to attain financial stability.
Build a budget
It is important to devise a blueprint of your income and expenses. Set a budget based on your monthly expenses — both basic and unplanned. Make sure that the budget is not overestimated or unrealistic. In alignment with the rule of marginal propensity to consume, your expenses should always be less than your income. There should always be space for savings.
Prepare for Emergencies
No matter how well thought-out your plans are, life could throw you a curveball. The most significant part of financial freedom is being able to manage an unexpected crisis. You must have certain emergency funds to fall back on, until you get back on your feet. Regularly set aside a portion of your disposable income and any surplus for unexpected emergencies.
Set Financial Goals
As humans, we’re more efficient when working towards a particular outcome. To achieve financial freedom, try to have a specific short-term or long-term goal. This could be buying a house, investing in crypto, or even saving to buy a luxury handbag. As your financial situation changes, you can make necessary adjustments to your life goals. This will motivate you to work harder, be more innovative and feel confident in your abilities when you accomplish the target.
Money allocated is money utilised. While saving your money is good, investing your money in suitable investments takes it a step further. However, neglecting the value of expert advice, skipping market research and directly rushing into investment opportunities based on peer recommendations is reckless. Always compare various banks’ interest rates, benefits and customer service before choosing to deposit your money there. Similarly, monitor market trends for investment options that you’d like to explore — such as stocks, crypto, non-fungible tokens, etc. Study how their value rises and falls, and invest accordingly. Investments are risky, but taking calculated risks can reap high rewards. Consulting a financial advisor could help with this.
Have Adequate Insurance
Purchase life and health insurance policies to secure your family’s interests, maintain their standard of living and be financially protected for medical emergencies, through various policies. You should thoroughly research the insurance policies you’re interested in and compare policies across various providers to choose one that meets most, if not all, of your criteria — you might want to seek an expert’s guidance for this. Purchasing insurance will strengthen your financial security.
Tackle Your Debt
Your credit score and rate of interest are inversely proportional. A low credit score could result in higher interest rates and costs on loans, mortgages and credit cards. To ensure that your credit score is strong when you need a loan, keep an eye on your credit card usage. Similarly, your financial freedom is inversely proportional to your debt. There are several justifiable reasons for taking a loan, but it is advisable to have an escape plan in order to not be held hostage by debts. Always explore and compare the interest rates of different banks before taking a loan. One of the best methods to devalue your debt swiftly and prevent unnecessary stress is to have multiple sources of passive income, like investments.
Plan Your Retirement
It is essential to secure your future. Unnecessary spending for temporary gratification when you’re young takes a toll on your future self. While you should indulge in recreational activities, a good chunk of your income should also be saved to serve as a cushion for retirement.
And finally, if things don’t turn out as planned or if you’re stuck in a downward spiral, it’s always a good idea to get a professional opinion.
Yogita Dand is part of the 1 Finance Advisory Committee for Qualified Financial Advisors — Mumbai Chapter.