We have always been saving/investing for our future goals. Investors regularly squirrel out money from their limited incomes for their big future objectives, for their house, first car, kids’ education, weddings, medical needs, emergencies, retirement, etc. However, people’s needs and preferences are changing and hence the goals have evolved. Buying the first car has overtaken the first house in many investors’ priority lists. Little luxuries like watches, purses, frequent vacations, dining in top hotels, etc., have found love for them among Indian consumers. A lot of young students as well as professionals are also inclined to pursue their passions like trekking, yoga, learning foreign languages, etc.

Another change that is increasingly being witnessed among millennials is the desire to retire early. The retirement target age for many has remarkably gone down from 60 to 50, some even want to retire as early as 45 or 40. While it’s a good idea to retire early and pursue your passions and travel the world, while you are relatively young and healthy, can you afford it?

Financially, retiring a decade earlier means 10 fewer years of regular income, translating into 10 fewer years of saving for retirement, and 10 extra years of only outflow. At the age of 35, with not much saving and investment, no proceeds from the inherited property coming your way, not many valuable assets, thinking to retire in the next 10 years may not make much sense. But is it possible? We would say only if the required time and planning are in place.

Before one retires, he/she must have provided for the following:

• Discharged major financial obligations, like having a home, having kids’ education and marriage expenses covered, etc.
• Have adequate insurance in place to take care of any uncertainties.
•  No outstanding loans or debt.
• Adequate retirement corpus to support you for a long duration.
• Early retirement may sound challenging, but achievable if approached right. Here are some points which can help you accomplish the above, and let you dream of early retirement.
  
  

2. Start investing for your Retirement as soon as you start earning. Take up the last goal first, and start saving and investing for your Retirement from the day you start earning, the sooner you start, you are simply buying yourself time for being better equipped for D-Day. You can start with a small SIP and increase gradually as you age and your income increases. While starting soon is important and will give you an edge, it’s not the end, the journey is demanding.

A blend of the following practiced over your working life should help you save enough for your goal:

-> Spend wisely
-> Save aggressively
-> Invest generously

3. Choose the right asset class. Apart from disciplined investing, one thing that can make a lot of difference and contribute immensely to your retirement kitty is the return on your investment. An 8% RD versus an Equity SIP with an average return of 12%, of R 10,000 per month will fetch you R 91.5 lacs and R 1.7 Crore respectively, in 25 years. A difference of just 4% in return almost doubled the corpus over the same period. You have a huge investment horizon in hand, complemented by the ability to take the risks because of the time, invest in products with good growth potential and make the most of compounding.

4. Ensure a debt-free life at the earliest. A prerequisite to retiring early is being Debt Free. So, start paying off your loans, start with high-cost debt like credit cards and personal loans, and gradually move to the car and home loans. Also, about loans, don’t unnecessarily burden yourself with them. When you have prioritized your needs, and an early retirement occupies the top position, let’s strive to achieve it, don’t go for a 3 Bhk house when a 2 Bhk meets your requirements. Or why go for an expensive SUV for a nuclear family, when a mid-segment hatchback or sedan does the job?

5. You can still make money after retirement. Fortunately, for many who wish to retire early, retirement doesn’t mean putting a full stop to earning. Many would be planning to work freelance, as consultants, and trainers, or run things like blogs, Youtube channels, etc. These things can be clubbed with a retired life long with pursuing your passions. Many would also like to build a secondary income source, say rent from additional property, the share of profits from some business as a passive investor, and so on. These things would likely bring in some cash flow which can be great for your retirement plans. The point is to be well-planned and prepared before taking the plunge.

6. Invest your retirement corpus wisely. Investment management is a never-ending process and it will continue even after your retirement. Your retirement corpus should provide you with regular income, if needed, to meet your routine expenses. There are various asset class options like real estate, fixed interest-bearing instruments, small saving schemes, etc., which can give you a regular income. However, the investing factors like risk appetite, income needs, liquidity needs, longevity needs, etc. Thus, debt mutual funds and balanced funds with SWP (Systematic Withdrawal Plan) option, can be looked at for your post-retirement investment planning. While a debt fund will give steady, relatively risk-free returns, a balanced fund will also allow making the corpus to grow and thus last longer, albeit with a bit more risk.

