Financial planning: Seven barriers to financial freedom

Published: January 22, 2020 1:30:59 AM

Wealth building is a gradual process. So set your goals, save, invest, pay taxes and buy insurance without getting emotional. And go for periodic reviews

It is observed that often many people vie for financial freedom, but fail because they make these grave mistakes.It is observed that often many people vie for financial freedom, but fail because they make these grave mistakes.

By Jimmy Patel

Being financially independent paves the path for financial freedom. It facilitates us to utilise hard-earned money the way we wish to, pay for daily expenses (including the lifestyle-related ones), address unexpected expenses, achieve the envisioned financial goals, and much more.

Financial freedom is abstract, unquantifiable and its true meaning could vary from person to person. But financial independence is quantifiable and can be planned to bring about financial security.

It is observed that often many people vie for financial freedom, but fail because they make these grave mistakes.

Fail to set SMART goals
In order to succeed, goal setting is very important; without it, it’s like roaming around in circles. Hence, setting Specific, Measurable, Adjustable, Realistic and Time-bound goals (SMART goals) is necessary and classifying them into short-term, medium-term, and long-term.

Not saving enough, live on credit
Instant gratification is one mantra most enjoy because of easy loan facility and credit offerings. But, this comes at a price. It leaves no room for saving and planning for a bright financial future. On the contrary, it makes one a spendthrift mostly backed by high credit card usage, which could pull a person into a debt trap.

Not investing in a prudent manner
Not just savings, but prudent and product investments help to achieve financial goals. It is observed that most people invest in an ad-hoc manner like not paying attention to the broader investment objective, invest incongruent with their financial goals and invest without assessing their risk profile. Holding a diversified portfolio as per one’s risk profile, broader investment objectives, financial goals and the time to achieve the goals, is important.

Choosing worthy and productive investment avenues and creating a strategic portfolio, is essential to achieve respectable inflation-adjusted returns. To achieve a bigger corpus to enjoy financial freedom, one needs to start early and invest regularly. Systematic Investment Plan, a mode of investing in mutual funds, potentially can prove rewarding if one continues SIP-ping in a worthy mutual fund scheme.

Side-stepping periodic reviews
The periodic review helps in keeping track of the investments and ensure one is on track to accomplish his/her envisioned financial goals. A timely portfolio review helps to identify and eliminate any underperforming investment avenues and switch to a new better and performing ones.

Disregarding tax implications
While we make our hard-earned money, paying tax is also our constitutional and moral duty. However, what we can do is engage in a tax planning exercise and legitimately save tax. There is more to tax planning than Section 80C. So, make the best use of all the provisions for legitimate tax saving.

Ignoring insurance cover
Individuals purchase life insurance and health insurance policies. But one observation is that their insurance coverage is often sub-optimal. A sub-optimal insurance cover endangers financial wellbeing of self and family. In case of an untoward event, personal savings and investments could drain and that may get in the way of one’s financial freedom. Do not purchase an insurance policy in an ad hoc manner just because it offers a tax deduction under Section 80D of the Income-tax Act, 1961.

Fail to control emotions
Robert Kiyosaki mentions in his book Rich Dad, Poor Dad that most people give in to five traits: fear, cynicism, laziness, bad habits, and arrogance. But what they forget is they are jeopardising their long-term financial well-being.

Falling prey to emotions is one of the biggest mistakes one commits. Instead, stand up to the challenge to tackle it astutely, learn to channelise emotional balance and be focused on accomplishing financial goals. A well-trained mind is set to achieve a lot more than a fickle, short-sighted, and cynic mind.

The writer is MD & CEO, Quantum AMC

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