Are You On Track To Achieving Financial Freedom?
Financial freedom can be achieved only if we plan our investment, follow a strategy and are willing to make a few sacrifices today to have a better tomorrow.
All of us would like to lead a comfortable retired life, provide the best education to our children, own a comfortable house, and have a few other things that could facilitate a particular lifestyle. Needless to say, only financial freedom can help us achieve all these objectives. The key, however, is to realize that financial freedom can be achieved only if we plan our investment, follow a strategy and are willing to make a few sacrifices today to have a better tomorrow.
Earning, saving and investing are the three main components for achieving financial freedom. Although each one of these has an important role to play in this process, the order of importance will change depending on what stage of life you are in. We all understand the importance of earning and working hard to improve our ability to earn more. However, many of those doing well in their career often don’t consider it necessary to save, assuming that there will always be enough money available to take care of their future needs.
How much you save will largely depend on how financially responsible you are. Simply put, being financially responsible doesn’t require you to live below your means. Instead, it requires you to avoid buying things that you don’t really need. The attempt should be to save as much as you can. Remember, if you spend 100 per cent of your income, financial freedom will remain a distant dream.
It is also important to understand the difference between saving and investing. Saving is what you keep aside out of your income and investing is when you put your money to work in a manner that it starts contributing towards achieving your investment goals that are to be achieved over varying time horizons. Remember, the more you invest, the faster you attain financial freedom. Now that we know the role of earning, saving and investing in achieving financial freedom, it is equally important to understand the process that can ensure that there are no slip-ups.
Most Indian investors prefer to invest in safer and fixed return yielding traditional investment options like fixed deposits, bonds and small savings schemes. While there is nothing wrong with worrying about the safety of one’s hard-earned money, it is equally important for investors to understand risks that emanate from ignoring the risk of inflation. It is a proven fact that traditional investment options can make you compromise on liquidity, flexibility, tax efficiency and real rate of return.
Considering that these traditional investment options offer lower returns and are taxed at your nominal tax rate, the real rate of return would usually either be negative or minimal. Consequently, you may fail to stay ahead of inflation over the longer term and hence you may be compelled to compromise on some of your important goals like children’s education and marriage and retirement planning.
Therefore, it’s time to look beyond traditional investment options and include market-linked products in the portfolio. Although market-linked products have attendant risks like volatility and uncertain returns, a careful selection of funds based on your asset allocation as well as investing through a disciplined investment approach can not only minimize these risks but also provide opportunities to earn higher returns. Needless to say, higher returns would allow you to have the freedom to do what you want at different stages of your life. Mutual funds have an important role to play since they offer a variety of market-linked products, allowing you to choose ones that are most suitable for your time horizon and risk profile.
Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.