What does financial freedom mean? If you ask this question to yourself and ten other people it won’t be surprising to find different answers from all. Even authors, financial gurus, and top advisors have talked about financial freedom in different tones. 

For some, it means never having to work again or having huge wealth while for others it may be financial stability or simply being free from financial troubles. Financial freedom is a term that is vastly and liberally used but is very subjective. Even having huge wealth is very subjective as there is no end to how much is enough while life needs can be satisfactorily met with much less than you may imagine. 

For one it may mean living a lavish life in a grand bungalow but for another, it may mean selling a Mumbai flat and settling in a village, with the proceeds lasting him a peaceful lifetime.

FINANCIAL FREEDOM: THE THREE CHECK-POINTS

Financial freedom is much more than having money. It’s the freedom to be who you are and do what you want in life. Financial freedom has different implications for different individuals though. And if we are aiming for financial freedom, we are aiming for something beyond the three checkpoints which have to be ticked. Only then could we say that we are financially free in a real sense.

It means having the freedom to maintain your lifestyle after a certain point of time, without having to work for it. Time can be your retirement period, it can be the happening of an unfortunate event, like an accident or failure of a business or it can be that one day when you simply quit your job and start exploring the beauty of this world without worrying about the ‘how to earn?’ part of the money.

And secondly, all your responsibilities and life goals should be satisfactorily met. Having financial freedom also means that not only you can maintain your lifestyle and meet daily needs but also are in a position to fulfill your life responsibilities like child education, marriage, arranging for a residential home, charity, and all other goals you may have.

Lastly, you should be able to sustain yourself for a very long period – a few decades maybe on the loss of income or your entire life or your post-retirement life until you become an old hag. This sustainability means that you should be prepared for and able to withstand any unfortunate event in your life, including ailments and accidents.

FINANCIAL FREEDOM: REALLY?

Financial Freedom, for most people, is the ultimate Goal. But to be realistic, NO ONE chooses to ‘stop’ working or live a life of a wanderer or a lazy person even if there was no need to work. Even the richest person on the planet works very hard but for a different reason. Once the question of making a living is solved, one progresses to the non-material aspects of living. It then becomes a question of your passion, beliefs, and basically what you enjoy doing in life. If it is your work or business, nothing like it.

So what we mean by financial freedom is not something vague or subjective. Financial freedom = freedom from fear. Freedom from the uncertainty of how you will live or do things you need to do tomorrow, irrespective of anything that happens. It is about being ready for freedom from financial worries & equipping yourself with enough investments and insurance for protecting your future needs. When considered in this context, financial freedom looks more like financial well-being for all of us and that looks very feasible and practical and an ‘X’ figure for the same can easily arrive mathematically. We will not talk about that now though. What we are interested in is really how quickly can we attain that freedom of mind & ensure its sustainability. We will now discuss the important steps which can help you gradually ‘attain’ and also ‘sustain’ financial well-being. So here we go:

ENSURING FINANCIAL WELL-BEING

(A) Passive Income: To get rich, you have to be making money while you sleep! A crucial step in financial well-being is not just protecting your income stream, but also creating a second or multiple sources of passive income. This can be in the form rental income, income from investments, side business, etc. Passive income is a must, especially when your primary income seems insufficient or seems at risk or when you plan to dump it in future. In simplistic terms, financial freedom could be closer if – Passive Income > All Expenses. If this can be ensured a predictable future, with a bit of margin, you are in a safe zone!

(B) Good Debt & Bad Debt: There is a distinction between good debt and bad debt and one should understand both and try to be free from the latter. Debt helps you achieve a lot of things in life that are impossible otherwise. You take loans for education, for buying your house, or your car or a businessman takes a loan for filling the working capital gap. In terms of the loan, this equation is necessary to be checked (i) asset is created or some basic /important need is fulfilled (ii) if an asset is created, the minimum return from the asset > interest rate of the loan, without the need for any speculation or leveraging. Using debt to finance short-term, non-important desires like vacations, gadget purchases, etc. is not welcome. Credit card loans & personal loans are the worst because of the high-interest rates they carry. Being debt free is surely a very healthy status to have and is necessary for long-term financial well-being. The thought ‘freedom from debt is financial freedom’ is not entirely misplaced. If you are using debt to own appreciating assets like homes, businesses, etc., make sure that you wind it up soon before thinking of financial freedom.

