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Financial freedom in India is not a new concept, but a large chunk of working professionals have begun working towards it over the past decade. That’s what data from The Global Economy suggests.
India’s score on the financial freedom index has gone up from 30 in the 2000s to 40 in the 2010s (on a scale of 100). Let’s explore what financial freedom means in the context of India.
There are many ways to define financial freedom and different people look at it differently. As a baseline, financial freedom is the financial ability to sustain a lifestyle you enjoy while doing things you enjoy.
It is generally associated with elements like eliminating debt, quitting one's job, and having multiple sources of income. In a nutshell, financial freedom allows you to live life on your own terms.
That said, achieving financial independence is more than just about money. It’s also about the freedom and luxury of having time and the peace to relish the finer things in life.
You may have heard of the F.I.R.E movement which is one of the ways to achieve financial freedom in India. But it’s very difficult to stick to (like a keto diet) and requires you to cripple your lifestyle.
This article isn’t about F.I.R.E or making exorbitant sacrifices to become financially free. It’s about making some sacrifices and starting small yet following effective steps to achieve financial freedom in India.
Achieving financial independence is a journey that needs to be broken down into simple checkpoints or steps. Let’s look at them in greater detail.
The road to financial freedom begins with your bank account. Where you currently are will play a major role in determining where you want to be and more importantly, how to get there.
Don’t worry if your bank balance is relatively low. Financial freedom is also about STARTING as opposed to dwelling over your apparent lack of funds. Moving on, you’ll also have to evaluate your debts.
We’ll talk about debts in greater detail later on, but remember that achieving financial independence requires you to have zero debt. In fact, it’s one of the true pillars of being financially free.
This brings us to your net worth, which is the sum of your assets minus your debts. In an ideal world, it should be in the green. If it’s in the red, speak to a trained financial professional like a wealth coach ASAP.
You can use this net worth calculator to visualize your current financial health
Also, factor in your current paycheck as this will be useful for:
1. Setting investment goals
2. Determining affordability
Once you’ve done that, it’s time to move towards #1, putting your goals down for the short, medium, and long term. It’s a very important step in answering the question of how to achieve financial freedom in India. You can consult a Cube Wealth coach or download a Cube Wealth application.
“Goals win you games, but a good defence wins you trophies”. This is a popular maxim in the world of sports but it can also be applied to financial freedom.
Goals are helpful and indeed important to build wealth for various life stages that eventually tie into the goal of achieving financial freedom in India. A good financial goal is:
1. Tangible: can be achieved realistically
2. Clear: no wiggle room for vagueness
3. Flexible: has room for future modifications
Furthermore, financial goals are generally divided into “terms”:
1. Short-term: for 0 to 3 years (wedding)
2. Medium-term: for 3 to 5 years (Euro trip)
3. Long-term: for 5+ years (retirement)
We’ve spoken about goals, now it’s time to talk about good defence - your emergency fund. It will be your fallback option for uncertainty like health emergencies or unexpected life events.
Most financial advisors suggest that an emergency fund should be worth at least 6 months of your paycheck. But remember, our goal is financial freedom which requires not living paycheck to paycheck.
That’s why your emergency fund should have more buffers in the form of solid investments that earn passive income and a conscious attempt to save money from your salary during your heyday.
That said, nobody can be certain of what’s to come in 30 or 40 years. Things that may change:
1. Your life events
2. Market dynamics
3. New assets launched
Thus, it is good to consult a reliable financial advisor to help you plan and stay on top of your ever-changing financial goals.
Achieving financial independence is simply not possible if you have debts. In fact, the aim of financial independence is to have a green net worth that’s enough to sustain your lifestyle and meet your goals.
Keeping that in mind, you must pay off your debts wisely or consult a trained financial professional who can help you do it. Yet, you may have essential loans like a home loan or car loan.
These types of loans are generally paid off with EMIs so you’ll have to find the right balance between paying off the loan and investing in the right assets that can nudge you towards financial freedom in India.
The question of “how to achieve financial freedom in India” can perhaps be answered by one simple phrase - “Pay yourself first”. This loosely translates to building wealth for your future self.
