Eight steps you can take this Independence Day to achieve financial freedom

Everybody speaks about financial freedom nowadays, but is it possible to achieve it? To find it out, you first have to understand what it is. In its truest sense, financial independence is all about reaching a stage where you have enough money to take care of your life goals. All you need is basic financial literacy, prudent savings and smart investing moves to be financially free. If you want to understand how to plan your finances to be financially independent, here is your quick guide.

Buy adequate life insurance cover
You can achieve all your life goals by working hard but what will happen to your family if you are not around? This is the biggest risk you have to secure your family against. Having a term life insurance cover can act as a safety net for your family in your absence. In case of death, your family members can claim the benefits of the insurance to secure their financial needs. Further, if you have debt and liabilities, your family can use the claim money to pay off those outstanding debts.

"In today's uncertain world, we are exposed to various life and health-related uncertainties. Life insurance helps us not only to achieve our plans for our loved ones but to a great extent meet our own goals with certainty irrespective of our life status," says Sunil Sharma, President, Chief Actuary & Chief Risk Officer, Kotak Mahindra Life Insurance Company.

Do you have a health insurance coverage?
No matter how hard you work and save, a major illness or hospitalisation can eat up all your savings in a jiffy, and even lead to big debt. Therefore, the second safety net that you need is health insurance. With hospital expenses rising, it is important to have medical insurance plans for yourself and your family. A family floater health policy using base policy and super top-up can save you from the burden of expensive hospitalisation.

"The cost of treating critical illnesses like heart attack, bypass surgery, cancer, kidney failure, etc can cause a huge dent in the financial well-being of a family. Further, the need for rehabilitation post-critical illness recovery puts additional pressure as the person can be away from work and will have no income for some time. Health insurance helps us to meet our financial goals and creates resilience while dealing with critical illnesses," says Sharma.

Emergency fund: A must
If you want to prepare for financial emergencies such as periods of income loss caused by illnesses, disability or job loss, you can start building an emergency fund. Without an adequate emergency fund in place, you may have to redeem investments earmarked for crucial financial goals to deal with financial exigencies, or avail credit at much higher interest rates.

How big should your emergency fund be? Naveen Kukreja, Co-Founder & CEO, Paisabazaar, says, "One’s emergency fund should be big enough to cover unavoidable expenses like existing EMIs, utility bills, healthcare expenses, daily household expenses, children’s tuition fee, insurance premiums, etc for at least six months. The emergency fund of those having job uncertainties or lower incomes should be able to cover their unavoidable expenses for at least 12 months.”

Fix a regular saving target as per your income
If you want to secure your future financially, you need to start saving money. And start saving early. Don't think that you don't earn enough to save. When it comes to saving, remember that every penny counts. And save regularly.

Based on your income, fix a practical saving target and save that money no matter what. Meet your expenses using the rest of the income. This is a better way to go about than using your income to first meet all the expenses and then using the rest to save. It ensures that your savings are not enslaved to your expenses.

For instance, you can start with a target of saving 20 per cent of your monthly income. This approach helps you to manage your expenses within a limit so that your savings are not disturbed.

You need a retirement corpus
Retirement is a stage when your earning capacity as well as physical ability will get reduced significantly. You need to figure out how you will meet your expenses when you do not have an active income. You need to make your retirement savings work for you in your old age.
But a substantial retirement corpus is needed to ensure you get a sizable monthly payout. Therefore, if you want to achieve financial freedom, you must start saving for your retirement quite early.

You may be wondering how much you would need after retirement. First, figure out when you plan to retire and how much time you have left until then. Then you must take into account how you want to spend your life after retirement: will your post-retirement lifestyle be the same as it is now or will you cut some expenses? Next, you must take into account inflation. The cost of living rises every year and it will have an impact on your savings and investments. Experts suggest you take into account an inflation rate of 6-8 per cent for your retirement planning.

Once you calculate how much you need for retirement, start investing. Equity mutual funds through a systematic investment plan is a good way to benefit from rupee cost averaging in the long term. During rising interest rates, you can invest in fixed deposits in banks. A laddering strategy will help you to accumulate more wealth, instead of investing in a single FD for the same tenure. You can also check other fixed-income instruments such as the Public Provident Fund (PPF) to accumulate retirement savings.

"Taking informed financial steps using, for example, NPS (National Pension Scheme) or other investments can create a strong safety net for personal needs during the later years," says Gaurav Jalan, Founder & CEO, mPokket.

How to achieve financial goals
Be it buying a house at 35 or saving for your children's higher education, you need to have a proper plan to achieve your financial goals. Having goals is not enough, you need to prepare “SMART” financial goals. SMART stands for specific, measurable, attainable, relevant and time-bound, says Anil Rego, founder and fund manager at Right Horizons, a SEBI-registered portfolio management service provider.

Let us understand what this term really means.

The first letter means your goals need to be specific, such as an international trip every two years or building a retirement corpus. Then measure or calculate how much money you need for it. Attainable refers to having realistic goals. Relevancy of your goal will motivate you. Finally, you need to calculate how many years are left to achieve that goal. Considering all these factors, calculate how much you need to save.

"Financial freedom is possible only when you have well-defined financial goals that you and your family are completely aligned with. By having defined amounts and time frames associated with financial freedom, the journey can be better managed and changes needed along the way can happen," says Vishal Dhawan, a SEBI-Registered Investment Advisor and Founder of Plan Ahead Wealth Advisors.

Ensure maximum equity exposure for long-term goals
Equity as an asset class outperforms fixed-income instruments and inflation over the long term by a wide margin. "In the case of taxation too, investments in equities are more favourably treated than most fixed income instruments. Long-term capital gains (LTCG) from equities and equity mutual funds (i.e. profits realised from the sale of stocks and equity mutual funds after 1 year of investment) of up to Rs 1 lakh per financial year are tax exempt. LTCG from equities above Rs 1 lakh per financial year are taxed at 10 per cent. The returns generated from most fixed-income instruments, except a few like PPF, NSC, and listed bonds, are taxed as per the tax slab of the investor. Thus, fixed income instruments barely generate positive returns when adjusted with inflation and taxation rates," says Kukreja.

These factors make equities the best asset class for long-term wealth creation. "However, as equities can be very volatile in the short term, investors should have an investment horizon of at least five years to invest in equities or equity mutual funds," he adds.

A right asset mix
Diversifying your portfolio based on your asset allocation strategy is a must to achieve financial independence. For long-term life goals, the biggest allocation should go towards equity.

A thumb rule to decide how much to invest in equity as per your age is by reducing your age from 100. So if you are 30 years old, your portfolio should have 70 per cent equity, 20 per cent debt, and 10 per cent gold ratio. You can gradually reduce your equity exposure as you grow older. Within equity, diversify between large-cap, mid-cap and small-cap stocks based on your return expectations and risk-taking capacity.