(C) Risk protection: Protect the downside with Insurance. Secure yourself and your family by taking adequate Medical Insurance, Term Insurance, Accidental Insurance, and Property Insurance. The insurance premium is often considered a burden, but it is the biggest shield you are creating for yourself in your fight for financial well-being. In case of an unfortunate event, your insurance will take care of the extra financial burden in the form of hospital bills, medical bills, and loss of income. Your investments working for your goals will be intact, thus ensuring continued financial well-being, devoid of any shocks.

(D) Staying within your means: Do not go overboard if you enjoy a good income and have created decent assets. Whether any expense is necessary at present and what potential wealth it can create in the future if invested? is a question one should keep asking oneself. Doing this will help us attain financial well-being sooner than we can expect. After that, sustaining your financial well-being will be a challenge. Sustainability is all about continuing to enjoy the lifestyle you deserve not the extravagant lifestyle you see in the movies. It is about staying within your means and within the acceptable boundaries you have planned for yourself.

(E) Don’t Be Stupid: There are many cases of millionaires and billionaires have gone bankrupt. So having money does not mean being rich always. Do not commit stupid mistakes when it comes to money. Many people with the desire to make more money quickly, take wrong investing decisions, which can hamper their finances for a very long period, can even stymie their goal of achieving financial well-being. Beware of ‘Ponzi’ schemes, equity market speculations, or investing in risky products – these things can cost you big in the long run. The better idea is to seek professional guidance and do the basic things right like starting early, saving, investing in the right asset class, being patient, and investing for the long term, etc. Remember you can attain and sustain financial well-being, provided you do not make big mistakes in life.

CONCLUSION

Financial freedom is a mental, emotional, educational, and behavioral process. If we consider it as our goal, it would require us to be and do much more than today. It would require discipline, focus, and to become more successful & stronger in every aspect of our lives. Having money is and will never be enough. How to use that money for our good is what matters. And how to live a life in the end, makes the most difference. The above steps are just a few things that will help you to take control of your situation and start your journey toward financial well-being & freedom.

1. 1. Anchoring
   

   Anchoring is quite a common cognitive bias witnessed among investors, which means basing investment decisions on an initial piece of information. This initial information serves as the starting point, which we adjust, to arrive at investment conclusions. Say, for instance, you bought a stock of XYZ co., in January at Rs. 100, at the end of May the stock went up to Rs. 130, then the top management changed, and by October the stock came trotting down to Rs. 90. Now, you are holding on to the stock hoping it will again rise to Rs. 130, then only you will sell to book the profits.

   In this case, you may be clinging onto the anchor. Buy, sell or hold decisions must be on the back of fundamentals, and not on previous highs or lows. Don’t let perceptions or experiences, good or bad, clout your judgment ability, a past bad experience with equity doesn’t direct the future, it’s the rudiments of the product that matter in the long term.

   2. Confirmation bias

   Another product of extending our beliefs and preconceived notions to our decision-making process is Confirmation Bias. For instance, you are looking forward to the launch of the new Honda Civic for your next car upgrade, you have read good reviews about the car, the Sunday car shows are talking about the Civic, and all the blogs you read people have written good things about the car, etc.

   All the information seems to be in the affirmative, so now you firmly believe that you have made the right decision. But have you ever thought that it is only because you are reading selective reviews and blogs? Probably you have subconsciously ignored contradictory views and negative reviews or skipped reading good things about other cars in the segment. In short, we are all ears to information that supports our beliefs, while filtering out everything that does not fit into our comfort zone. And when this tendency is extended to finances, it dilutes the investment decision-making process.

   You may be looking at only that information that is in alignment with your notions while ignoring the rest. Try to look at contradictory viewpoints, and consult your financial advisor, he/she will show you the right path.

   3. Loss aversion bias

   The most common one, we fear the possibility of loss, and we are just not prepared to let go of our money, under any circumstance. We hold on to the poor performers because we do not want to book losses we purchase more of the same infertile stock/mutual fund to average out the cost and cover up the losses that we have made. You have to accept the fact that a bad decision was made, book losses, and move on. Our strength is tested in volatile times when we see our investments falling. It’s up to us, we can either fall prey to the bias, and sell our investment to avoid losses; or we can do what we ought to do, that avoid the noise, and hold the investment for it is for our long-term goals.

