Financial freedom can be achieved by following 10 simple steps

Life becomes simpler when you develop healthy financial habits. While access to information on personal finance is abundant, many people lack the discipline to implement. It leads to growing debt, unexpected financial emergencies, and careless spending. Regardless of your current financial situation, adopting these steps can set you on the path to financial freedom.

Step 1: Prepare a budget

An essential financial habit is to outline your expenses for the month and budget them. It will help you plan the payment of your bills and build your savings over time. Also, your tendency to splurge will reduce significantly, allowing you to achieve your financial goals comfortably.

Step 2: Repay all your credit-card dues

Outstanding credit card dues are a major roadblock on your journey towards financial freedom. Also, there is a tendency for credit card dues to pile up over the months. Add to that, the high interest rates that the banks levy on unpaid dues.

So, always make sure to pay off your credit card bills on time. Similarly, be regular with the repayment of other high-interest consumer loans such as student loans. By repaying your loans on time, you'll build a better credit score.

Step 3: Create an emergency fund

An emergency fund helps you cover unforeseen expenses. Ideally, you should work towards building a cushion of six months' worth of expenses. While it helps you build a sense of financial security, you'll also not be in a position to take on debt whenever an emergency comes up.

Step 4: Understand the difference between 'needs' and 'wants'

Always keep a distinction between needs and wants. This will help you make more deliberate spending decisions.

'Needs' refers to those things that you require to survive, whereas 'wants' refers to those things that you would like to get but aren't required for your survival. Give priority to needs in your personal budget. Once all your needs are met, you may allocate a discretionary fund for your wants.

Step 5: Get medical insurance

An important consideration: The adage 'prevention is better than cure' plays a crucial role when it comes to your financial well-being. After all, you cannot avoid certain ailments impacting your health. Adding to it, health insurance acts as an armour against rising healthcare costs.

Suggested read:Buying health insurance? Seven key things you must check

Step 6: Get life insurance

Life insurance is crucial if you have financial dependents. Make sure that your insured amount is sufficient enough to take care of your family members' expenses and cover other non-negotiable requirements in your absence.

When it comes to buying a life insurance product, always opt for a pure term plan.While ULIPs combine insurance and investments, these vehicles do not serve either of these purposes.

Step 7: Start saving ASAP

Although it is said that it is never too late to begin saving for your retirement, it is always rewarding to start early. The sooner one starts, the better off one will likely be during the golden years.

Step 8: Take home loan if necessary, but within your limits

Taking out a home loan might be the biggest decision you will ever make. So, always make sure that you borrow the amount that you will be able to repay. A simple thumb rule is to have no more than 30 per cent of your monthly income as the EMI.

Step 9: IMPORTANT: Start investing in equity

While volatile markets can be scary for a new investor, markets historically even out over the long term, thus leading to a net positive return. Also, equity usually is the only asset class that beats inflation hands down in the long run.

So, keep in mind that you should start investing early and stay invested for the long term. This way you can benefit from the power of compounding. In fact, compounding can make you a millionaire.

Step 10: Systematic Investment Plan (SIP)

Even the newest of investors know of the term "SIP", such is its popularity. So, what is it and how does it work? A Systematic Investment Plan (if you expand SIP) allows you to spread out your investments at regular intervals. By deducting money from your bank account on a fixed date, it helps you stay regular with your investments. This is different from a lump sum investment, which means you invest a whole sum of money in one go.

So, why do we recommend SIPs over lump sums?

First, SIPs remove the need for timing the market. When the markets are down, you'll get more units, and if the markets are up, you'll get fewer units. Over time,due to rupee cost averaging, your average acquisition price remains reasonable. However, if you try to time the market and do a lump sum, you might catch the high point of the market. This will result in significant losses if the market falls.

Second, SIPs can help you stay invested in a disciplined manner, regardless of market conditions. This removes the immense mental load of having to track the market movements and time your investments.

Also read:
A pyramid of investing needs
Achieving the dream of financial freedom
Why SIPs score over lump sum investments

This article was originally published on May 03, 2022, and last updated on August 15, 2024.