Over a casual chat with a few friends a month ago, I was stunned by their alacrity to plan a long Independence Day break. I was pleased that they had taken the initiative to draw up a plan, figure the logistics and also allot a budget to it. It was perfect to say the least. Yet, as we were heading out over the weekend, the conversation mostly revolved around how one had to borrow or cut corners to make this trip happen. I butted in with small talk about financial independence and why it is important to take stock of our financial independence.

Are we really ‘free’ or is debt or some other financial crisis getting in the way of enjoying a peaceful life? While financial freedom may mean different things to people from different walks of life, the one imperative meaning that holds true for all is the state of having sufficient personal wealth to live by. You won’t get financial independence by accident—it requires you to be smart with your money to achieve it. So, here is my take on what financial freedom is all about. Some of my friends on this trip are already looking eager to get on this path before next Independence Day; perhaps you too could embark on this path and attain financial freedom.

Money Management – You will never go ahead if you don’t have a plan for your money in place; by definition it’s called a budget. Instead, at the end of every month you’ll end up wondering where all the money went. Just being capable of spending doesn’t qualify as financial freedom, without a plan it’s a recipe for financial disaster. Budgeting is important to getting your finances on the right track.

Lay out a financial map; list your income and expenses, and understand if your current income is in line with your expenses. At the start of every month give every rupee you will spend a name and track your spending throughout the month. This way you’ll establish areas where you may be overspending and under spending, which then can be adjusted. As taxing as it may sound, a budget and proper management will only help you create wealth over time.

Balancing needs and wants – Instant gratification, expensive lifestyle, impulsive splurging along with ‘YOLO’ (you only live once) mantra may have grown to become the new way of life for the youth, but has also made hand to mouth living a reality for a larger populace. These may also gradually snatch your financial freedom by way of debts.

It pays to be mindful of needs vs wants—a newly launched high-end Smartphone or an expensive pair of shoes on discount may seem like an enticing offer but, before dolling out a huge amount ask yourself if you could delay the purchase by a few months; if you can postpone it, you don’t really need it. The extra buck that you can save from such avoidable expenses can be stashed in the bank or better still, learn about a smart alternate to the bank account – a liquid mutual fund. That doesn’t mean you got to be a complete spendthrift—do splurge now and then, and sometimes to invest for bigger things later in life.

Steer clear of debt – It’s a no-brainer and yet, unfortunately, a common phenomenon, which stands as a huge obstacle in the way of living a peaceful lifestyle. Most people fall into debt inadvertently because they spend above and beyond their means. While credit cards may come in handy, they could also easily sway you into the dreadful waters of debt if not used responsibly. Also, in fulfilling our needs and dreams of a house, quality education, car etc., we end up incurring loans.

First piece of advice would be to spend well within your means. Learning to be satisfied with your limitations is a difficult and yet crucial step towards a debt-free life. However, if you’ve already made the mistakes, face them head-on and start cleaning the mess. Debt undermines your ability to build wealth and puts your financial plan at risk. Make it a priority to repay any form of loan in time and in full and once you have, stay there. Buy our word, being debt-free is a liberating feeling.

Save and Invest – Saving is one good habit we should inculcate since early on in life. As we grow and start earning it becomes all the more important to take savings seriously. Saving is the first step towards achieving financial independence—it empowers you to spend on whatever and whenever you want and helps you in achieving your short and long term financial goals without having to borrow, loans can be an expensive affair after all. More importantly, financial freedom is about being able to cover unexpected emergencies—savings will keep you sheltered in the case of an emergency, like a job loss, and unforeseen events, like hospitalisation or just a phone replacement because you dropped it and it broke.

Start by setting aside at least 10-15 per cent of your monthly income as savings. Once added, move towards multiplying – invest it into suitable investment tools for your savings to grow and beat inflation. Just saving a set amount doesn’t end your work of ensuring a secure and independent future for you and your family, investing regularly and smartly is the next step forward.

Freedom in retirement – Don’t let retirement take away your financial freedom—start early and plan well to remain financially independent even in your work-free years. With change in social structure, increasing longevity, and expensive lifestyle to maintain, financial dependence on children or family post retirement may not work well for you. Don’t procrastinate retirement planning just because it’s many years away and has ‘time’.

Use your early working years to your advantage by starting early and benefit from the power of compounding while building a healthy retirement corpus which will ensure you peaceful golden years. For those into retirement, ensure the growth of your retirement corpus by investing it and not leaving it in the bank. Again, there are several options to choose from; dedicated retirement savings for senior citizens and mutual funds based on your risk profile.

The biggest threat to your financial independence is inflation, which can be the biggest hurdle to your financial growth. Make sure this Independence Day you take the inflation beating pledge and put your money into financial instruments that have the capability to beat inflation or at least match it. In the long run, financial freedom wouldn’t be possible unless your savings and investments are beating inflation.

Happy Independence Day!

Shipra.singh@outlookindia.com