   4. Mental accounting bias

   Mental Accounting Bias is the tendency to mentally categorize money into different mental accounts based on their source or the basis of its intended use, and then treat the money in different categories differently. For Example, you had set aside Rs 500 note last month for buying yourself a book, but then today when you open your cupboard, you find that you have lost the note. You are sad and decide you’ll not buy the book. Normally, had you ‘not’ dedicated this note to the book, and would have lost Rs. 500 in the usual course, the book purchase might not have been affected. This is a simple case of Mental Accounting Bias. Similarly, people take investment decisions based on the mental accounts they have created. For instance, in case of a sudden inflow of money like a bonus or inheritance received, people tend to be irrational in their decisions compared to when the source is their monthly salary. Or say you have kept an FD for your vacation and at the same time you are paying massive interest on your credit card bill outstanding. Logically you should break the FD to pay the loan since you are getting 7% and paying 25%, but you don’t do so, since you have created a mental account for that money in your mind. We must understand here that money is fungible, and the value is the same irrespective of the source or the outlay. Hence, you must be careful of such mental accounts and the impact they may have on your investing decisions.

   5. Familiarity bias

   At times our investment decisions are based on our connection or comfort with the product we are investing in. People working in banks often purchase their employer’s stocks or banking sector stocks, we invest in stocks or sectors because we have researched a lot on this stock/sector and believe in it, and the like. Because of this bent towards our familiar options, we are restricting our investment horizon. There is a universe of investment products available out there, and we must choose the best from the lot.

   6. Bandwagon

   As the name suggests, we have this uncontrollable urge to order what the people at the other table are eating. We often extend the urge to our investing decisions also, we feel other people are making money because they made better choices, and we feel we are missing out on some information that they may have, it’s a typical case of FOMO (Fear of Missing Out), and it can have disastrous repercussions. Every individual is unique in terms of his/her financial standing, goals, needs, priorities, and risk appetite, so how can the investing process or products be similar? Hence, you must always be mindful that investing is not about making more money by following your neighbor, rather it’s about gratifying your unique goals and needs.

   To conclude, a large number of times, we follow our emotions, and inclinations tend to influence our day-to-day decisions. Without realizing it, you might have fallen prey to biases, while in investment decision-making. They say “The one who has mastered his emotions is mightier than one who conquers a city”, it is inordinately applicable to investing, and we must always stick to the fundamentals and follow our master plan religiously. And your financial advisor is there to help you overcome these cognitive biases and to show you the mirror whenever your decisions are clouded by your emotions.

1. The Exciting 20s, 20s is the time when we all are enthused, energetic, and excited. However, it is also a time when people make the most mistakes in life. Many of us start the investment process early well before turning 25. But while the time may be on our hands, wisdom often isn’t. And hence investors in their 20s are highly prone to committing some common financial mistakes like

   Overspending, no savings:

   With your own money now in your hands, you feel empowered and deserving to spend it. We now wish to fulfill all our college dreams, and savings is the last thing on our minds. While you may be well deserved to spend as per needs, splurging extravagantly isn’t desired. We often splurge on things like watches, cars, entertainment, clothes, and especially gadgets like mobiles, changing them to buy the latest edition. But remember that every rupee saved and invested at this time has the potential to create the maximum compounded wealth over time. Time is the biggest resource you have during these years. Starting a SIP at age 25 can help you create enough wealth to help in the purchase of a house or say starting your own business later by age 35/40.

   Not learning about investments:

   Lack of financial literacy is often witnessed among young investors. Somehow, the inclination towards savings, investing and management of finances are just not there. There are big dreams but the path to be followed to actualize them is often missing. This is the time when you can experiment and learn and still have time to recover from any hiccups in the process. It would be a waste of valuable time if we do not get out of our 20’s without enough knowledge and some experience in investments.

