Category: Investment

Rich people stay rich by living like they are broke. Broke people stay broke by living like they are rich.

 

With convenient credit available, thanks to credit cards, EMIs and Buy Now Pay Later schemes, it is becoming increasingly easy to live like the rich and yet stay broke. Easy because it seems attractive to shop for shiny new things. Easy because we are living for today and not worrying about tomorrow.

 

But that’s dangerous. As Warren Buffett rightly said: “If you buy things you don’t need, soon you’ll have to sell things you need.” This is the mantra everyone must understand. One should reduce their spending and start investing for the future.

 

The importance of saving
So, how do you begin? Right off, you need to learn how to save. It is actually an art to keep aside money every month. This is how you can too: calculate your monthly fixed cost (your rent, travel cost, grocery, etc). Once you do that, check how much money is left with you and then decide to save aside a certain portion of the money.

 

But what if I end up using up that saved money too, you may ask? This is where investing comes in handy.

 

The importance of investing
Investing is a must if you want to a) protect the money you are saving and b) building your wealth. That’s right, investing can actually help you build wealth in the long run. Even if you are in the early stages of your career and the salary isn’t very high, investing can be a game changer for you.

 

And that’s because of the power of compounding. Compounding can grow your money manifolds even if the investment amount is small.

 

Therefore, developing this belief in saving and investing is important and it has nothing to do with the scale. There are a lot of people who earn well but they don’t invest, and there are a lot of people who don’t earn so well but are very disciplined about their savings and investments. So, it’s more a matter of attitude and habit and you should inculcate that habit as early as possible.

 

Where to invest
If you ask your parents, chances are they will nudge you to put money in bank fixed deposits. What you get out of fixed deposits is safe and guaranteed returns but this investment is not very desirable in terms of protecting you from inflation.

 

The best way to create wealth is to invest in equities. And historical data suggest that though equity may be risky over a short period of time, it is the fastest way to grow your money in the long run.

 

For starters, nothing beats the convenience of mutual funds if you want to invest in equity. Here, you can start investing with as low as Rs 500 per month. So, you don’t need a lot of money to start investing. With new technologies, getting started has become easier than ever. If you have a bank account and a mobile phone, you don’t even need to leave your house. Everything can be done online these days.

 

So, what are you waiting for? Just start, no matter how small it might look right now. This investing habit will help you gain experience and make you a wise investor over time. So, the next time you catch yourself splurging money, you should remember that it is better to be rich than broke.

 

 

Source: Valueresearchonline

Risk versus returns. Nothing ventured, nothing gained. The idea that the more returns you want, the more risk you must take is ingrained deeply into the way we think about investing. This is not just a concept or general rule of thumb anymore. There’s even a Nobel Prize that has been given out for work from which this risk-return concept can be mathematically derived.

 

Before someone gives you any investment advice, they are supposed to figure out your ‘risk tolerance’. In fact, in India as well as in most well-regulated parts of the world, this is a mandatory part of being a registered financial advisor. However, there is something fundamentally unsound about this idea. Not the idea of judging an investor’s risk tolerance, but the concept of a person having a single tolerable risk level. In reality, the same person almost always has different risk tolerances for different aspects of their financial life.

 

Conventionally, financial advisors treat all of an investor’s investments as a single portfolio and try and tune this to the investor’s self-perceived risk-tolerance. They try to fathom this risk-tolerance by asking some questions and/or by rules of thumb based on age, income stability and some other factors.

 

I have never believed that such an approach is useful. It may elicit something about an investor’s attitudes but it can’t be the basis for planning an investment portfolio. That’s because each saver, each family, has many different financial goals and each needs a separate portfolio. Think about it. A financial goal is defined by a particular purpose that the money will be used for, as well as a time-frame. Example goals could be ‘Child’s Higher Education’ which might be needed in eight years, or ‘House Purchase’ in about five years, or a ‘Holiday to Europe’ in about three to four years.

 

Some goals have a precise time-frame (like a child’s college education) while others, like an expensive holiday, would be nice to have but not crucial, so to speak. Again, some things can’t be postponed but others can be. There are also general goals like having enough emergency money on standby but that doesn’t need much of an investment strategy. As you’ll realise when you think about these examples, each goal has a different risk level. Moreover, this risk level itself varies not just with the nature of the goal but with how far into the future the targeted goal fulfilment is.

 

Therefore, the approach to portfolio-making that I have evolved at Value Research is based largely on the time-frame for which you are investing. For investments whose goals are far away, we can take more risks and get higher returns. The nearer a goal date is, the less risk you can take. For money that might be needed immediately, zero risk tolerance is needed. This approach means that the conventional idea of a person’s risk tolerance is meaningless.

