20 Mar 5 Steps to Financial Freedom
Opt out from the rat race; create a better future for yourself by understanding the true meaning of Money, Investments & Insurance by following these 5 steps to Financial Freedom.
Financial freedom continues to be the most elusive paradigm to conquer and the knowledge about finances, given the huge influx of options and avenues available nowadays, is indispensible. Most of the people I meet are stuck in some rat race, be it in their jobs, businesses or maintaining their so called Social Status. Parents do anything & everything to instil in their child, right from the onset, the need for scoring good marks & studying really hard so that the children get admission into good colleges because it is a cornerstone for scoring a good job. They literally push the child to go beyond his capabilities to achieve this.
There is so much hue and cry all around, elucidating the gravity of earning money but there is so little that is being done or said about the most cardinal question, which is “how money works!”
People get a good degree & then they join a big company & start working, after a few years they feel they are trapped & are not satisfied with what they doing. Even the money they are earning does not give them the peace & happiness they want. So what went wrong along the way?
In the endless pursuit for money, people get overworked, tired and eventually end up doing something they don’t really relate to and this makes them even more restless. Working over time, not being able to spend time with the family, peer pressure to perform at the office & personal life worsens the situation even more. It is appalling to know that the concept of”burn out” has become a common occurrence and so many people are suffering from this. The actual reason of their being unhappy & dissatisfied in life is their little or no understanding of how money actually works. It is surprising but most of the people I have met, from all walks and spheres of life, do not properly understand how money & investments work for them. We rely deeply on what is being preached to us but what we need at the moment is more extensive information about this subject.
This Money, Investment & Financial Freedom is a long topic to write on & cannot be summarized in one go but I am presenting before you a crisp 5 point dose to cure this problem. At Least this is what you can start with.
- START INVESTING FOR THE “REAL RETURNS” Most people have a pre conceived notion about fixed returns when it comes to Investing, they don’t want to understand equities coz they think they are too volatile and elusive. But what they don’t realise is that, Fixed deposits, which is literally the buzzword for safe investments do not in the literal sense yield fixed returns. In the last 20 years Fixed Deposit rates have come down from 12% to 6.5%, so how is it a fixed return ? If you had planned something for yourself with a 20 Year horizon, you are not getting the money required for it at the end simply because the returns came down over a period of time & to make things worse the average inflation rate from last 40 years is around 7% so the real returns you have got in hand after deducting inflation & taxes is zero to negative.
On the other hand most of the people treat stock markets as a gambling arena, they just don’t want to talk about it. Let me ask you to do an activity.
From the time you wake up in the morning start writing down the products & services you use of any company all along the day till the time you sleep at night. It can be your toothpaste, soap, breakfast cereals, milk, car/bike, fuel, mobile, laptop, clothes, accessories, your phone service provider, entertainment, shopping & so on. Now check how many of these companies are listed on the stock market. You will be hugely surprised to see the numbers. These brands & companies now make your life. Your life is nothing but a reflection of these companies. For example, we all have been using some very basic products or services since our childhood but we don’t have the slightest idea, how these companies have grown all along these years.
For example : Hawkins Pressure Cooker is not at all a new word for any of us, our mothers have been using them for long to make good food mingled with mother’s love for all of us. But most of us don’t know that the sales of this cooker have raised multi-folds in last 1-2 decades & it reflects in its price as well. Hawkins price has moved from Rs 40 to Rs 3000 since year 2000 till date.
Relaxo, Hero Honda, Maruti, HDFC, SBI, Bajaj, Colgate, ITC, Airtel, Eicher Motors, L&T, PVR, Jubilant Foodworks, Indian Oil, HPCL, Bata, companies making pens, paper, phones, computers, footwear, clothes ,electric switches, fans, tubelights, furniture, tyres etc, the list is endless. All these companies & products are the ones which you use daily but you are just the consumers of their products, it’s time you become their owners by investing in these companies. Take the route of Mutual Funds or direct stock investing whatever you like but don’t just sit & become their consumers. Remember Hero Honda sells more motorcycles in a day today than it use to do in a year a few decades back, that is the kind of growth these companies are seeing. You definitely don’t want to miss this, believe me. But remember you have to see these as companies & not some trading instrument, Invest in them for decades & you will be wealthy & financially free.
“If you don’t find a way to make money while you sleep, you will work until you die.”
