It has been noticed that people in India do not understand the necessity of buying insurance policies. The insurance penetration in the country is noticeably lower as compared to the universal average. Even most of the insured people in India are grossly under-insured. If you are someone, who comes under this category, it is important that you understand the consequences of being under-insured and take action to secure the future of your family.
What is underinsurance?
To understand what is underinsurance, you have to know the goal of a life insurance cover. It is designed to provide financial cover to the family of the policyholder in case of their untimely demise. Under-insurance is the condition where the life insurance cover is not enough to take care of the financial needs of your loved ones. It means the sum insured by your policy is not adequate. Underinsurance can put your family in a financial crisis when you are not there to take care of them.
Example of underinsurance
Imagine if your current lifestyle requires ₹50 lakh as financial support for your family for the next five years, but your term insurance cover is ₹30 lakh. That means you are under-insured by ₹20 lakh.
Reasons for being under-insured
Now that you understand the underinsured meaning, you need to know what results in underinsurance. These are some of the most defining reasons:
Investing in insurance to save taxes
Most life insurance products come with huge tax benefits. So, many people buy insurance policies to save taxes and forget that the main purpose of life insurance is to offer death benefits. Hence, they end up settling for underinsurance.
Greedy agents
Most insurance agents try to sell you products that can ensure them a hefty commission. Hence, they do not prioritize the benefit that you require. This results in underinsurance.
Wrong product
There is a huge range of life insurance products available. However, not every product is designed to meet the needs of every single policyholder. If you end up buying the wrong product, you will either unnecessarily pay a higher premium or end up with an inadequate cover.
The risks of being under-insured
There are many disadvantages of being underinsured, and the biggest one is that your family will suffer financially when you cannot be there for them. They will receive less than the amount of money they need to meet their financial responsibilities. It also means what you invest as a premium will be wasted.
Underinsured Renovating Cost
Similarly, when you only insure your building’s market price and not the re-build cost, then you’ll lose the insurance amount you have put while re-building it or renovating it.
How to identify when you are under-insured
A term insurance plan can be a very fruitful investment if you are not underinsured. So, how do you even know when you are underinsured? Firstly, you have to calculate your yearly household expenses, which must include rent, bills, groceries, and repairs. Add to that the loans that you need to repay and the investments that you hold. Also, do not forget to include the expenses for your children’s education and marriage.
Once you have an idea about the yearly average expense, multiply it by 15, and that number is the required sum assured to make sure that your family will be financially covered for a long time.
You can consider buying online term insurance, as that way you can easily compare different products and their specifications. This will ensure that you buy a suitable life insurance plan for the family.
What happens when you are underinsured?
The most serious risk of under-insurance is that it produces a false sense of security in the mind of the individual acquiring the life insurance policy, which is actually worse than not having any protection at all. Only after an unexpected incident does the family realise that the quantity of insurance is insufficient to pay off obligations, let alone develop a corpus for the children’s education and a replacement income stream, etc.
This is covered in underinsurance
Term insurance
It is much better to keep investments and insurance separate than to combine them, and term insurance allows you to acquire a lot larger cover at a fraction of the cost.
Furthermore, in a growing economy like India, where inflation is causing prices to rise on a daily basis (especially medical and educational inflation, which is in the double digits), 10 lacs today will not have the same value as it will ten years from now and will certainly not provide you with the same purchasing power. As a result, treating insurance purchases as a one-time “fill it, close it, forget it” activity is insufficient.
Underinsurance vs over insurance
Underinsurance generally means that your out-of-pocket healthcare costs exceed 10% of your family income or that your deductible exceeds 5% of your income.Underinsurance can lead to people going without medical care or incurring debt.Insurance add-ons can help fill coverage gaps, but they are not cheap.There are free and low-cost healthcare services available for the uninsured and underinsured.
How Does Coinsurance Work?
Coinsurance is the percentage of the treatment cost that you have to bear before the insurer starts covering the medical expenses. It is a form of cost-sharing between you and the insurance provider. The coinsurance is usually a fixed percentage of the treatment cost. However, the coinsurance terms only apply after you (the policyholder) have surpassed the deductible amount applicable under your plan. Let’s understand how coinsurance works with an example.
Understanding Coinsurance With an Example
Let us assume that the coinsurance term of your health insurance plan is in the 80/20 ratio and that your plan has an annual out-of-pocket deductible of ₹2,000. Now, say that you suddenly require an urgent surgery early in the year that will cost you ₹50,000. Since you may not have met your deductible amount this early in the policy period, you will first pay the ₹2,000 of the total bill.
After meeting the deductible of ₹2,000, you will then be responsible only for the coinsurance payment i.e., 20% of the remaining bill amount, which will be ₹9,600 (20% of ₹48,000). Your health insurance provider will cover the remaining 80% of the treatment cost. Later in the year, if you need to undergo another medical treatment, your coinsurance clause will come into effect immediately as you have already met your annual deductible.