 

One important implication of this approach is that eventually, the long-term becomes short-term and then becomes imminent. Your eight-year old daughter will start her higher education in 2032 and that’s a long-term goal. But by the time 2027 arrives, it’ll be a medium term goal and in 2031 it’ll be a short-term goal. Therefore, the way these investments are treated must change with time. The risk tolerance that the same goal needs keeps getting lower and lower as D-day approaches and thus the portfolio earmarked for fulfilling that goal must also change. None of these real-life nuances are captured in the conventional way of rating risk-tolerance.

 

At the end of the day, no conventional set of investment products and services will take all this into account. Savers have to learn the concept themselves and take care of their needs. However, as you can see, it’s all just simple common-sense – something that is not available as a service but which you yourself can provide.

 

Source: Valuesearchonline

As is the norm every year, it is yet again that time of year when I must draw up my new year resolutions. I start my list with the compulsory emphasis on my health and eating right with the right dose of regular exercise thrown in. Though the lure of making money has always been on everyone’s list, never before has it become more fashionable to talk and discuss finance and investments than in recent years.

 

My New Year resolution list too has this mandatory entry. On the basis of my mixed experiences on my ‘Do It Yourself’ solutions to financial security, I am super excited to draw up my list of New Financial Resolutions for 2023.

 

1. Responsible Investing: In the last few years, we have all heard about people discussing the best investment scheme that helped someone become wealthy. We have heard about quick fix solutions that would help us create wealth. Armed with knowledge gained from my best friend: ‘The internet’, I took to investing in the newer and fancier investment products that I understood very little but was certainly enchanted. Crypto currency, P2P lending, Futures & Options and many more; all came highly recommended as the shortest way to create wealth. They sure did come recommended but they also came with their inherent risk. As I lost money, I gained experience and lessons were learnt. In 2023 I resolve to be more responsible towards my money while investing.

 

2. Not all that Glitters is Gold: As everyone around me made money in the stock markets after the economy opened post Covid era, it felt natural to pull out from my other investments even at the cost of throwing my carefully planned asset allocation for a toss and joining the bandwagon. What followed was a slew of purchases based on ‘hot tips’ and NFO’s and IPO’s. The euphoria soon dissipated as these ‘hot tips’ got cold feet and many of the so-called ‘golden IPO’s” failed to make a dent on their listings. In 2023, I resolve to be more careful while I select my investments and not go by hot tips.

 

3. Winners take it All: While the indices in India made new heights, my stocks had a mind of their own as they continued to behave stubbornly like a belligerent child and refused to budge north. Call me a loyalist or someone who believes in long term relationships but I certainly had great faith in them (after all they had been purchased on hot tips by my more successful investor friend). My money remained blocked in these while I missed on valuable opportunities to use it to its full potential. In 2023, I resolve to sell my loser investments whose intrinsic value is unlikely to ever recover!

 

4. Bad news should not necessarily translate into staying away from stock markets: TheRussia-Ukraine war followed by high global inflation pushed many world economies to the brink of recession. As is usual in such circumstances, pessimism ruled the roost. Even while the world took steps to circumvent, the general consensus all of last year has been that we are heading for massive corrections. The Indian markets, however, seemed immune as they factored in these blips and continued their journey upwards. I booked profits and worse still stayed out of markets preferring the staid Fixed Deposits and sticking to cash. I kept waiting on the sidelines for the right time while the markets continued to make newer highs. In 2023, I resolve to not time the market but rather invest in a disciplined and staggered manner.

 

5. Future Perfect: “If you save after you spend you will be left with nothing to save at all.” So implied the Investment Guru; Mr. Warren Buffet. Post Covid, many of us took to random and luxurious purchases in the form of cars, laptops, eating out at fancy places and expensive vacations. This was a natural fall out of more than a year spent in captivity at home due to Covid restrictions. As spendings became more extravagant, our savings became thriftier. Each time I skipped a few investment months, my savings for the future got set back by a few years! In 2023, I resolve to be more in control of my spending and committed to save towards my future.

 

It is said that resolutions are made to be broken and possibly I will too! However, lessons learnt from mistakes serve as beacons for future prudence. Well begun is half done and I feel quite satisfied with my list of resolutions. As I put down my pen, I am confident that I have taken the first step towards smarter financial decisions! Have you?

