It is that time of the year when freedom as a thought dominates. Financial freedom is propagated by every bank, mutual fund, insurance company or stockbroker. You are inundated with messages on your phone, email and in the press. They prod you to find your financial freedom. Ideas about retirement at 30 or 40 sound good to everyone. However, take a breath, and you will realise that it is easier said than done. It needs more of you than anything else. Your determination and effort would make a difference. This column has argued for a step towards gathering financial knowledge whenever possible. No matter your background. You need to work towards giving direction to your money.
The way to financial freedom is through financial literacy. Knowing practical concepts makes a significant difference. You may have learnt about compound interest in school. The idea is the single most important one to create wealth. All your investments have to earn an ‘interest on interest’ for a long time. The minimum time frame is ten years. The more, the better. The real power of compounding propels your wealth much later.
The other important concept to master is the inflation rate in the economy. You need not dive deeper to learn about the way one arrives at it. But you must track the movement in prices regularly. Your freedom is tied to the ability of your investment to beat the inflation rate consistently. If the inflation rate is higher than the return you get on your long-term savings, you are not creating wealth. You are essentially losing money.
There are a few other things too. Concepts like diversification of risk, the relationship between risk and returns and interest rate on loans. Once you get on top of these concepts, you will create room for a viable plan towards financial freedom.
Your money behaviour
Besides knowledge, your actions matter a lot. Your behaviour towards loans and the use of credit cards would also drive your ability to liberate yourself in financial terms. If you spend ahead of your income, you will end up in a debt trap. When you borrow your credit card and do not pay the total outstanding amount every month, you delay your financial freedom.
Borrowing to create assets makes sense. However, borrowing to spend money will not help. If you wish to retire early, you need to start early. Your attitude towards money, savings and investments will primarily make or break your wealth. Investing in tax-saving instruments like the public provident fund, equity-linked savings schemes or national pension schemes allows you to get a pre-tax deduction. That money is your retirement money. You do not touch it if you wish to set yourself free. When you invest in a tax-saving instrument, there is usually a lock-in period. You need to tell yourself that it’s the money you are giving yourself. That allows you to set aside money for your future and also save tax.
Why financial literacy matters
In 2019, the government came up with a National Strategy for financial literacy. A survey of 75,000 people on parameters like Financial Attitude, Behaviour and Knowledge revealed that 27% of the people achieved the minimum target score. It was 20% in a similar survey conducted in 2013.
The survey was conducted among adults in rural and urban areas, government services or private and students. Financial literacy is highest among salaried in the government services. It is the lowest among agricultural labourers.
An essential first step towards financial freedom is the creation of an emergency fund. Your ability to withstand an unexpected shock determines your level of independence. The pandemic in 2020 has wiped off the savings of millions in India and abroad. Many of you had a disruption in your long-term investment plans. Being financially free differs from one individual to another.
It means ensuring that you have enough to meet your living expenses without work. That may not be enough to realise all your dreams. But it should be sufficient to maintain harmony in your life.
If you wish to retire early, you need to start early. Your attitude towards money, savings and investments will primarily make or break your wealth
(The author is editor-in-chief at www.moneyminute.in)