What is Financial Freedom, really? The dictionary defines freedom as a “state of not being imprisoned.” And the fact is that most of us spend our entire lives either imprisoned by money – or by the lack of it! Hardly a day would pass in our lives when we do not think about things like meeting expenses, paying off our debt, getting our next pay check and making rent or EMI’s, buying something that we want or meeting our long-term goals for ourselves or for our families. If we are not investing quite enough money, we worry about our financial future. If we are investing adequately, we stress over market movements and portfolio returns. And so, the “imprisonment” never ends – it just gets upgraded at best!
We would define financial freedom not as some utopian future state, but rather a state of mind that can be attained fairly quickly, if we take a few simple measures. In this definition of financial freedom, we no longer obsess over money but view it as a means to an end rather than a way to keep score (or an “escape button” from the so-called drudgery of every day work!)
Let us begin with an understanding of how money ends up “imprisoning” us. For most people, the answer would be in the day-to-day minutiae. Bogged by loans, lifestyle spends and unfettered expenditures, many of us end up in the familiar position of “having too much month left over at the end of our money!” And unless we lay the foundation by managing debt and cash flows properly, we will never be able to take measures to attain financial freedom. Working with a financial planner to map out your cash flows and establish your key financial ratios (such as reserve-surplus, savings-surplus and debt-income) is an excellent first step. You may need to make some lifestyle adjustments at this stage, because there is no silver bullet solution for spending more than you earn and becoming financially free!
Also Read: Why investing just to save tax is not a good idea?
Now, with enough money left over from your income to save for your goals, the next step would be to take a deep dive into your investing beliefs. After all, when it comes to investing success, your behaviours will play a far greater role than the investment product that you select. Your investing beliefs can make or break your entire investing journey. For instance – do you succumb to greed/fear often? Are you overtly conservative or speculative? Do you chase returns? Do you compete with friends or family on returns? Do you invest with purpose – or in an ad hoc manner based on tips? These are just a few things that you must explore before you move forward to the part where you invest, or else it will just be one step forward, two steps back. Setting expectations in this manner will not guarantee investing success, but it surely will increase your chances of creating wealth in the long term.
What next? With your monthly spends in check and the correct investing beliefs imbibed, you will already be ahead of 99% of the general population when it comes to attaining financial freedom. No longer will you continuously worry about money or obsess over investment returns. This is a great starting point for setting up a goal-based investing plan.
Setting up clearly defined goals and investing for them systematically is the ultimate step towards financial freedom. You will now be able to indulge in some guilt-free spending, knowing that your financial future is secure as long as you stay the course with discipline and stick to the plan. Also, you will break free from the “returns centric” mindset that pretty much guarantees investing failure. Your entire perspective towards saving and investing will undergo a dramatic shift, and you will automatically be insulated from a lot of behavioural biases that would have otherwise held you back. You won’t worry as much as your friends when another pandemic or geopolitical event causes notional losses in your portfolio (after all, your goals are still a long time away!). Investing with a financial plan and with clearly defined goals is the best way to make your money work for you.
In conclusion – stop chasing mirages like “FIRE” or trying to triple your money overnight in crypto. Financial Freedom is all about sticking with the basics. Get your fundamentals in place and work with a financial planner towards your financial goals. You will be surprised at how “free” this simple act will make you!
(By Harsh Gahlaut, CEO, FinEdge)