Financial freedom as your action plan

India’s ‘tryst with destiny began in August 1947. The nation was free politically from colonial rule. Economically though, India remained under siege.

Published: 15th August 2022 09:18 AM  |   Last Updated: 15th August 2022 09:18 AM   |  A+A-

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Representational purpose only. (Express Illustrations)

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India’s ‘tryst with destiny began in August 1947. The nation was free politically from colonial rule. Economically though, India remained under siege. Draconian laws stifled businesses and prevented markets from determining prices. For decades, the government remained the most significant job creator. It was only in 1991 that India began opening up the economy slowly. That was nearly two decades behind China and other East Asian tiger economies.  

The history of independent India is half glass full on democracy and half glass empty on the economy. That means successive governments in India have to do a lot more to expand the economy rapidly. That is irrespective of the ideology. Rapid economic reforms and growth are the only ways to lift people from poverty. That entails encouraging a culture of entrepreneurship. The government cannot alone solve problems for the people through public sector investments. You need business people to take risks and commit capital too. As governments build more efficient transport systems in urban areas and build roads and utility infrastructure in rural areas, businesses have an opportunity to grow. 

In a way, that is excellent news for an investor who is looking to grow wealth steadily. Businesses thrive on the back of an expanding economy. They create jobs and boost consumption in the economy.  From your standpoint, that is useful as companies rely on the demand created to sell their goods and services. Growing their business and profits allows share prices to move upwards. The overall trajectory of share prices is always in line with companies’ profit growth. That is valid for the past 40 years since we have records on the BSE S&P Sensex and over 30 years for the NSE Nifty. 

You are committed to your work for a large part of your life. If you enjoy your work, you will enjoy your journey. However, most people struggle to find the work that they love and the one that compensates well at the same time. In such a situation, your job becomes necessary, and you look for other avenues to earn more. 

Investing is a natural progression in that context. If your investments do well, you can generate a corpus allowing you to lead a life on your terms. It is at least a 20-25 year project. If you start work early and learn to invest, you can get to that state by the time you get close to 50. 

Before you start investing, you need to learn about your spending habits. As you earn more, you need to save and invest more.  Your investments have to be led by equity assets. They have to beat inflation in the economy over the 20-25 year investment span. Index investing is an efficient approach to channelise your savings into wealth. 

Your approach towards money 
Financial Independence Retire Early, or FIRE, is a concept propagated by many personal finance writers and advisors. It entails you to save and invest to accumulate assets towards a target amount that is enough to generate a passive income. That passive income is generated by drawing out 4% of that amount every year. For example, if you accumulate assets worth Rs 2 crore. That means you can withdraw `8 lakh every year without affecting the value of that money. You can withdraw more if your investments generate a reasonable rate of return.

That is possible only through appropriate asset allocation. There are limitations to a defined benefit or guaranteed return scheme offered by the government. The 10-year government bonds are offering yields to the tune of 7.2%. You can certainly generate more returns through index investing. The Sensex has consistently offered a 13-14% average return over 30 years. That is provided you can stay invested. 

All of that boils down to your approach toward money. If you spend more than you earn or spend before your investment, your investment plan is doomed. You also need to know a bit more about how your money is allocated to asset classes. With so much information available at the tap of your smartphone, not knowing about investing is no longer an excuse. 

Asset allocation and passive income
Financial Independence Retire Early, or FIRE, is a concept propagated by many personal finance writers and advisors. It entails you to save and invest to accumulate assets towards a target amount that is enough to generate a passive income. That passive income is generated by drawing out 4% of that amount every year. 

(The author is editor-in-chief at www.moneyminute.in)



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