10-Step Process to Achieve Financial Freedom

Like food, water and money another tool which enables you to buy the things for living the life you want is financial freedom. In order to achieve financial freedom, you need to consider money as a tool to achieve your dreams and lead a stress-free life without any financial woes. In this column, we will discuss what financial freedom is and how any individual can achieve financial freedom.

What is Financial Freedom?

The definition of financial freedom may vary from person to person. But for all the people the financial freedom may look like,

  • Freedom to choose career what you love without any boring 9-to-5 job.
  • Take an international vacation without compromising your budget.
  • Without any financial woes about the marriage cost or education cost of children.
  • Freedom to retire early i.e. at an age of 50, a decade early than the usual retirement age of 60.

How to achieve Financial Freedom?

Needless to say, the first step to achieve the financial freedom you need to write your goals with a time horizon in black and white. This is because it is much easier to achieve the goals when you know exactly what goals you need to achieve and by what time you will achieve your goals.

Set life goals

In order to achieve financial freedom, you must have a clear view and a good understanding of the expenses that will be required to live after retirement. The current inflation rate is 7% per year. It means next year you will need Rs. 107/- to buy the same product you can buy now with Rs. 100/-. So if you can fulfill your requirements with Rs. 20000/- per month now, you will need Rs. 1, 52,245/- approximately per month after 30 years. Consider the case of inflation and do the needful.

effect of inflation

Retirement planning

Now let’s calculate the desired corpus you need to accumulate when you retire at the age of 60 years if you have started your professional career at the age of 25 years.

Suppose you have started earning at the age of 25 years and your earning is Rs. 25000/- monthly. So, you have got 35 years to achieve a sufficient amount in order to make a happy and prosperous retirement life.

Your yearly salary – Rs.3, 00,000/- assuming Rs. 25,000/- a month.

Your Yearly Household Expenses – Rs. 1, 80,000/- assuming Rs. 15,000/- a month.

Term insurance premium – Rs. 7,000/- assuming assured sum of Rs. 1 crore for a term of 30 years.

Health insurance premium – Rs. 8,000/- assuming a cover up to Rs. 5 lakh/ year for a term of 30 years.

Expenses on festive season = Rs. 25,000/-

Total Expenditure

So, your expected expenses throughout a year is = Rs. 1, 80,000/- + Rs. 7,000/- + Rs. 8,000/- + Rs. 25,000/- = Rs. 2, 20,000/-.

Then, the expenses at the age of 60 years assuming the current inflation rate of 7% will be = Rs. 21 lakh. [excluding term insurance premium and health insurance premium since they are fixed at the time of buying].

So, you have to accumulate a corpus of [Rs. 21 Lakh × 20 years = Rs. 4.2 Crore] at the age of 60 years assuming you will live at least 80 years.

Let’s assume you have two kids i.e. one daughter and one son. So, the Education cost of son & daughter as well as the daughter’s marriage after 20 years = Rs. 40 Lakh.

Total amount need = Rs. 4.2 Crore + Rs. 40 Lakh = Rs. 4.6 Crore.

Financial Planning

Make a budget

Earning and saving both are equally important. Saving is needed to secure future or to meet the future obligations such as after retirement life, education cost of children, and marriage cost of daughter if any, to own a house, treatment cost of self and family members, to finance the son for his business or any other occupation. So, from the rising of sun i.e. early days of employment, you should concentrate on savings and proper management of the savings to beat the inflation rate.

Now the question arises how much you should or can save. You should divide your post-tax income into three parts and allocate every part for every sector. Your income will be divided as 50% on needs, 30% on wants and the rest 20% for saving. Surround yourself with financially educated and conscious people from whom you can learn about financial planning. Also, make sure that your group of friends comprise people who share similar financial goals.