- LIFE INSURANCE “SAHI HAI” Now let me be very clear here, I am not talking about any bogus & useless life insurance product here which your agent has been endorsing with the pretext of saving your taxes. What I am talking about here is “Pure Term Insurance”. Now most of you must be knowing what term insurance is, thanks to the endless TV advertisements by various life insurance companies but still term insurance is a life insurance cover you get at a very nominal price with a big sum insured to cover the risk of death of the earning member of the family so that his family don’t have to suffer financially in case of untimely demise of the earning member. Usually you don’t get the premiums paid at the end of the term in term insurance. Its works mostly like your car insurance, you pay the premium every year, if nothing happens your premium is gone, if some accident happens then insurance company gives you the claim. Only in this case when the claim arises i.e. if the insured person dies family gets the claim & Insurance contract is over. Usually Term Insurances cover Accidental, Natural & Suicidal Deaths.
Now just imagine about a family whose sole bread earner dies untimely in an unfortunate mishap, how would his family survive, how will his children continue their education, they will have to substantially downgrade their standard of living just to survive. Moreover the family will eat into the assets created by the man just to keep afloat & in the process they will sacrifice their future as well coz those assets were invested for their future needs.
A simple term insurance solves all these problems. By paying a small premium you get a complete peace of mind. It’s a very important part of financial planning.
“Unless you are immortal, you need life insurance.”
- HEALTH INSURANCE “JARURI HAI” Rising medical cost is not something you don’t know about but what is the plan you have to tackle it if such a need arises? Some may say I have kept aside some funds to handle the issue but what if something big some up? Critical illnesses like Cancer, Tumour, Heart problems etc can eat into all of your savings & land you in debt trap as well. I have seen people selling everything they have in a bid to save their loved ones from these deadly medical issues. I am sure you must be knowing someone from your around who has faced such a problem. In most of the cases the patient does not survives & the family loses everything as well in the treatment cost or even if the patient is cured the financial health of the family is affected severely.
All these can be covered by taking a simple health insurance, there are many amazing insurance products being offered now at very nominal prices which cover almost all the health issues. Go & study them. Basically what health insurance does is that it covers the risk of losing your assets, your lifestyle, your well settled life & your mental peace in time of medical issues in your family. You should focus on the best treatment you can get for your loved ones in times like these & not be worrying about the hospital bill all the time. One more important thing is to take health insurance well in time & should cover you for a decent sum insured. A 1-2 lac sum insured policy is as good as nothing in today’s times.
“Take the Health Insurance when you don’t need it, coz when you need it you don’t get it”
- MAINTAIN EMERGENCY FUNDS This is one of the least followed steps in financial planning but in my view is the most important of them all. One should have a 3-6 months corpus of his monthly family income to cover the short term expenses like paying for child’s school fee, outings, house repairs, family functions & some surprise expenses which come out from nowhere. If you are not maintaining these funds then every time you have a surprise expense you are going to dig into your investments & by doing that you will disrupt the compounding effect on your Investments. Compounding is something we all have learnt in school but I am yet to find a person who truly understands it, it’s one of the prime reason most of the people are living average life’s but that’s for some other time coz If I started writing here then this magazine will convert into a book.
So by maintaining emergency funds you stop yourself from ruining your financial freedom for which you have been working very hard through the way of your investments. This one point can make all the difference in weather you will be wealthy or not.
- CREDIT CARDS “A BIG NO NO !” Debt is not going to help most of us simply because most of us don’t know how to handle it for our good. Credit cards lead to overspending, as simple as that. In these times of malls, online shopping sites & easy EMIs you are bound to overspend no matter how much you control yourself. Having a credit card is only going to make things worse. Simply avoid them. Even better, cut your credit cards into half or burn them, you will feel bad for a while but after sometime you will definitely enjoy the freedom you will have.
“Modern slaves are not in chains, they are in debt.”
It is imperative, that we imbibe the knowledge of finances ourselves and also inculcate the same into our children. You will need a good financial advisor to handhold you for taking important financial decisions and sailing through the long journey before you finally start to experience the coveted stage of Financial Freedom.
“Financial Freedom is doing your job/business because you want to, not because you have to!”
Introduction of Author
Aman Gupta is a Financial Planner having an experience of over 12 years in the field of Personal Finance & Investing. He has helped over 1000 clients in understanding the true meaning of finance, money & investing. He is based in Chandigarh but serving clients across the globe & is trying to educate more & more people on how to manage their finances & create a better life for themselves.