 

Source: Financialexpress

The author of The Chronicles of Narnia famously said, “You are never too old to set another goal or to dream a new dream.” And this is true for everyone, both old and young. All of us have goals in life, and they range from short-term to very long-term. For instance, you may want to purchase the latest iPhone in the market – that is a short-term goal you may wish to accomplish over the next month or so. You may also want to retire at 45 and travel the world for the next five years. Based on your current age, this could be a medium or long-term goal. Others may want to purchase a car, or start farming or learn a new hobby – there is no limitation on the number of goals or dreams you can have. However, there is one thing that every goal requires – adequate time and surplus funding to help realise it. Suppose you wish to purchase an iPhone next month, child wedding after 10 years or a retirement monthly cash flow 20 years down the line. What is the one thing in common here? You need money to make this happen. And, in your investment journey towards realising your goals, asset allocation can be your best friend.

 

Setting your goals

 

Whichever phase of your life you may be in, you need to have a clear understanding of your goals, as well as the time frame you wish to achieve them in as per the time frame, the goals are classified as important or urgent. if you wish to purchase a house 10 years down the line, just thinking about the goal will not lead to its fruition. You also need to figure out how to accomplish that goal. You may plan to take a home loan, but you still have to put up a certain amount of corpus to qualify for the loan. This is where goal setting comes into play.

 

Asset allocation to the rescue

 

Asset allocation involves the practice of diversifying your portfolio in an attempt to secure the highest possible returns, at the lowest possible risk. Based on your investor profile, and the time frame for achieving your goals, you can allocate your corpus to a variety of assets. Suppose you wish to have a corpus of 1.50 crore (current value 75 lakh) rupees to purchase a house after 10 years. You can start working towards this goal by creating an investment portfolio featuring a mix of equity, debt, and other assets, in line with your risk appetite.

 

If you are young and do not mind facing higher risk in the quest for higher returns, you can allocate a larger portion of your portfolio to equities, and leave a small portion in the comparatively safer debt category. Alternatively, if you are saving and investing for a short-term goal, it is better to stick to debt funds, since these keep your money safe while offering stable returns. An important aspect to remember here is that, the closer you get to your goals, lower should be your portfolio risk. This is because the equity market is known for its volatility, and you may end up facing major losses in an unfavourable situation. With the goal nearby, you may not have enough time to recoup your losses. For instance, if you are 25 years old, and want to create a corpus of one crore over the next 10 years, you can allocate a larger part of your portfolio to equities. As you near the completion of the goal, you can shift your corpus from equity to debt funds or from more aggressive equity lesser aggressive equity , to keep it secure. This routine rebalancing is the key for Financial freedom journey as there can be change of goals with amount with time frame.

 

Selecting the optimal schemes

 

Based on your goals, and the time frame, you can choose from a wide variety of schemes, including equity, debt and hybrid funds. To zero in on the scheme most suitable for your needs, you must assess your personal attributes, risk appetite, return expectation and the time frame for realising the goal. As a means to make it easier for the investor, there are solution based schemes like multi-asset or balanced advantage category scheme that an investor can opt for. Here, the fund manager, depending on the relative attractiveness of the various asset classes, the fund manager will do the needful in terms of rebalancing. As a result, an investor need not worry about rebalancing.

 

To conclude, investors can make use of a variety of mutual funds to meet their financial goals. In this journey, with optimal asset allocation, you can ensure that nothing ever comes in the way of achieving your goals.

 

Source: Outlookmoney

Marine insurance is a type of insurance that protects against losses and damages associated with the maritime industry. This includes insuring ships, cargo, and other assets against risks such as accidents, theft, piracy, and natural disasters.

 

In India, the marine insurance market is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). The IRDAI has issued guidelines on the types of insurance products that can be offered in the market, and also monitors compliance with these guidelines to ensure the integrity of the market.

 

Marine insurance policies in India can be divided into two main categories: hull insurance and cargo insurance.

 

Hull insurance provides coverage for the vessel itself, including its machinery, equipment, and any other property on board. This type of insurance is typically required by law and is necessary to protect the vessel and its owners against financial losses due to accidents, damage, or other unforeseen events.

 

Cargo insurance, on the other hand, provides coverage for the goods being transported by the vessel. This type of insurance protects the insured party against losses or damages to the cargo due to accidents, natural disasters, or other unforeseen events.

 

This is basically an open policy of 12 months duration and such policies are issued to Concerns having estimated annual turnover of Rs 2 crores or above. All transits upto the sum insured are covered without any exception and total value of goods in transit are required to be declared atleast once in a quarter in the form of a certified statement. Period of insurance for this policy is one year.