50/30/20 Rule

Buy a term insurance plan and family floater health insurance policy

What will your family have to face on your sudden demise if you have taken a home loan or car loan or education loan? It is a big question. Here comes the role of term insurance plans. Term plans can ensure the future of your family. In the case of health insurance policy even if you are young 10-20 day hospitalization costs sway all of your savings. So, take insurance policy at a younger age. You need to pay a lesser premium if you take a term plan or health insurance plan earlier.

financial freedom

In the case of Term Insurance Plan

Suppose, you buy a term plan at the age of 25 and you want to continue this plan till the age of 60 years and the sum assured is Rs. 1 Crore. So, the duration of the term plan is 35 years. If you choose a Term Plan at the age of 25 then you have to pay Rs. 6800/- per year. If you choose a Term Plan at the age of 30 then you have to pay Rs. 8300/- per year instead of choosing a term plan at the age of 35 that costs Rs. 10,200/-. So, you have to pay a lesser premium at the age of 25 instead of at the age of 35.

term insurance premium

In the case of Health Insurance Plan

If you take a family floater plan at the age of 30 years of Rs. 5 lakh and the plan consists of self, your spouse and 2 dependent children, you have to pay Rs. 11,000/- on a yearly basis. But if you take the same plan at the age of 40, you have to pay Rs. 16,000/- on a yearly basis. So opt for family floater plan as early as possible. It is better to take a family floater plan just after marriage and later you can include your children.

Write down the debts and pay off the debts

If you have taken any kind of loan irrespective of types of loan you should try to pay off the debts as early as possible. Here are the benefits to pay off the debt,

  • If you pay off the debts then you will enhance your credit score which enables you to get loans at the cheaper rate.
  • You can invest the surplus money which you pay as the interest in accordance with the loan amount.
  • If you remain debt free then you can invest money in order to make retirement corpus and for future obligations.
  • Since you are debt-free, you will not experience stress which will increase your self-esteem, performance, and fewer illnesses. This will increase your productivity which increases your paycheck.

One of the common questions is whether any individual should pay off the debt or start investment. The straight forward answer is that if you are not like Warren Buffet then it is a wise decision to pay the debt first then start investment.

Set a fixed percentage of the debt you need to take while you buy a flat or luxury car

Usually, an individual takes a loan to build his/her own nest on easy EMI option either a monthly or quarterly basis repayment from banks or any other financial institutions. After the withdrawal of home loan, people get trapped into a vicious cycle. Earlier, I have mentioned on various occasions the benefits of remaining debt free. Now, if you have decided to buy a home via EMI then you should follow The 20 Percent Rule, The Income Rule, The 28/36 debt Rule, & The 20/4/10 Debt Rule to calculate the money which you are free to put to buy a home or a flat or buying a luxurious car.

Let’s illustrate these famous rules to calculate spending to buy a home or a car.
  1. According to The 20 Percent Rule, an individual should put at least 20 percent down when buying a home. This rule ensures that any individual does not spend more amount while buying a home than what the individual can afford.
  2. According to The Income Rule, an individual should buy a house cost of which does not exceed his three years’ worth of the gross annual income when buying a house. This rule ensures that any individual doesn’t spend more amount while buying a house than what the individual can afford.
  3. According to The 28/36 Debt Rule, Debt-to-income Ratio, an individual should not spend more than 28% of gross income on housing expenses and more than 36% of all debt including a car loan or housing loan, etc. In accordance with The 28/36 Debt Rule, 28% represents the monthly principal, interest payable, property taxes i.e. estate tax and insurance payable on the property. The rest 36% represents all recurring monthly debt compared to one’s gross household income including credit card debt, personal loans, EMI on Housing loan, EMI on a car loan, etc.
  4. According to the 20/4/10 rule, any individual should make down payment of 20% value of the vehicle while buying, repay the whole amount within 4 years, and expenses towards the car i.e. the installment i.e. EMI, insurance premium, fuel expenses, and maintenance in any month should be less than 10%.

20/4/10 Rule

Pay the credit cards bill in full

You receive a credit card from your credit card issuer and the card issuing authority gives you a stipulated time of 40-45 days to repay the credited amount. Now it is your responsibility to pay off the amount timely. This will not only increase your creditworthiness but also affect your CIBIL Score. If you fail to pay off the credit then the company usually charges between 2-3% interests on a monthly basis. If calculated on a yearly basis then you need to pay an interest of around 40% yearly.

interest calculation of credit cards in india

In the event of you fail repeatedly to pay off the dues then it will affect your creditworthiness and CIBIL score. The direct impact of this will be that you won’t be able to get Credit Card in the near future by any credit card issuer. So, you need to pay the credit cards bill in full amount which you have incurred.

