Financial freedom is an undefined goal. It is an idea that makes you smile when you think about it. For many of you, it means not going through the grind daily. In terms of personal finance, it means your money earns enough money to pay for your living expenses. For that purpose, you need to work harder than you do now. You must focus on achieving financial milestones before your presumed retirement age. It is usually considered to be 60.
To achieve financial freedom, you need to invest wisely and regularly. These challenges make you take risks in an area that may not be your core competency. You could be a doctor or an engineer and would not know much about interest rates and financial market cycles.
Your investment is subject to market risk. You will often hear this warning from mutual funds. They warn you of potential losses while investing in equity assets. Mutual funds also warn you about debt markets. Credit and interest rate risks may indirectly affect the value of your unitholding. The government and regulators are keen to warn you about the pitfalls ahead as you are willing to put your hard-earned money to work.
Your risk appetite is related to your ability to earn a regular income. If you are confident about your income, you can risk your money. At different stages in your life, you will have a different confidence level about your income. It does not matter how much you earn. You must create a monthly surplus and regularly invest in equity assets to create wealth. You must learn about paying yourself first. That means saving money and investing for your retirement early in your life. Your long-term goals that require more savings need adequate time to beat inflation and grow for your needs.
All of that assumes you generate a steady monthly income, and your income will grow yearly. If you land up with significant wealth through inheritance or by selling an asset, you must put it to work to enhance your risk appetite. If you create a secondary source of income by investing that lump sum into a fixed-income instrument, that money is perhaps your risk appetite. You are still energetic enough to work and earn. At the same time, your money will work and generate an additional income you can invest. Your risk appetite enhances significantly as a result. You can allocate more money to equity assets and have the ability to ride through market cycles. You are also uniquely positioned to buy more equity when others are fearful and sell when there is euphoria.
You need to choose your path wisely when it comes to taking risks. Do not risk your only source of income entirely on equity assets. For example, many people feel confident about increasing the allocation to equity in sunset years after receiving retirement money. A lot of you believe that you should invest when you have money. However, that is a risky approach. Your retirement money is not for your life after your retirement and not for risking it.
As explained earlier, your ability to take risks depends on your future income. If you think your inheritance or assets will likely generate a regular income in perpetuity, you can keep buying quality equity assets forever. Legendary American investor Warren Buffett is still looking to deploy over $100bn cash on the Berkshire Hathaway balance sheet at the age of 94. He is comfortable waiting and riding through stock market falls or making the most of stock market rallies because he has managed to save and invest regularly over decades.
You can learn new skills and ensure they help you generate an income even without a regular job. Your financial freedom rests solely on your ability to boost your risk appetite.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)