How Does Coinsurance Benefit the Policyholder?
If you are considering buying a health insurance plan with coinsurance, the main benefit it offers you is lower premiums. If you opt for coinsurance in health insurance, where you pay a fixed percentage of your medical costs, your insurance premiums towards the policy will be lower. But it is recommended to consider the out-of-pocket expenses that you might have to bear every time you raise an insurance claim while opting for a plan with coinsurance.
How to Calculate Coinsurance Payments?
To calculate the coinsurance payment that you must bear, you need to understand the coinsurance rate applicable under your health plan. If the coinsurance is 20% of the medical costs, then you can first convert the percentage into a decimal. Hence, coinsurance of 20% would become 0.20 and coinsurance of 15% would become 0.15. Then, you can estimate the coinsurance payment in the following way:
Coinsurance Rate x (Total Cost of Bill – Deductible) = Amount to be Paid
Let’s take the example discussed above, with a coinsurance of 20%, a deductible of ₹2,000 and a total medical cost of ₹50,000.
0.20 x (₹50,000 – ₹2,000) = ₹9,600
Thus, the amount you are required to pay after covering the deductible is ₹9,600. However, you must remember that you need not consider the health insurance deductible component after you have cleared it during the policy term.
Wrapping Up
Even though opting for coinsurance offers you lower health insurance premiums, your out-of-pocket expenses during medical treatments will go up with such a cost-sharing clause. This can lead to an unnecessary financial burden during medical emergencies. Hence, you must compare health insurance plans available in the market before buying a policy, read all the terms of the health insurance plan you are opting for, and make an informed decision.
Proper tax planning can not only help you save on taxes, but also increase your income. We all want to know how and where to invest to maximise our return on the investments, but make some obvious mistakes such as keeping tax planning for the last minute. Experts say people make impulsive investment decisions last-minute. Here are a few smart strategies that help you maximise your investment returns.
Start tax planning at beginning of the financial year
This is a very crucial step to maximise the returns on your investment. Anup Bansal, chief investment officer, Scripbox says, “Tax planning is a crucial aspect when it comes to saving on returns. If one starts at the beginning of the financial year it provides more time to select instruments as per one’s goals and preferences.” Also, it helps you avoid last-minute impulsive investment decisions.
Additionally, if you are planning to make investments in tax-saving instruments like ELSS and PPF, experts say it is best to do it at the beginning of the year to give more time for growth. If there are changes in your personal situation, such as rental agreement changes (HRA) then take these into consideration and intimate your employer for accurate TDS.
Financial gifts to parents
To avoid income clubbing, you can make financial gifts to your parents, or even your grandparents. Bansal says, “If a parents are over the age of 65 and do not have a taxable income, the taxpayer can invest in their name to earn tax-free interest.” Senior citizens over the age of 60 are entitled to a Rs 3 lakh baseline exemption. And if you wish to take the help of a senior citizen above the age of 80, the exemption is even higher at Rs 5 lakh.
Investing in the name of your kids
Investing in the name of your kids is a great idea as they help you save tax like your parents and grandparents.
“After becoming an adult, the kid will be treated as a separate individual, for tax purposes and would even be eligible to open a Demat account and invest in stocks and mutual funds, with money gifted by the parent,” says Bansal.
Long-term capital gains of up to Rs 1 lakh will be tax-free every year, while short-term capital gains would be tax-free up to the standard exemption of Rs 2.5 lakh per year.
Invest in NPS for tax benefits
India has low annuity rates, and the scary thought of putting away your retirement money forever, has led to NPS being considered an unattractive investment option. However, Bansal points out that NPS’s withdrawal regulations have seen recent reforms which have reversed this to some extent, making the pension scheme more appealing to those in their 50s. “The new rule opens a few different tax-saving options for investors,” he says.
Benefit from the available tax deductions. It is important to know where you can benefit from the available tax deductions. You can claim certain deductions up to Rs 1.5 lakh under Section 80C. Even for investing in NPS, you get a deduction up to Rs 50,000 under Section 80CCD(1b).
Financial freedom—having enough savings, investments, and cash on hand to afford the lifestyle you want for yourself and your family— is an important goal for many people. It also means growing a nest egg that will allow you to retire or pursue any career you want—without being driven by the need to earn a certain amount each year.
Unfortunately, too many people fall far short of financial freedom. Even without occasional financial emergencies, escalating debt due to overspending is a constant burden that keeps them from reaching their goals. When a major crisis—such as a hurricane, an earthquake, or a pandemic—completely disrupts all plans, additional holes in safety nets are revealed.
Trouble happens to nearly everyone, but these 12 habits can put you on the right path.