 

This Insurance covers

All Risks subject to Inland Transit ( Rail or Road) Clause –A

Inland transit ( Rail or Road) Clause (B) ( Basic Cover)

The policy may be extended to cover SRCC, subject to payment of additional premium.

 

The policy is not assignable or transferable. However where the interest in respect of goods in transit has passed on to the consignee, claims, if any, may be settled with such consignee, if so requested by the assured.

 

The sum insured under the policy shall be on the basis previous year’s annual turnover. In case of fresh proposal, the sum insured shall represent a fair estimate of annual dispatches. If the estimated annual turnover during the year is found to be inadequate due to increase in the Assured’s turnover, not envisaged at the inception of the policy, an increase in the Sum insured may be allowed on payment of the difference in premium involved. Such midterm increase should not be more than twice during the currency of the policy. Midterm increase in Sum insured may be allowed twice only during the currency of the policy. Final premium will be adjusted (downward only) on the basis of actual turnover of goods covered.

 

 

Did you know that the financial planning and advisory market is worth $59.2 billion in the US alone?

 

This is not surprising as more people are genuinely concerned about their financial future. However, many people still don’t realize the importance of hiring a financial advisor.

 

Handling financial matters can get complicated, especially as you approach important life decisions. It requires a unique set of expertise you can only get from a Certified Financial Planner.

 

But, it’s normal to be skeptical about hiring one. After all, why hire one when you are doing just fine, currently?

 

Here’s a list of some of the unbeatable benefits of hiring a financial advisor.

 

1. UNDENIABLE EXPERTISE
What do you do when you’re feeling unwell? Chances are, you drop everything and schedule an appointment with your doctor. That’s because you don’t have your doctor’s expertise.

 

The same should be the case in all matters relating to financial planning. Sure, there are many resources online detailing how to tackle planning by yourself. But most financial moves need an expert’s guidance.

 

Financial advisors, especially those who are Certified Financial Planners, have unique experience and understand how all of the financial pieces fit together. So they’re in a better position to advise you on financial decisions big and small.

 

2. REDUCED STRESS
Let’s face it; financial planning is not the easiest or most enjoyable task. Chances are, even thinking about it causes a slight headache.

 

Defining your financial goals is just the first step. Working to meet these goals can be challenging and stressful. There’s more to financial planning than saving money each month.

 

You have to deal with taxes, financial markets, and the law, all of which can be tasking. These are all things your financial advisor can tackle. So, hire one if you’re tired of having to do all these things on top of holding down a job.

 

3. IT’S A LEARNING EXPERIENCE
You’re bound to pick up vital skills when working with a professional advisor. Most advisors meet with their clients to discuss investment opportunities. A good financial planner offers a wide range of advice beyond your portfolio. That could include discussions around estate planning, insurance, social security, and more.

 

All you need to do is ask as many questions as possible during these meetings. Learn why they recommend specific opportunities for you and disregard others. Feel free to pick their brains about budgeting and any areas where you feel you could use more guidance.

 

4. IT ELIMINATES EMOTIONS FROM INVESTMENTS

Emotional reactions can be costly for an investor. It’s easy to get lost in the fear and greed evoked by the investment market.

 

You may be tempted to sell your stock in a particular company because you’ve heard some rumors. Or, you may want to sell your property because you’ve received a great offer. While these decisions may seem logical, your financial advisor may hold a different opinion.

 

Financial advisors make decisions after tremendous research. They are disciplined and will hold out for the best possible outcomes. They can also run through model scenarios to see how a decision today could potentially impact your future goals. That’s why you need a financial advisor to guide your every move.

 

5. PROMOTES COORDINATION

Hiring a financial advisor will prove invaluable because they’re good coordinators. Wealth management requires the effective coordination of various facets of your life.

 

A financial planner will work with other individuals in your life to promote your best interests. That’ll involve coordinating with your lawyers, estate planners, and business managers. By acting as “quarterback”, your financial advisor can be sure your financial plan is comprehensive and cohesive.

 

6. HELPS WITH DEBT CONTROL

Let’s face it; loans are a normal part of life. In fact, Gen X and baby boomers owe an average of $140,643 and $97,290, respectively.

 

But most people don’t know how to manage their debts. It’s not always as easy as making monthly payments. Sometimes, debt consolidation may be your best option to reduce costs.

 

That’s why it’s essential to consider hiring a financial advisor. Your advisor will develop a strategy that minimizes costs and maximizes your benefits. By getting your finances in order and a budget in place, it’ll also help ensure you make timely repayments to reduce loan-related fees.

 

This secures your financial future as it increases the chances of loan approvals. Lenders consider your past repayment history when deciding whether to approve your loans.

