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How to attain financial freedom?

22 Nov 2023

What do we understand by financial freedom? It is all about ensuring that money works hard for you. Most of make the mistake of being too conservative with our investment habits when we can actually afford to take risk. To attain financial freedom you need to understand the key pillars like expenditure management, debt management; leveraging equity trading etc have to be handled smartly. Let us understand how to achieve financial freedom and the key steps to financial freedom. Remember, that financial freedom is a great feeling when you can rest assured that your future is well taken care of.

The big question is; do we really get to enjoy financial freedom? The answer is that you can if you are willing to work towards it. Financial freedom is not a goal but a process. Since you need to work towards financial freedom you need to understand the steps to financial freedom. As Euclid said centuries ago that, “There is no royal route to geometry”; so also there is no royal route to financial freedom. Let us understand how to gradually move on the path to financial freedom. Here are some of the logical steps involved.


Step 1: Ensure that you are adequately and appropriately insured
Financial freedom has to begin with adequate insurance. Your family needs to find a way to pay for their expenses even when you are not around. Your liabilities should not become a burden for the family in your absence. Your assets should not incur unnecessary pressure on your budget. All these can be managed through insurance. Your children’s education must not be negatively impacted because of your absence. Calculate the expenses of the family, project the future value based on inflation and take adequate insurance. Appropriate insurance is another factor. Don’t waste money buying endowments as they do not add any value. You are better off focusing on term plans. Don’t mix your insurance needs and your investment needs.

When we talk of insurance it is not just your assets, expenses and liabilities. It also covers your health. Quite often, we underestimate the importance of medical insurance. You need medical insurance, not only for yourself and your family, but also for your parents. Medical costs are going through the roof and even a 3 day hospitalization can set you back by a tidy sum. You cannot really think of financial freedom unless you have adequately covered yourself and your family medically.


Step 2: You need credit history but you don’t need high cost debt

You need to have some loans to have a credit history. Otherwise you don’t get a CIBIL score. The problem is with high cost debt. There is no way you are going to enjoy financial freedom unless you get out of high cost debt. Paying whopping rates of 18% interest on personal loans and 35% on credit cards can never give you financial freedom. As long as you are destroying value for yourself, you are moving farther away from financial freedom. Exiting high cost debt, therefore, is one of the pre-requisites for financial freedom. When you close a high cost debt like a credit card, it is tantamount to earning 35% on your money. That is something no asset in this world will give you and you also free up liquidity for more productive use.


Step 3: Use equities to create wealth and debt for stability

Most people do not get this logic right. The result is that your long term savings are locked up in bonds and PF with low rates of interest and zero chances of wealth creation. On the other hand, your short term money is going into speculating in equities with disastrous results, more often than not. You actually need to reverse this order of working. Financial freedom is all about asking money to work harder and help you make more money. But that is subject to 3 conditions. Firstly, you need to start making money work for you early as only then will the power of compounding work in your favour. Secondly, you need to be invested in the right assets; especially wealth creating assets like equities and equity funds. Lastly, you need to stay invested for the long term and here we are talking of time frames of 10-15 years. This step is your real ticket to financial freedom.


Step 4: Review if you are using your assets smartly
It is important that you put all your assets to good use. Leaving assets idle is the antithesis of financial freedom. For example, if you have a piece of land, see how you can make it work. If you have an idle piece of property, you can always lease it for added revenues. You can make your idle apartment a regular rent earner by logging into the Airbnb network. Look at each and every fixed asset you own and make the best of it. Every asset has income generating capacity and financial freedom comes from understanding this point to the hilt.
Financial freedom is all about rigorously questioning every allocation and every risk that you take. Make the best of what you have and you are on the right track!

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