1. Set Life Goals
What is financial freedom to you? Everyone has a general desire for it, but that’s too vague a goal. You need to get specific about amounts and deadlines. The more specific your goals, the higher the likelihood of achieving them.
Write down these three objectives:
1.What your lifestyle requires
2.How much you should have in your bank account to make that possible
3.What age is the deadline to save that amount
Next, count backward from your deadline age to your current age and establish financial mileposts at regular intervals between the two dates. Write all amounts and deadlines down carefully and put the goal sheet at the front of your financial binder.
2. Make a Monthly Budget
Making a monthly household budget—and sticking to it—is the best way to guarantee that all bills are paid and savings are on track. It’s also a regular routine that reinforces your goals and bolsters resolve against the temptation to splurge.
3. Pay off Credit Cards in Full
Credit cards and other high-interest consumer loans are toxic to wealth-building. Make it a point to pay off the full balance each month. Student loans, mortgages, and similar loans typically have much lower interest rates; paying them off is not an emergency. However, paying these lower-interest loans on time is still important—and on-time payments will build a good credit rating.
4. Create Automatic Savings
Pay yourself first. Enroll in your employer’s retirement plan and make full use of any matching contribution benefit, which is essentially free money. It’s also wise to have an automatic withdrawal into an emergency fund, which can be tapped for unexpected expenses, as well as an automatic contribution to a brokerage account or something similar.
Ideally, the money for the emergency fund and the retirement fund should be pulled out of your account the same day you receive your paycheck, so it never even touches your hands.
Keep in mind that the recommended amount to save in an emergency fund depends on your individual circumstances. Also, tax-advantaged retirement accounts come with rules that make it difficult to get your hands on your cash should you suddenly need it, so that account should not be your only emergency fund.
5. Start Investing Now
Bad stock markets—known as bear markets—can make people question the wisdom of investing, but historically there has been no better way to grow your money. The magic of compound interest alone will grow your money exponentially, but you do need a lot of time to achieve meaningful growth.
However, remember that—for everyone except professional investors—it would be a mistake to attempt the kind of stock picking made famous by billionaires like Warren Buffett. Instead, open an online brokerage account that makes it easy for you to learn how to invest, create a manageable portfolio, and make weekly or monthly contributions to it automatically. We’ve ranked the best online brokers for beginners to help you get started.
6. Watch Your Credit Score
Your credit score is a very important number that determines the interest rate you are offered when buying a new car or refinancing a home.
It also impacts the amount you pay for a range other essentials, from car insurance to life insurance premiums.
The reason credit scores have so much weight is that someone with reckless financial habits is considered likely to be reckless in other areas of life, such as not looking after their health—or even driving and drinking.
This is why it’s important to get a credit report at regular intervals to make sure that there are no erroneous black marks ruining your good name. It may also be worth looking into a reputable credit monitoring service to protect your information.
7. Negotiate for Goods and Services
Many Americans are hesitant to negotiate for goods and services, because they’re afraid that it makes them seem cheap. Conquer this fear and you could save thousands each year. Small businesses, in particular, tend to be open to negotiation, so buying in bulk or positioning yourself as a repeat customer can open the door to good discounts.
8. Stay Educated on Financial Issues
Review relevant changes in tax law to ensure that all adjustments and deductions are maximized each year. Keep up with financial news and developments in the stock market and do not hesitate to adjust your investment portfolio accordingly. Knowledge is also the best defense against fraudsters who prey on unsophisticated investors to turn a quick buck.
9. Maintain Your Property
Taking good care of property makes everything from cars and lawnmowers to shoes and clothes last longer. The cost of maintenance is a fraction of the cost of replacement, so it’s an investment not to be missed.
10. Live Below Your Means
Mastering a frugal lifestyle means developing a mindset focused on living a good life with less—and it’s easier than you think. In fact, before rising to affluence, many wealthy individuals developed the habit of living below their means.
This isn’t a challenge to adopt a minimalist lifestyle. It simply means learning to distinguish between the things you need and the things you want—and then making small adjustments that drive big gains for your financial health.
11. Get a Financial Advisor
Once you’ve gotten to a point where you’ve amassed a decent amount of wealth—either liquid assets (cash or anything easily converted to cash) or fixed assets (property or anything not easily converted to cash)—get a financial advisor to help you stay on the right path.
12. Take Care of Your Health
The principle of proper maintenance also applies to your body—and taking excellent care of your physical health has a significant positive impact on your financial health as well.
Investing in good health is not difficult. It means making regular visits to doctors and dentists, and following health advice about any problems you encounter. Many medical issues can be helped—or even prevented—with basic lifestyle changes, such as more exercise and a healthier diet.
Poor health maintenance, on the other hand, has both immediate and long-term negative consequences on your financial goals. Some companies have limited sick days, which means a loss of income once paid days are used up. Obesity and other dietary illnesses make insurance premiums skyrocket, and poor health may force early retirement with lower monthly income for the rest of your life.