Why? Because you want to achieve financial freedom in the future, that is, not be dependent on living paycheck to paycheck or even a pension. Instead, you’ll create a portfolio that pays you.
You can pay your future self by inculcating good financial habits and with reliable investments that generate a sizable amount of passive income and returns. Your options for this could include:
1. Mutual funds
2. P2P lending
3. Asset leasing
3. Stocks
4. Gold
5. Real estate
6. NPS
Note that taking out debt means borrowing money from your future self which is something that we’re actively trying to avoid to achieve financial independence.
Being frugal is one of the sacrifices to make if you want to achieve financial freedom. No, this doesn’t mean skipping meals or not getting health insurance like some people would lead you to believe.
It’s about tracking your spending and ensuring that you’re not overspending. You’ll begin to notice the finer details of your spending habits that’ll help you work towards curbing unnecessary splurging.
Tracking your spending on coffee is a popular example of this. Let’s say you can’t resist a good french brew every morning and spend at least ₹2,000 per month on it. This adds up to ₹24,000 per year.
Remember, we’re not talking about avoiding coffee. Instead, it’s about monitoring your spending habits and making adjustments to accommodate coffee.
Say, by not spending too much on other luxuries like AirPods or an Armani handbag that costs more or less the same. This will help you stay within your monthly budget for achieving financial freedom. You can consult a Cube Wealth coach or download a Cube Wealth application.
In fact, tracking your spending can ensure that you can indeed enjoy the finer things in life like a good morning brew.
It wouldn’t be a stretch to say that financial freedom is all about generating multiple sources of passive income. To start with, this will pay your future self as we discussed earlier.
At the same time, your additional income sources like a P2P lending investment can act as a pseudo paycheck that you receive in the form of recurring payouts.
Investments are one form of additional income Professionals in their 20s and 30s have been known to work on side gigs to earn extra money for their goals like achieving financial independence in India.
Overall, the aim of building a portfolio of additional income sources is to make your money work for you so that you can eventually achieve your goal of financial freedom.
Can a bank fixed deposit that earns 4.5% interest at the most help you achieve financial freedom in India? Logic generally says no because of two reasons. One, that’s too low of a return on investment.
Two, the inflation rate in India has been known to fluctuate between 5% to 7% over the past decade. This means that investing in bank FDs equals losing money due to inflation.
That’s why it’s important to invest in quality assets to achieve financial freedom in India. There are certain benchmarks that investors like to look at starting with whether the asset can beat inflation.
Other popular indicators include track record, consistency, management quality, and more. Given all of this, a list of good quality assets can include:
1. Equity & debt mutual funds
2. International mutual funds
3. ELSS mutual funds
4. Indian & US stocks
5. P2P lending
6. Asset leasing
A good way to learn more about high-quality assets is to research how they work and why they’re top quality. Useful resources for this include:
1. Stocks Vs Mutual Funds – Differences, Returns, Risks, Performance
2. 5 Important Things To Keep In Mind Before Investing In US Stocks
3. What Are Alternative Investment Options In India?
4. Is Asset Leasing The Right Investment For You?
You can also consult a reliable financial advisor with a strong track record to help you plan your investment portfolio and achieve financial freedom in India.
Ans. The concept of the "7 Steps to Financial Freedom" has gained recognition through the works of various financial experts and authors. It does not originate from a single individual but comprises well-established principles in the realm of personal finance.
Ans. Although following all seven steps in sequence can provide a structured framework, the applicability may differ among individuals. Some may need to prioritize specific steps based on their existing financial circumstances and goals.
Ans. The pursuit of financial freedom encompasses financial decisions and investments that entail inherent risks. It is essential to be cognizant of these risks and make informed choices. Diversifying investments and seeking professional guidance can mitigate potential risks.
Ans. The concept of the "7 Steps to Financial Freedom" has gained recognition through the works of various financial experts and authors. It does not originate from a single individual but comprises well-established principles in the realm of personal finance.
For individuals in India, leveraging opportunities such as tax-saving instruments, government-backed savings schemes, and the power of compounding through investments can be instrumental in realizing financial freedom. Additionally, cultivating a culture of frugality, prudent spending, and wise financial decision-making can help accelerate progress toward financial independence.
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