Setting goals to attain financial freedom
What Is Financial Freedom?
Financial freedom is the state of having enough wealth and economic security to live the lifestyle you want without having to worry about money. This means having enough passive income, savings, and assets to cover your expenses without relying on a traditional job or source of income.
How to achieve financial freedom is something that drives most people, but financial freedom can mean different things to different people. For some, it may mean being able to retire early and live off their investments. For others, it may mean having the ability to pursue their passions and hobbies without worrying about financial constraints.
To achieve financial freedom, making smart financial decisions, such as saving and investing wisely, paying off debt, and creating a budget, is often necessary. It may also require lifestyle changes, such as reducing expenses or increasing income, to improve your financial security. You cannot achieve financial freedom overnight, but it is a goal that you can work towards over time with planning and discipline.
As you move forward into the next financial year, it is an excellent opportunity to examine your financial plans and set financial planning goals for this year and beyond. It is also a time to reflect on what worked (or didn't) in the previous year and create short to long-term goals accordingly.
How to Achieve Financial Freedom
Financial planning allows you to be prepared for a variety of scenarios in future, planned and unplanned. Hence, let’s look at a few simple practices you can follow to ensure financial wellness and freedom.
Understand your expenses and plan a fixed budget
The key to setting financial planning goals is understanding your current income and expenses, establishing a budget, and sticking to it. To attain a clear assessment of your financial situation, the first step is to evaluate your current monthly income sources and expenditures. Your expenditures include regular expenses such as house rent, educational fees, utility bills, premiums and EMIs, and educational expenses. Next, make a fixed plan that aligns with your current earnings and outflow and stick to it. A fixed budget places a healthy constraint on your spending while also providing you with a budget you should aspire to save.
Pursue the habit of saving
Saving money and achieving long-term objectives like pursuing education, buying a home, or retirement is all possible with a robust financial strategy. Depending on your career stage, current income levels and outflow, get into the habit of regular saving. Set a yearly savings target, and ensure you meet it. With every new year, increase your savings target to ensure you build a sufficient corpus for the future.
Protection for yourself and family
Life and health insurance is a financial safety net that you may rely on in times of need. It is a crucial and priceless instrument. It ensures financial security in a rare life crisis; hence, it must be an imperative part of financial planning. It not only provides financial security, but it also lessens stress later in life, particularly when things go wrong.
Build an emergency fund with your surplus
When you have funds set aside for an emergency, it may take the weight off your shoulders and make it seem like an inconvenience rather than a financial hardship. Begin with a small amount; the main goal is to get started and slowly keep adding until you have saved enough. Your singular objective should be to save at least three to six months of expenses. If you're the sole breadwinner or your income is unpredictable, you may also want to save more than six months' expenses. Your emergency fund should be liquid and in an accessible form always.
Build a long-term asset
A long-term asset such as investing in a house is a great investment option. It will generate passive income every month, and its value will only increase with time, helping you build long-term wealth. To buy a house, it is important to have a sizeable down payment that does not affect your current living standards and near-term plans, a good credit score and a comfortable debt-to-income ratio which will help you get a loan with reasonable interest rates.
Maintain a healthy credit score
A healthy credit score is of utmost importance to map out your finances wisely and achieve your long-term goals. It is a crucial element that assesses a person’s financial credibility and increases the likelihood of credit card sanctions and loan approvals. It also suggests that a person is less likely to default, allowing lenders to extend credit. Thus, the borrower is in a favourable position to negotiate higher limits and lower interest rates with potential lenders.
Take time to assess your financial planning goals, just as you might set fitness or lifestyle goals. Set reasonable goals and desires to avoid overburdening yourself and keep things running smoothly. Remember, achieving financial goals is a step-by-step procedure to be followed one day at a time. When actioned well, financial freedom plans and goals can have a long-term and positive impact on your financial well-being.
Navin Chandani, MD & CEO, CRIF Highmark