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Dear Qualified Financial Advisor,

The amount of information and advice around dealing with money is overwhelming and confusing for someone like me, who isn’t familiar with the world of finance. But I know that in order to turn my dreams into reality, I have to get my finances in order. I’m approaching 30, and one of my current goals is to be financially secure by the age of 45. I don’t have a proper strategy in place to achieve this and I’m not sure if it is even possible to reach that stage in this timeframe. Any tips on how I could go about this?

An Eager Planner

Dear Eager Planner,

The confusion around planning your finances is completely understandable — basic financial literacy, which is possibly the most important tool to have as an adult, often isn’t inculcated at an early age. Through my interactions with hundreds of working professionals in their 20s and 30s, I’ve observed that this absence of money management skills, along with comparisons to peers and societal conditioning that stresses on earning enough money to meet your needs but not on what to do with money once you’ve earned it, results in losing sight of your own goals and feeling ill-equipped to make financial choices.

Financial freedom is a state where you have enough to not only meet your needs, but also have the luxury to make fulfilling choices that add meaning and value to your life. Handling money and prioritising your needs and wants demands emotional intelligence, and this is where most of us face challenges. For instance, we might make impulse buys for instant gratification — knowing that it will take a toll on our savings — or be unaware of our spending patterns, or have trouble setting up a well-allocated budget in line with long-term goals. People assume that they need to understand complex financial models and jargon in order to manage money well and be financially free. Of course, proper planning and some knowledge of financial markets are important, but personal finance is not rocket science — and not knowing everything from the get-go should not prevent you from taking the first step.

Acknowledging the power of compounding is the best way to start with small but consistent investments. For instance, someone in their early 20s can afford to allow their investments to grow over a good 15–20-year period. It might also help to ‘gamify’ your financial goals — set up targets for the short, medium and long term, think of the rewards that await you later, and work towards them at a reasonable pace.

Besides taking these steps, I would ask anyone who wants to be financially free by 45 to follow some basic rules while keeping in mind that these should not be treated as absolute — individuals must also take into account their unique financial traits and circumstances. For one, keep your saving ratio upwards of 30% — it helps you strike a healthy balance between spending and saving, and direct this money towards long-term goals and investments. Secondly, use the ‘100 minus age’ rule to decide what part of your savings should be targeted towards equity investments — so if you’re 25 years old, you can place 75% of your savings in equity. Younger investors can typically take on more risk, while the risk-taking ability will be lower for a middle-aged person who has more financial obligations. And finally, restrict physical assets like gold and real estate to 30% of your portfolio. While these asset classes are important and do generate returns over a long period of time, which helps beat inflation, a portfolio skewed towards physical assets may not help grow wealth in the long run. 

You may not see the full impact of compounding in the first 6–8 years of holding your investments, and volatility in the markets might even make you doubt your equity holdings. While investing legend Warren Buffet has been often quoted to say, “Be fearful when others are greedy and greedy when others are fearful,” many of us don’t actually invest in equities during a market downturn — but this is where an experienced advisor who understands the nuances of financial behaviour can help you see reason in numbers and patiently sail through rough patches. So, if you hope to achieve financial freedom by the age of 45, you might want to keep these points in mind, consider seeking guidance, and start soon to reap greater rewards. 

Gaurav Karnik

By Gaurav Karnik

Co founder, Fortunexus pvt ltd

Gaurav Karnik is a financial planner and advisor with over a decade of experience in providing financial advice.

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