 

7. YOU ENJOY A CUSTOMIZED FINANCIAL STRATEGY

Contrary to popular belief, financial planning is not a one-size-fits-all process. Saving is just one piece of the financial planning puzzle.

 

Many factors determine the best approach for different individuals. Some of these include your financial goals, your timeline for these goals, and your income.

 

Sometimes, saving could be your best option, but other times, your answer may be investing. It’s up to your financial advisor to help you decide on the best approach depending on your needs. So, hire a financial advisor for a strategy that’ll help meet your financial goals.

 

8. HELPS CHOOSE THE BEST INVESTMENT OPPORTUNITIES

There are thousands of investment opportunities. But, only a few of these opportunities are the right fit for you.

 

Identifying the best opportunities for you is a complex and daunting task. It requires a lot of research and market knowledge. That’s where a financial advisor comes in.

 

After analyzing your financial goals and risk appetite, they’ll recommend investment opportunities that will help you reach your goals. They can help find the balance between risk and return on your investments. They can also act as a sounding board when new investment opportunities peak your interest.

 

Creating appropriately diverse portfolios requires a considerable amount of time and expertise. So, it’d be best if you were to hire a financial advisor to help you rather than go at it by yourself.

 

It’s even more meaningful for you to ensure your financial advisor is a fiduciary. [Insert link to the RIA difference page] This will give you peace of mind knowing that suggestions and guidance are based solely on your best interests and not on the what would be more lucrative for your advisor.

 

9. HELPS PREPARE FOR LIFE TRANSITIONS

You pass through various phases of life as you grow. Your finances play a crucial role in how comfortable you are in these phases. It’s vital to have your finances in order as you navigate through life.

 

A financial advisor will help you prepare for the expected transitions like retirement. They’ll also help prepare for the unexpected ones, like divorce. It’s their job to prepare your financies for unpredictable changes and plan accordingly.

 

GET VALUE BY HIRING A FINANCIAL ADVISOR

Have you decided to hire a financial advisor? The next step is finding the right professional.

 

A financial advisor will help with financial planning, investment decisions, and wealth management. An advisor who is a fiduciary will make sure all decisions are made in your best interest. It’s never too early or too late for professional financial planning.

 

Source: Mortonbrownfw

F.I.R.E stands for Financial Independence, Retire Early. It is a movement that challenges conventional methods of working until 65 years and practitioners of the F.I.R.E method hope to be able to quit their jobs in their early 40s or 30s to live the rest of their lives on small yet disciplined withdrawals made from their investments.

 

The F.I.R.E movement is becoming increasingly popular because millennials and Gen Z investors are questioning the current consumerism-led template. For example, they are critical about taking a home loan, buying a car, working 9 to 5 for the next 30 years to repay these loans, accumulating enough wealth to retire in our 50s or 60s, etc.

 

This blog will explain the F.I.R.E movement in detail and give you a step-by-step guide to retiring in your 40s using the F.I.R.E method.

 

F.I.R.E Movement: The Beginning

The concept of F.I.R.E was inspired by the book titled “Your Money Or Your Life” written by Vicki Robin and Joe Dominguez in 1992. For Robin and Dominguez, financial independence wasn’t just an idea but a way of life. It was an existence built around self-sufficiency, moderate consumption, and control over one’s time. And seeking greater satisfaction from life outside the nine to five rat race.

 

It took the world more than a decade for the concept to sink in, the F.I.R.E movement. But now, the F.I.R.E movement has many disciples who extol the virtues of this approach.

 

Take, for instance, Pete Adney. He retired from his job as a software engineer at the age of 30 by spending only a small percentage of his annual salary and consistently investing the remainder in stock market Index Funds. Some of you might have heard of Pete Adney, who uses the pseudonym Mr. Money Mustache. From his website, he gives practical advice and motivation to fellow mustachians to build a life for themselves that’s free from financial worries.

 

Today, the F.I.R.E community has expanded beyond software engineers, including writers, bloggers, YouTubers, travel enthusiasts, podcasters, etc.

 

Younger generations are putting up a case that the traditional views are outdated. They are advocating the creation of a new rule book that asks people to live their lives on their terms. F.I.R.E movement appeals to such people as it gives them the financial breathing room to work part-time, do something that they enjoy, convert a hobby into a business, spend time with the family, etc.

 

In essence, when they use the word retire, it’s not to say that they have stopped working. Instead, they have happily retired to something else that they absolutely love.

 

As you have learned the basics of the F.I.R.E method, let’s understand how to set up a F.I.R.E strategy to retire early.

