The majority of us strive for financial freedom during our working years. In actuality, having a solid strategy in place is the only way to fulfil your aim to become self-sustaining financially. Although the term “financial freedom” may have different meanings to different individuals, it is simply a condition that is attained when a person is no longer forced to work to provide for their basic requirements. You can define yourself as being financially free when your wealth meets all of your needs for the rest of your life.
It is that phase of life, when one is no longer dependent on a job or a career to cover living expenditures, personal and family expenses, and costs associated with entertainment, trips, and medical requirements. You might consider yourself to have attained a degree of economic independence as a salaried or business person when you are not dependent on a consistent source of active income. In other words, you wouldn’t need a job or depend on other people for support since you would have amassed enough riches to cover your living needs for the rest of your life.
Building your retirement corpus:
The objective is to accumulate enough assets that might generate an income stream to enable the goals to be achieved at various times of life. Let’s explore what it takes to become financially independent.
Start by estimating the size of the retirement capital you want to build. The number of years before retirement, longevity, post-retirement costs, growth rate throughout the phase of build-up, growth rate on reserve during retirement, and other important elements should all be taken into consideration when calculating the amount you will require to be financially independent. Keep in mind that all of these are only assumptions, and the actuals in practice may differ greatly. Therefore, before you set out to create your route to financial freedom, maintain modest and realistic expectations. You should keep your future retirement objective in sight. Set reasonable goals for life expectancy and inflation as well. Evaluate the real requirements of each of your goals before you begin to invest. Take into account your monthly spending at current prices. Increase these by the amount of years you have till retirement, assuming an inflation rate of around 6%. You may then calculate the increased monthly expenditures you’d need to cover in order to live comfortably in retirement. Here, the computation is reversed. Calculate how much you will need to save between now and the time you plan to retire in order to build a reserve that might pay you the inflated monthly sum. Consider the corpus of the provident fund that you would have built up as well. One shouldn’t start planning and saving for retirement unless they are certain of the amount of money they need to set aside each month.
Start to invest early:
Your prospects of achieving financial autonomy will increase if you begin investing earlier. People who get off the starting blocks first have an edge over others who do not. If you start saving when you are 25, that is, when you are probably you are in your first job, you can start for the retirement corpus accumulation by setting aside 5–10% of your net income until you are 30, when you are probably married. Here, the head-start offers your corpus an added benefit even if they decrease a little bit in the years to come. The benefit stems from compounding’s ability to increase your money over time, which means that the earlier you start, the more time it has to do so. Early saving, even in little increments, will enable you to amass a sizable investment portfolio. The key is to consistently invest and to continue investing the returns that you make as well. Your profits will therefore contribute to receiving larger returns.
The outcome depends on the route one takes. Select the appropriate asset type, such as equities, for long-term objectives. It should be the goal to achieve returns that are at least 4% greater than inflation. The maturity corpus is impacted by even the smallest variation in returns. Real returns, not nominal returns, are more important for building wealth over the long run. Studies has demonstrated that over the long term, stocks have produced higher real returns than any other asset type, including gold, debt, or real estate.
An early start in equities mutual funds also develops an efficient investment habit. The markets continue to be erratic in the short- to medium-term, but they stabilise over a longer time frame. An investor who has experienced the ups and downs of such a market is often unaffected by such frequent oscillations and is set for a long tenure.
Additionally, while investing in shares, make sure your asset allocation strategy includes a variety of assets, including debt instruments, gold, and real estate. You may make sure that, among all other financial instruments, mutual funds, National Pension System (NPS), and Public Provident Fund (PPF) are used to accumulate savings for retirement.
How does SIP help you in your investing journey:
A systematic investment plan (SIP) is a key component of mutual fund investing. Numerous studies have already demonstrated that returns from SIP investment are significantly higher than returns from lump sum investing. This is due to the fact that funds invest in equity assets at all levels in SIP and therefore the average cost of owning units is lower. The SIP strategy does a great job of reducing the risk associated with market timing.
Instead of putting everything at once, SIP entails investing a certain amount of money at regular periods. The majority of investors who wish to routinely engage in the market but do not have a sizable surplus of cash to invest would benefit from this type of SIP investment. When you invest through SIPs, you are not trying to time the highs and lows of the stock market; instead, the price of your investment is spread out over time. Investors automatically buy more units when the market declines and they buy fewer units when the market rises.
It basically means that you purchase fewer units when prices are high and more when prices are low. As a result, the average cost per unit decreases with time.
Start moving money away from stocks and divert them to less volatile debt assets when you are around three years away from your target. This aids in capital preservation. Make sure you maintain some exposure to stocks, ideally through balanced funds. This aids in reducing the impact of inflation on your funds.
Ensure adequate Insurance:
Another viewpoint on financial independence is to reach a point in life where all of your future aspirations are taken care of. Your family’s objectives and level of life must not be hampered by the absence of the breadwinner.
Make sure your medical insurance requirements are sufficiently met as you get ready to become financially independent. Anybody can have a medical emergency at any time. It may be quite detrimental to one’s money if one is not financially equipped to deal with it. Private healthcare institutions, where you are most likely to end up, have expensive and rapidly escalating medical expenditures. The predicted rate of healthcare inflation is roughly 17%, far higher than the overall economic inflation rate.
Selecting between an individual health plan (IHP) and a family floater (FF) health plan is the first step. Family floater, which has a smaller premium outlay than an IHP, is best for people with small, young families and, ideally, no negative medical history. Specifically around age 40, add a policy for critical illness to your health insurance. Continue to renew on schedule. Purchasing health insurance is simply insufficient in light of escalating prices. If you wish to boost your coverage later, you should find out what alternatives the insurance provides you with and how much it may be enhanced.
Final Summary:
Notably, you must achieve all of your financial objectives before you can call yourself financially free. The cost of the children’s further education and their weddings ought to have been covered. In essence, you should no longer be financially responsible for your children. Additionally, women often outlive men and hence you need to save for their retirement requirements for a far longer period of time than men do.
It is not simple to achieve freedom. Stop procrastinating and start saving today. Create a savings plan so that money is set aside from income and the remaining amount is used for expenditures. Market fluctuations and volatility are inevitable, but one must keep to their long-term strategy of investing to build their retirement corpus. After all, the path to financial freedom is paved with fear, but once it is taken with a plan in place, it is comforting to partake in its benefits.
