Live A Better Life

A 10 Step Guide For Achieving Financial Freedom

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Achieving financial freedom is something most of us dream of. The rewards that it offers are many. It allows you to be who you are and lets you pursue your dreams. It does away with the need to worry about how to arrange for the finances to provide for your family and yourself. This will make your life richer, more meaningful and you might also be able to also help out the society as a whole.

Unfortunately, due to various reasons, it continues to remain a dream for many forever. The main reason is that it requires knowledge, self-awareness and a lot of self-discipline to become financially independent. It also requires some sacrifices in your lavish lifestyle. So, unless you are really motivated, there is a chance that you might give up at some point of time.

So what are the steps required to become financially free? Here is a step-by-step approach which you can adopt to improve your future substantially.

Phase A. Preparing for Financial Freedom

Step1: Goal Setting:

Everyone has aspirations in life, and so would you. Why not start by assessing what your life’s goals? This will have a major impact on the amount of money that you would be required in the future. For example, you might want to buy a car in two years, a house in five years, would need to provide for your children’s education as well.

How much money you would need to meet your goals will determine how much you will need to save and how aggressively you will have to invest your savings. So, keep your goals reasonable, and do not go overboard with your estimates.

Remember, the steeper your goals are, the more difficult it will be to achieve them. In fact most people make this mistake, get demotivated with the difficulties they face in meeting up with the aggressive savings targets and give up.

This is one of the main reasons why most people do not achieve financial freedom, in spite of aspiring for it!

Step 2: Assess your spending habits:

A big part of achieving financial freedom would require you to assess how you are at managing money at present, and how you need to change your habits to reach your goals. Keep an eye on your expenditures for at least three months, and note down every expense that you incur. After that, divide the expenses under the following heads:

  • Essential: these are expenses which cannot be curtailed at all. These will include your household expenses like power bills, grocery bill, children’s education fees etc.
  • Nonessential: these expenses can be rationalized to some extent, but not totally curtailed. For example, instead of a high-priced branded apparel, you might opt for a cheaper alternative from another company.
  • Avoidable: these are expenses which can be curtailed totally, and your lifestyle will not get hugely hit if you do not spend on these items. All Expenditures on luxury items, changing your smart phone every year, purchase of the latest gadgets, et cetera will fall in this category.

Step 3: Evaluate your present financial situation:

Assess the level of investments and insurance coverage you have at present. If you already have plenty, then you’re well on your way to achieving financial freedom. However, if that is not the case, it might require more discipline and time commitment from you.

Phase B. Build a foolproof plan

Planning the road ahead is crucial, and depending upon the financial knowledge and acumen you have, you might want to do this yourself, or take the help of a qualified financial planner.

Step 4: Determine your target rate of savings:

The best way to get started is to target for a 20%-30% savings every month. Initially, if this seems to be unachievable, then at least aim for 15%. Anything below that will not be of much use.

When you get your monthly income, take out the targeted savings immediately. Tell yourself that you never owned this money at all. This will help you to control the urges of reaching out for that money whenever you feel like going overboard with your budget.

Let us take an example: suppose you earn INR 30,000, and your target is to save 20% out of this. As soon as you receive your salary, take out INR 6000 and keep it away. Think that you own INR 24,000 only. This will help you to curtail impulse buying and to reach your savings target of 20% every month.

Step 5: Prepare an expenditure plan:

Also known as a monthly budget, this expenditure plan will allow you to plan your expenses from beforehand. Not only will this help you estimate how much you can afford to spend every month, it will also act as a motivation for staying within the project, if you want to see some money left over at the end of the month.

The segregation of the expenditures that we did in step 3 will come in extremely handy when you start preparing your budget. What you need to do is create separate heads for every expense, and estimate how much you will need to spend. If you overspend on any particular item, then try to adjust it by reducing the spending on another one. This balancing will require some time to get used to, but at the end of the effort will be well worth it.

Phase C: Start building wealth:

Step 6: Repay your debts fast:

Another big target that you will have to take is to be of your loans as soon as possible. You can treat every loan, especially the high interest ones like the credit card dues drain out your liquidity, and is a huge impediment to achieving financial freedom. The sooner you are able to be of these debts, the stronger your financial health will be.

While you might not be able to pay off all your debts at once, you can certainly speak to the lender to see if they will allow you some discounts on the interest rates. While this might not always work in India, for the readers abroad, this is a powerful idea which many have already opted for.

Step 7: Get insured:

Speak to an insurance adviser to determine the quantum of life insurance and health insurance that you need to buy for your dependents and yourself. Never underestimate this need, because if you are not insured, then your life saving can get drained out on a single medical emergency very easily.

Step 8: Watch the small expenses:

The small expense that you are ignoring today might cause your efforts to fail totally. these can easily add up to a large amount, and eventually deplete your monthly budget. Be careful about every expense, and watch your wallet closely.

Step 9: Save at every opportunity:

Don’t overlook the smaller opportunities to save. Make saving your habit. Remember the old proverb:

[su_pullquote]A penny saved is a penny earned[/su_pullquote]

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For example, you can avail of the various discounts being offered by online retailers and shopping malls on the items that you would need to purchase. Offers often result in substantial savings, especially when you purchase in bulk. So try to visit the store once and buy most of your monthly requirements at a time, and avail of additional discounts on high value purchases. You will not get this discount if you purchase one item at a time.

Step 10: Invest wisely:

Your monthly savings are of no use unless you invest them wisely in assets that generate higher returns. You can only build wealth for yourself when you start investing. If you have not yet started investing, the best time to do it is now

Investing is an absolute must if you want to achieve financial freedom within your working life. I have already discussed the importance of saving and investing in one of my earlier posts Saving And Investing Can Secure Your Financial Future.

I will continue this series with articles on how you can actually invest your money in different financial instruments. So stay tuned and come back often to this site to read those upcoming articles.

Feel free to ask me questions and share your thoughts about how you plan to get started on your journey to financial freedom. I look forward to seeing your comments below.

  1. Tufan Nag says

    I enjoyed your article a lot Sir. Thanks for sharing your views. It will help me a lot.

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