2. The Settling 30’s

   30s is the time when we would be settling into our jobs, home, relationships, and also as a person. This is the stage when the investor has attained some degree of maturity in all aspects of his life, including finances. This is a crucial period as you would be expected to make critical financial decisions that will have life long impact on your finances. The common investing mistakes that a 30’s investor should be careful of are:

   Towering EMI burden: The most prevalent financial problem among the 30’s investors is they overburden themselves with EMIs. EMIs for homes, cars, and other sophisticated electronics, all running at the same time. The reason probably is the easy availability of loans, however, an investor should not be taking loans more than he can afford to repay. As a simple rule, your EMIs should not exceed 50% of your net monthly cash inflow. EMIs on depreciating assets (like a car, or electronics) are worse than appreciating assets like property. There should be a substantial gap between a person’s income and the sum of his EMI. Excessive EMIs leave the investor with little or no room for saving and investing for other important life goals like kids

   No planning for long-term goals: 30s is the time when an investor must have a financial plan for the rest of his life prepared. This is the apt time when the initial steps towards long-term goals like kids’ education, marriage, and retirement should be taken. But for some, long-term goals are nowhere on the list, their life is revolving around near-term goals like home, car, vacations, etc., and what they don’t realize is, the time to realize it is now or else it’ll be too late. Proper planning not done now will force one to compromise later in life.

   Inadequate insurance: Another major problem in a 30’s investor financial plan is inadequate insurance. People often treat insurance as an expense and try to keep the premium payments as low as possible. While insurance is an asset that is going to protect you and your family during difficult times, therefore you need to be adequately covered at all times. If your parents are dependent on you, it is critical that you start health insurance for them too as early as possible before it is too late as they may be nearing old age. If not done, health emergencies in your family can potentially sabotage your financial worth at any point in time.

3. Responsible 40’s

   This decade puts many financial responsibilities on your shoulders. You are in the middle of your career, you have to take care of your kids’ education, your loans, and your parents’ expenses, and at the same time, you and your spouse may want to live your dreams, as you are still in the young category. This is a very crucial time for managing your finances right and some common mistakes that a 40’s investor often commits are:

   Preferring traditional products: The biggest blunder of 40’s investors is their bias towards fixed-income investments or traditional products like PPF, gold, property, etc. There are many reasons for this, like a lack of awareness about non-traditional products, bad experiences, unwillingness to learn and change, and so on. While no traditional product is negative per se, an investor has to holistically look at his entire portfolio and make the right asset allocation decision. Often we see that investors lose track of their asset allocation during these times.

   Losing track of financial goals: Another lapse in our finances as we progress is, we sway away from our financial plans and goals. This may be due to a lack of regular revisions in your financial plans or losing touch with your financial advisor. This is perhaps the last phase when you can still invest in equities for goals that are yet far away. The risk you then carry is falling short of your goals and compromising on them or diluting your financial net worth. Retirement should now become a critical goal for you to plan and if you haven’t yet started, it must be at the top of your list.

4. The Maturing 50s

   50s is the time when you would see a lot of events and changes taking place in your personal life. This stage is the last decagon of our working life, not to be underestimated as you have the highest earning capacity. Some of the common money mistakes of a 50’s investor are:

   Compromising on your Retirement Kitty: The greatest financial mistake you may be forced to do is to compromise on your retirement by withdrawing from its corpus to fulfill your other responsibilities towards your children like marriage, education, business support, etc. Lack of adequate planning in earlier life stages has got you in this position today and all the efforts directed towards living a financially independent and peaceful life post-retirement take a big hit. The 50’s investor should remember that retirement years are approaching, there will be no inflow of money soon, but there will be outflows, and he/she should take due care and have enough money to fill in the blank. Retirement planning should be the top focus here and you should do all that is possible to reach adequate numbers.

   Lack of Estate Planning: While many investors may still be in the pink of their health, the 50s does bring in some uncertainty in our lives on the health front.

   It is a stage when you have adequate wealth accumulated and invested in various avenues, including property. Be it you or your spouse, it is also the time that you start thinking about estate planning or at least creating a proper will for wealth distribution. Estate planning would be crucial if you still have someone close to you who would need special care & attention in your absence. Keeping all documents in one place and getting proper estate planning / will writing done, will save a lot of hassles and confusion on part of your children in your absence while also ensuring that your spouse is not left at the mercy of others.