Start investing now in accordance with time horizon and risk appetite

You need to specify your goals either it is short term or long term because you have to decide your investment portfolio in accordance with your goals. If you are planning for the purchase of four wheeler car within the next few years then you need to invest your corpus in debt instruments. It is because in the short run the stock market is quite volatile. But in the case of retirement planning which is a long term goal you should invest in the equity asset class since the equity asset class outperformed all the asset class over the long term.

Financial freedom

Plan for taxes

Do you know if you have a yearly income of Rs. 12 Lakh then you can save at least 1 Lakh per year? That’s the power of tax planning. Many individuals ignore the tax planning and they can no avail the benefit of deductions available under chapter VI-A of the income tax act, 1961.

If your income is taxable you should calculate your tax liability at the starting of a year. You may consider income tax as an expenditure or you may take your income after deducting your tax.
The most efficient way to take advantage of Section 80C is to invest in Equity Linked Savings Scheme (ELSS). It has the shortest lock-in period as compared to all the other tax-saving options available under Section 80C. In this way, you can save taxes up to Rs. 45, 000 and avail a deduction up to Rs 1.5 lakh. Additionally, the ELSS is a diversified equity fund helps you to achieve your financial goals via investment in the equity market. Apart from 80C, there are various deductions available under chapter VI-A of the income tax act, 1961.

Create an additional source of Income

According to Warren Buffet, apart from your salary income and investment, you should create various income streams.

But How? Well, this is a Million Dollar Question.

financial freedom

Almost everyone has a hobby of his own. This hobby can be transformed into an occupation. If you have knowledge about anything you can share that information via blogging. So you can create a blog or website. If you are interested in how you or any person can earn money by blogging just click on the link Make Money Blogging. Here I have mentioned blogging as a tool to create a source of income apart from your job or profession because of,

  • Make money through affiliate marketing.
  • Display ads on your website or blog.
  • Write sponsored Blog Post.
  • Write a review of any specific product or services.
  • Offer your own digital products such as e-book etc.
  • Offer your own services in which field you have expertise.
  • Create a membership site by making use of MemberPress, LearnDash.
  • Accept donations like other websites such as Wikipedia.

How to start a blog to make money blogging

There are many other occupations you can choose. It is up to you what you choose to increase your income. You may do anything to get some earning. For advice, you can read our article 100+ business ideas with a small investment, and How to start a WordPress blog with SiteGround.

Live below your means

If you want to achieve financial freedom, you should avoid unnecessary expenses and try to live below your means. Let’s make it clear with the following example.

After getting a salary an average individual does not think about savings and investment of the money. The first thing he does is he goes to the restaurant with his friends and spends lavishly. He makes unnecessary enjoyment with his money. So he is left with no savings at the end of the month. Suppose you need a bike for your conveyance. There are lots of bikes ranging from Rs. 60000/- to Rs. 1, 50000/-. Now it comes to you which one to buy. If you get a salary of Rs. 25, 000/- you may buy a bike costing from Rs. 60000/- to Rs. 80, 000/- via EMI. You may, of course, buy a bike more than that price, but it will not be smart financial planning. Just try not to be spendthrift.

Surround yourself with financially educated and conscious people from whom you can learn about financial planning. Also, make sure that your group of friends comprise people who share similar financial goals. It can be difficult to adhere to financial disciplines when you spend time with spendthrifts. A great way to learn about the art of finance is to find a family friend who can mentor you throughout the process – someone who has achieved his own financial success.

How Capitalante can help you

Are you confused about how to prepare an effective financial plan to achieve financial freedom? If yes, learn how to prepare effective financial planning.

Financial Planning eBook

Hope this article will definitely help you to achieve financial freedom. If you have any questions feel free to comment so that we can have a discussion. If you have found this post helpful feel free to share this post with your loved ones.

Leave a comment