 

F.I.R.E Method: Setting Up Your Strategy To Retire Early

• The core tenets of a F.I.R.E strategy are simple.

• Start by saving 50-70% of your income.

• Show economic discipline by living frugally.

• Invest your savings wisely with a low-cost Index Fund.

 

And that’s it. Save more, spend less, and invest wisely. These are the three bedrock principles of any F.I.R.E strategy. Now, before we get into each of these in greater detail, it’s important for a F.I.R.E enthusiast to first establish the math.

 

The Math Behind F.I.R.E Method

You can do it by asking two basic questions. One, how much income do you need to sustain your lifestyle in early retirement? Two, how soon do you want to retire?

 

The second question is probably the easier one. So let’s focus on the first one.

 

To answer how much income you need to sustain your lifestyle in early retirement, you need to find out how much you can spend on a monthly or yearly basis. A helpful and often used rule of thumb around this is the 4% rule.

 

Now, what’s the 4% rule? If you retire with a kitty of, say, Rs. 5 crores, as per the 4% rule, you can use up to Rs. 20 lakhs annually. Another way of doing this is to reverse the rule. So, 4% when inverted comes to 25 times. Thus, your retirement corpus needs to be 25 times the amount you withdraw in the first year.

 

For instance, say you need Rs.10 lakhs for expenses in the first year of retirement. Then, 25x of that comes to Rs. 2.5 crores. It is the corpus you must have before you retire. Now, the focus and calculations were done in the 1990s by using numerous assumptions that are very specific to the United States.

 

For instance, the 4% rule was built on the assumption that your investment portfolio would grow at an average of 7% per year. But then, some of the variables might not pan out now, like the fact that the 4% rule was built to work reliably for 30 years.

 

However, if you retire at the age of 40 or 45, your retirement journey is a lot longer. Also, the 4% might be a bit high in that particular case. Another issue with the 4% rule is that it doesn’t account for inflation. For a country like India, it’s much higher when compared to highly developed countries like the United States. But the good thing is that you can make your version of the 4% rule on an excel worksheet. If you make one, you surely want to add inflation to it.

 

The whole point of doing this is to get your retirement number right. Nonetheless, with math out of the way, let’s understand each step of the F.I.R.E strategy in detail.

 

F.I.R.E Method Step 1: Save 50 -70% Of Monthly Income

Save anywhere from 50-70% of your income every month. It is much higher than the standard 15-20% saving that most people do. Realistically, saving 50% of the income might not be possible for everyone with some essential expenditures. The expenses list includes rent, food, child’s education, home loans, etc. But the idea should be to get as close as possible.

 

In that context, what can really help is a boost in your income. It can be done in many ways like taking up a part-time job or some extra consultancy work, asking for a pay hike, changing jobs for a better salary, reskilling oneself, starting a side hustle, etc.

 

F.I.R.E Method Step 2: Spend Wisely

The second step under the F.I.R.E strategy is “Spend Wisely.” So you identify what is essential and what expenses can be tagged as discretionary.

 

F.I.R.E enthusiasts have a lot of helpful tips on managing expenses. It includes driving a used car, using public transportation if you live in the city, considering renting instead of buying a house, making your own meals, cutting restaurant expenses, avoiding credit card debt, using them for rewards, etc.

 

Another area worth considering here is the importance given to passive income by the F.I.R.E community. Now, passive income can be of many kinds like dividends from stocks, interests from fixed deposits, blog income, YouTube channel monetization, rental from properties, etc. And passive income is something that F.I.R.E members are continuously striving for.

 

In fact, several followers use something called the FI ratio or the financial independence ratio. It’s the proportion of one’s monthly passive income to one’s monthly expenses. For example, if you earn Rs. 2 lakh as passive income and your expenses are Rs. 1.5 lakhs, then you have a FI ratio of 133%.

 

Generally, anything over 100% indicates that some real good progress has been made towards financial independence.

 

F.I.R.E Method Step 3: Make Prudent Investments

The third and final step in the F.I.R.E movement is investments. Initially, the F.I.R.E principles require us to invest as much money as possible. Here, a savings account is not something that fits within our investment description.

 

The FIRE movement requires its followers to give their money the best chance of growing, especially in developed countries like the United States. They use a low-cost Index Fund or Exchange-traded Fund (ETF) to do that job effectively. The funds mentioned above are getting bigger by the month in India as well. You can use them more smartly to achieve higher than benchmark returns.

