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6 steps to financial freedom

Freedom sounds sweet. While we have achieved political freedom way back in 1947, many still struggle with financial freedom. Everyone wants to be financially free and it is not something that is exclusive for just a few people. Having said that, financial freedom is not a child’s play. It is a series of steps.

So, here are some of the steps that you need to take towards financial freedom:

Set your goal: Having a goal gives a sense of direction and purpose. You will also be able to track your progress. In this aspect, it is essential to understand what financial freedom means to you. Many associate financial freedom with early retirement. Here are some of the other instances of how financial freedom may look like:

• Freedom to choose a career without worrying about money
• Freedom to go on frequent vacations without straining your budget
• Freedom to take care of the needs and wants of other people the way you want
• Freedom to retire early

Have an emergency corpus: The second step in this journey is having an emergency fund. It is a crucial step, as it will help you to tide over emergencies. No one can predict crises and hence, it is always better to be prepared. Emergencies can include job loss, car repairs, house repairs etc. Without an emergency corpus, you may have to dip into your savings, which may adversely delay your goals. Or worse, take a loan.

Hence, one needs to have an emergency corpus with 3 to 6 months of expenses. The best way to park in an emergency corpus is in a liquid fund. It is crucial to keep in a different account, out of your sight so that you are not tempted to use it.

Budget

Having a budget is a crucial part. And this is one step that requires trial and error. A simple yet effective thumb rule is the 50-30-20 rule. According to this thumb rule, you may allocate 50% of your income towards needs, 30% for wants and save the rest 20%. You can also tweak it according to your convenience. However, it is better to have a higher allocation of investment and savings in the budget.

Secondly, you can also identify your monthly expenses based on the past six months. Later divide your expenses into essential, non-essentials and junk. Use this list to prioritise and cut whatever possible. You can also use budget apps to track your expenses. Also, invite every family member to share their concerns regarding the budget.

Pay yourself first

If you read financial blogs and books, you must have come across the concept of paying yourself first. Even before we receive our salary, many of us start planning ways to spend it. If you want to be free, you should consider paying yourself first. By this, we mean that you should earmark a certain amount of money for investing. You can also automate your investments. Set up a systematic investment plan (SIP), and you can see your money grow over time.

Another way to pay yourself is by investing in yourself through reading books, going to workshops etc. This will help you to increase your earning potential and to build a second source of income.

Say bye to debt

While people like to segregate debt into good or bad, there is nothing good about debt. There are harmful debt and less harmful debt. Having debt is one of the most significant impediments in financial independence. If you have many loans, look at reducing loans that don’t carry tax benefits. Otherwise, look at repaying the debt with the smallest principal. Once you can repay the smallest loan, you will be more charged up to clear your other debts.

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