I’ve always talked about the importance of achieving financial freedom.
Financial freedom can give your life a purpose. You can live your life fearlessly and do what you love without ever worrying about money. Travel around the world, play your favourite sport or do nothing. You have the freedom to do anything.
In this article, I will talk about 5 Ways through which you can achieve financial freedom.
Concept Of Financial Freedom
People often confuse financial freedom by being rich. Sure, rich people have more ways to achieve financial freedom but being financially free is not about being rich. There are many rich people who are not financial free. Let me clear the concept of financial freedom to you.
Financial Freedom is simply about having enough passive income to cover all your living expenses.
For example – Let’s say your monthly income is 1 Lakh Rupees. This is sufficient to take care of your living expenses for a month. But to earn this income you have to put in hours of work. Now, let’s say you saved 1 crore rupees and invested in mutual funds that can give you a dividend at 12% annually (this is just a supposition). 12% of 1 crore is 12 Lakhs. This amount is the same that you are getting from your primary work. Therefore, once you’ve developed a source of passive income that can match your primary income or overtakes it then you can call yourself financially free.
I hope the concept is clear.
The point is to develop a source of passive income that can take care of all your living expenses. Now your living expesnses can be less than 20,000 per month. That means you need a passive source that can pay you 20,000 every month for the rest of your life and you will be financially free.
The point of financial freedom is to attain the freedom to do whatever you fee like instead of working for the money.
Let’s see how 5 Ways to achieve Financial Freedom.
1. Increase Financial Awareness
Where is your money?
This is the question that you need to ask yourself constantly to keep yourself aware of your finances.
Increasing your financial awareness is step one in the equation.
You must know where your money is and how much is it?
- How much is invested in Mutual Funds?
- How much is in your bank(s), FDs
- What’s the maturity date of each FD?
- Are there any RDs? How much? And for How Long?
- Any SIPs? When did you start with that? When are you planning to end it? And remarks or goals for it?
- Is there anything under Debt funds? How much?
- Is there anything in Liquid Funds? How much and for how long it has been there?
- Have to invested in Gold?
- What are your daily expenses? Are those expenses constant?
There are many ways to keep track of all your money. You could either go for a money manager app on your smartphone to maintain all your expenses and investments. Or if you are an old fashion guy like me then maintain a Google Sheet with all your expenses.
I keep a track of all my money in excel sheet with beautifully color-coded columns.
This helps me to maintain a holistic view of my finances. Like a bird’s eye view. And when you have this view in front of you, your mind actually starts to link different pieces together and sometimes you come up with wonderful ways to make more money.
This usually happens with me when I see unused money spread across. That is like the perfect opportunity for me to go crazy and invest it all in high-risk-high-profit stocks.
Maintain a holistic view of your finances if you don’t have already.
2. 50-30-20 Rule
This is a mantra to financial freedom.
For this you must answer these questions first,
- What is your total income?
- What is your expenditure?
- How much do you save, invest or give away?
There are different ways to interpret this rule. But the one that you need to attain financial freedom is this,
Let’s say you earn 1,00,000 INR per month. The first thing that you need to do is keep aside 50,000 INR. That will leave you with 50,000 INR. Now invest 30,000 INR out of the remaining money. The remaining amount of 20,000 INR is what you can spend on your expenses and needs.
This is the fastest way to increase your wealth. Once you have sufficient amount saved up, invest that into a low-yielding-low-risk bonds or debts and reap the benefits.
This is a slow but sure way to become financially independent.
Let me introduce you to the concept of frugality.
Many people think (the wrong way) that frugality is about being “Kanjoos”. Well, you are wrong my friend. Frugality means thinking twice or thrice before spending any money. Frugality means spending only what’s needed.
It doesn’t mean you should draw yourself from buying the essential stuff, it means asking yourself whether you need it. And if you need it you should have it. That’s frugality.
“Frugality is a quality of being economical with money” ~ by Google.
When you practice frugality and think very closely about every dime that you are about to spend makes you aware of your finance even more. Now, you can accurately predict how much you can save and what is needed to save that amount.
Combine this with the above rule and you will find a way to save more than 50% of your income.
Increases your Risk Taking Abilities
Risk is a way to increase your wealth very fast. Risk for me is a tool by which you can boost your income by a lot in less time. For example – recently wipro shares were down, I made a purchase. It was a significant purchase at the price value of 430 INR. Two days later the price shot up to 473 INR. I sold all immediately and mode 8000 INR. This was possible only because I had the ability to take risk with my money and in the process I gave a boost to my current month’s income.
Most people can do it very easily but if your income is low and you cannot make your ends meet then you should focus on increasing your income first. At least to a level where you can survive easily.
With that said, let’s move on to the next concept i.e. to understand risk taking ability.
4. Understand Risk-Taking Ability
When the car runs smoothly, we often tend to forget the speed limit. And that’s where the accidents happen. Same goes with your finance. If you are going great, you tend to overlook or mis-calculate the risks or mis-calculate the risk and go for it. That is where we lose the most.
You should always maintain a sheet of all your risks. And you should always quantify it.
Like 10% my total savings is my risk percentage and I’m not gonna move past that.
And as you hit that risk mark, you should stop immediately. Wait until past risks pays off. That is the power.
By doing this you will also realize that the more you think about the game the better you become. And instead of planning for very long term you start to break down your goals into months and sometimes days. And when you can plan for a few days ahead with precision you can actually attain the long-term goals.
Just make sure that you are not going par with your risk taking abilities.
When Risk Takes Everything Away
My father told me this story. He knew a person who was new to the stocks and started with intraday trading. Every other day he use to come and say things like I made 3k today, I made 2k today and I made 8k today. And everyone was impressed and some was curious. So people who heard his stories started trusting him. And then a few of them stated giving him their money to invest in the stocks.
The first few days were good for all. They all earned money out of it. Now, when things go well, you tend to forget the risk. So, now out of greed one person invested more than 10 lakhs rupees. He was hoping to earn big, at least 1 lakh in a day. And guess what happened? He lost big time. That day market fell down badly and he lost more than 2 lakhs.
After that he was broken. He was so sad that he started hating the stock market.
Well, stock market is not the bad thing here, his greed and mis-calculation is.
So there is a good lesson to learn from this story.
Do not get motivated by the big money stories or movies that shows a person risking everything and coming out as a millionaire. Those type of shits shit doesn’t happen in the real world. Well even if it happens it doesn’t happen so often.
Instead of thinking out of greed, always think whether you can afford to lose that much before taking a risk. And what is the profit if you get successful. And profit should always be 3 times of the loss. That’s my motto.
Forget about the thing called overnight riches.
Warren Buffet being the best investor of all time, even for him it took more than 20 years to build a significance wealth. So, always choose wisely when it comes to your risk taking ability.
5. Ensure Yourself Properly
Always make sure that you and your dependents are properly insured.
Do take mediclaims policies for you and your family.
You already know how much does it take to earn 6 lakhs (1 – 2 years) and how much it takes for a hospital to take that money (1 – 2 days).
Make sure you a are ensured properly.
Take the necessary Term Insurance and Mediclaim insurance. Nobody has seen the future, it is only wise to stay prepared for the worst.
And if you invest early, your premium is much smaller as compared to if you invest later on.
These are the some of the points that I wanted to discuss with you. By following these advice you will definitely make a good early retirement with lots of cashflow. Also, these are some of the things every school should teach their children. This basic financial knowledge goes a long way in creating long-term wealth for you and your generations to come.
Being financially free is just a matter of making a few right decisions in your life and daily habits and keeping the patience to let it grow and support you later in life.
Let me know your thoughts in the comments below.