 

Conclusion

F.I.R.E practitioners say that their new lifestyle is deeply gratifying and pushes them to be creative and collaborative. But most people don’t like the idea that the F.I.R.E strategy requires them to sacrifice too much of their lifestyle. So, financial independence is not that easy to achieve through the F.I.R.E strategy. In fact, the F.I.R.E strategy may not be suitable for everyone.

 

Ask yourself how much sacrifice you can make. After all, it depends on your goals, disposable income, and what you’re prepared to give up to keep your savings rate high. With some of the techniques on keeping income high, expenses low, and investments right, we are sure there are enough bullets in your chamber that’ll allow you to take a good shot at F.I.R.E or at least some version of it.

 

Source: ETMoney

Different people interpret the term “financial freedom” in different ways. Some people interpret financial freedom as the freedom to buy what they want and when they want. For many, it could mean not worrying about how they will pay their bills or sudden expenses. For some people, it could simply mean becoming debt-free, while for others it could mean being rich enough to retire. While all these interpretations are somewhat correct, they are all half-baked answers.

 

In this blog, we will explain what financial freedom truly means. More importantly, we will also look at the 9 steps that can help you achieve it.

 

What Is Financial Freedom?
As ironic as it may sound, financial freedom is about control i.e. control over your own finances. So, one of the better ways to define financial freedom is to have enough residual income that allows you to live the life you want, without any worries about how you will pay your bills or manage a sudden expense.

 

In other words, financial freedom is not always about being rich and having a lot of money. Instead, it is more about having control over your financial present and your financial future. To give you the context, there are 8 different levels of financial freedom. These levels range from someone not having to live paycheck to paycheck to having more money than what a person will need in his lifetime.

 

One of the most interesting levels is the first level, where you are not living paycheck to paycheck. It is an interesting level because living under tight financial conditions need not be limited to the working poor. It can occur at all levels of income. Even a super-rich person might be earning and spending to the limits that he would be living under tight financial conditions. This is exactly why financial freedom is nothing but financial control.

 

Another noteworthy level is level 4 i.e. the freedom of time. It’s something many people aspire for. Freedom of time happens where your cash flows are sorted in a way that allows you to leave your job to follow your passion or spend more time with your family. But most importantly not going broke while doing so.

 

Level 5 is an interesting one and can be crudely expressed as the FIRE movement. FIRE is an abbreviation for Financial Independence, Retire Early, and is a lifestyle that is becoming popular in the West with people in their 20s and early 30s.

 

The concept of FIRE is around frugality with participants intentionally maximizing their savings rate by finding ways to increase their income or lowering their expenses. The idea is to save 50 to 75% of your income, which is then used to accumulate assets and helps in generating enough passive income to provide for retirement expenses.

 

You can pick your ideal level of financial freedom depending on your current situation and lifestyle. Your quest for financial freedom can be broken down into 9 essential steps. Some of these steps can be behaviors, tactical and strategic decisions. The more steps you can achieve, the faster shall be your journey on the path to financial freedom.

 

1. Understand Where You Are Presently
The first marker on the path to financial freedom starts with knowing where you are currently. This includes having a clear idea of how much debt you have, your accumulated savings, monthly expenses, your income, etc.

 

In other words, you need to know your personal financial statement with a fairly accurate knowledge of your income, expenses, assets, and liabilities. Once you have these numbers, you move to step 2 of your financial freedom journey which is writing your goals.

 

2. Pen Down Your Goals
Why do you need money? It could be to get rid of an education loan, trying to start a business, to travel, to plan weddings for your kids, for your retirement, and so on. As soon as you have enough money, these are the things that you want to fulfill.

 

Thus, money is simply a means to achieve your financial goals. But until you write down your goals, your money will be without a purpose and you will not know how to make the best use of it. So take a piece of paper and write down your top 5 goals that you would like to achieve over the next 1, 5, 10, and 20 years.

 

Also, ensure that while you are writing the goals, you are identifying SMART goals. It means goals that are specific, measurable, achievable, realistic and time-bound. For instance, a plan to accumulate Rs. 10 crore by 2050 to fund your retirement is an example of a SMART goal, because it is specific, measurable, achievable, realistic, and time-bound.

 

3. Track Your Spending
The next important step toward financial freedom is tracking your spending. You can do this in many ways like using a notebook or perhaps using an excel spreadsheet. You can also use the money tracker facility available on the ETMONEY app, which is an easy and effective way to track your spending. The app automatically tracks your expenses and categorizes them in terms of travel, shopping, eating out, etc.

 

This tracking of expenses is an important step towards financial freedom as it makes you more accountable. And also reveals many needless expenditures that you make merely on account of an impulse buy. If anything, an impulse buy is about losing control and works as an obstacle in your path to financial freedom.

