Interest money

Your Money: Seven Steps to Financial Freedom

By Sushil Jain

If you aspire to become financially independent or at least become financially strong, there are some essential things you need to put in place. Without a plan in place, accumulating and investing piecemeal will not be successful in the long run.

Here are seven steps to help shape your financial life.

Step 1: Organize your finances
First, organize all your finances. Consolidating all of your savings, investments, insurance, debts (personal and business), and non-financial assets in one place can be a time-consuming process. Unless you know where you are now with your finances, the plan for your future financial life will not emerge with clarity.

Step 2: Cash and Debt Management
Next, you need to note all the different input and output sources. Input sources can include salary or business income, interest or dividend income, rental income, bonuses, among others. Also consider the contribution of the spouse. Separate the entries according to their frequency. This will give you a better picture of cash flow to make informed decisions.

Similarly, prepare a statement of outgoings that includes household expenses, business and professional expenses, loan repayment, and any other outgoings. Some of the expenses could be discretionary expenses while others could be non-discretionary in nature. Separating outgoings on a monthly, quarterly, semi-annual or annual basis will help in making informed decisions while managing money.

Also find out the amount of your debts. The only constructive debt is a home loan, as the value of a house should increase over time. Make a plan to get rid of all unconstructive debt as early in life as possible. Aim to have positive cash flow year after year.

Step 3: Liquidity and emergency risk management
Now plan for the worst times: job loss, medical emergency, economic and geopolitical uncertainty, etc. Such events may require you to find money to overcome the situation. Therefore, have an emergency fund in place. Purchase adequate professional indemnity, home insurance, life insurance and health insurance for complete protection.

Step 4: Manage financial goals
To achieve your financial goals, you must have an appropriate plan detailing each goal. Start by identifying the financial goals, then estimate its cost and the time frame you need to reach it. The target at current cost should be inflated to arrive at the actual cost for which you will need to save regularly. This is the basic and first exercise for each financial goal.

Step 5: Wealth creation and second income
Building long-term wealth is a slow process and requires patience. One of the most important factors in building wealth is the right asset allocation. Based on your risk profile and objectives, you should design an asset allocation plan and update it periodically based on time horizon, risk capacity and market conditions until that the objectives are achieved. The choice of stocks, debt and alternative investments and their allocation will greatly contribute to the creation of long-term wealth. While building wealth, think about income-generating assets. This will give you the freedom to work on your own terms as the income-generating asset will provide you with a second income to maintain your much-needed lifestyle.

Step 6: Wealth Management
As your wealth grows, you must take every precautionary measure to ensure that the wealth grows and does not run out during the accumulation phase. How you manage risk, goals, savings and investments will determine your ability to manage your wealth over the long term.

Step 7: Estate planning
The transmission of your heritage or the heritage created is the last step. To ensure a smooth transition of wealth to your legal heirs, you must have an appropriate succession plan. Make a will that will support the financial needs and goals of all family members without any legal talk in the future.

The author is CEO, PersonalCFO.in