 

Thus, it is important that you stay in control by religiously tracking your spending.

 

4. Pay Yourself First
“Pay Yourself First” means putting a specific amount of money in your savings or investment account before paying for anything else like bills, discretionary expenses, rent, etc.

 

This one act of paying yourself first has helped many people come closer to financial freedom. And the reason why this works is that it forces us to explore alternatives to limit your expenses.

 

For instance, if what remains as allowable expenses is not enough for you then you would be forced to take some additional action. This can be reducing your current expenses by making small tweaks in your lifestyle or can also mean picking up a side hustle in order to supplement your current income. Either way, by paying yourself first, you guarantee that you are always putting money aside to invest in yourself and your financial future.

 

5. Spend Less
Money saved is money earned. But it’s not an equal equation wherein Rs. 1 saved is Rs. 1 earned. Because when you invest that Rs. 1 rupee, you end up earning a lot more.

 

Now, spending less does not mean compromising on your existing lifestyle or living a barebones life. Financial freedom is more about smart spending which can be done in many creative ways. Some of the common techniques include learning to make delicious food at home thereby reducing your eating out expenses. Setting up auto-debits so that you don’t pay late fees on your credit cards.

 

The mere postponement of a non-essential item by a couple of days can go a long way in reducing impulse purchases, which then moves you closer to financial freedom.

 

6. Pay Off Your Debt
Paying off a big debt supports financial freedom in more ways than one. After all, you have more future cash flow to work with. Your credit rating is strong. And most importantly, closing a loan lifts a massive weight off your shoulders.

 

There are two main methods of paying off debt. The first one is the snowball method where you pay off the smallest debt first. So basically get one tick mark in your checklist and then move on to the bigger debts. And the second method of paying off debt is the avalanche approach where you first pay off the debt with the highest interest rate and then move to the lower ones.

 

Both these methods work efficiently and if you have a pile of debt, you need to decide what works best for you. But there is no hiding the fact that getting rid of debt is one of the most crucial factors to achieving financial freedom.

 

7. Always Keep Your Career Moving Forward
Increasing your income – while keeping the spending levels constant or in check – is one of the fastest ways to reach financial freedom. This requires you to continuously work on advancing your career or your business.

 

For instance, your career and therefore your income can go on the ascendency faster with you learning new and valuable skills and increasing your value to your employer. If you are self-employed, it means working on growth strategies to keep your business moving to the next level.

 

So if you have been leaving your career progress to chance, then probably now is a good time to take stock of how to accelerate the process. This in turn will increase your income levels and take you closer to financial freedom.

 

8. Create Additional Sources Of Income
For the majority of people who are serious about financial freedom, a 9 to 5 job may not be sufficient. In other words, you might need to look beyond a job for building income. In fact, some financial experts encourage people to discover as many as five streams of income. So if you have a 9 to 5 job, then congratulations – you have one stream of income. Now, you have to identify four more!

 

Additional income can come in 2 ways. The first approach is active income i.e you trade time for money. And the other approach to building an additional income is to do it passively, where you do the work once and money keeps coming in an automated manner.

 

If you take the first approach i.e. trade your time for money then you are limited by the hours in a day, which cannot go over 24 hours in any circumstance. However, active income is very quick to implement. And it can get you started in no time with side jobs like becoming a freelance writer, driving an Uber, designing logos on Fiverr.com, etc.

 

On the passive income front, the typical activities that generate money for you will include selling digital content like e-books and courses, becoming an affiliate marketer, investing in stocks, etc.

 

9. Invest
The ninth and most future-looking step to attaining financial freedom is investing.

 

The first move is to invest as much as you can and as early as possible, therefore allowing the power of compounding to assist you. Next, increase investments each year at a percentage higher than your increase in income.

 

Another key thing to do is achieve an asset allocation of 50-60% in equities as quickly as possible. As a thumb rule, keep a 60-40 allocation between equity and non-equity assets. But feel free to change that ratio depending on your risk tolerance.

 

The next actionable step is to set up your investments in an automated mode using SIPs and don’t worry about timing the market. And finally, review your portfolio once a year, and don’t forget to rebalance your portfolio.

 

Bottom Line

These nine steps listed in this blog have different degrees of complexity and you might see some tasks come very naturally to you while others might require a lot more work. For instance, a number of people find tracking expenses, spending less, and investing a lot easier than, say, creating an additional source of income.

 

The more steps you can achieve, the faster shall be your journey on the path to financial freedom. It is a decision that you will need to make on the basis of what works best for you.

 

Source: ETMoney