What Is Financial Freedom?
Everyone defines financial freedom in terms of their own goals. For most people, it means having the financial cushion (savings, investments, and cash) to afford a certain lifestyle—plus a nest egg for retirement or the freedom to pursue any career without the need to earn a certain salary.
What Is the 50/30/20 Budget Rule?
The 50/30/20 budget rule, popularized by Senator Elizabeth Warren, is a guideline to achieve financial stability by dividing after-tax income into 3 categories of spending: 50% for needs, 30% for wants, and 20% for savings and paying down debt. We have built an easy-to-follow budgeting calculator to help you categorize and control your spending and saving—which is the essential first step toward financial freedom.
The Bottom Line
These 12 steps won’t solve all your money problems, but they will help you develop the good habits that get you on the path to financial freedom. Simply making a plan with specific target amounts and dates reinforces your resolve to reach your goal and guards you against the temptation to overspend. Once you start to make real progress, relief from the constant pressure of escalating debt and the promise of a nest egg for retirement kick in as powerful motivators—and financial freedom is in your sights.
Did you know that the financial planning and advisory market is worth $59.2 billion in the US alone?
This is not surprising as more people are genuinely concerned about their financial future. However, many people still don’t realize the importance of hiring a financial advisor.
Handling financial matters can get complicated, especially as you approach important life decisions. It requires a unique set of expertise you can only get from a Certified Financial Planner.
But, it’s normal to be skeptical about hiring one. After all, why hire one when you are doing just fine, currently?
Here’s a list of some of the unbeatable benefits of hiring a financial advisor.
1. UNDENIABLE EXPERTISE
What do you do when you’re feeling unwell? Chances are, you drop everything and schedule an appointment with your doctor. That’s because you don’t have your doctor’s expertise.
The same should be the case in all matters relating to financial planning. Sure, there are many resources online detailing how to tackle planning by yourself. But most financial moves need an expert’s guidance.
Financial advisors, especially those who are Certified Financial Planners, have unique experience and understand how all of the financial pieces fit together. So they’re in a better position to advise you on financial decisions big and small.
2. REDUCED STRESS
Let’s face it; financial planning is not the easiest or most enjoyable task. Chances are, even thinking about it causes a slight headache.
Defining your financial goals is just the first step. Working to meet these goals can be challenging and stressful. There’s more to financial planning than saving money each month.
You have to deal with taxes, financial markets, and the law, all of which can be tasking. These are all things your financial advisor can tackle. So, hire one if you’re tired of having to do all these things on top of holding down a job.
3. IT’S A LEARNING EXPERIENCE
You’re bound to pick up vital skills when working with a professional advisor. Most advisors meet with their clients to discuss investment opportunities. A good financial planner offers a wide range of advice beyond your portfolio. That could include discussions around estate planning, insurance, social security, and more.
All you need to do is ask as many questions as possible during these meetings. Learn why they recommend specific opportunities for you and disregard others. Feel free to pick their brains about budgeting and any areas where you feel you could use more guidance.
4. IT ELIMINATES EMOTIONS FROM INVESTMENTS
Emotional reactions can be costly for an investor. It’s easy to get lost in the fear and greed evoked by the investment market.
You may be tempted to sell your stock in a particular company because you’ve heard some rumors. Or, you may want to sell your property because you’ve received a great offer. While these decisions may seem logical, your financial advisor may hold a different opinion.
Financial advisors make decisions after tremendous research. They are disciplined and will hold out for the best possible outcomes. They can also run through model scenarios to see how a decision today could potentially impact your future goals. That’s why you need a financial advisor to guide your every move.
5. PROMOTES COORDINATION
Hiring a financial advisor will prove invaluable because they’re good coordinators. Wealth management requires the effective coordination of various facets of your life.
A financial planner will work with other individuals in your life to promote your best interests. That’ll involve coordinating with your lawyers, estate planners, and business managers. By acting as “quarterback”, your financial advisor can be sure your financial plan is comprehensive and cohesive.
6. HELPS WITH DEBT CONTROL
Let’s face it; loans are a normal part of life. In fact, Gen X and baby boomers owe an average of $140,643 and $97,290, respectively.
But most people don’t know how to manage their debts. It’s not always as easy as making monthly payments. Sometimes, debt consolidation may be your best option to reduce costs.
That’s why it’s essential to consider hiring a financial advisor. Your advisor will develop a strategy that minimizes costs and maximizes your benefits. By getting your finances in order and a budget in place, it’ll also help ensure you make timely repayments to reduce loan-related fees.
This secures your financial future as it increases the chances of loan approvals. Lenders consider your past repayment history when deciding whether to approve your loans.
7. YOU ENJOY A CUSTOMIZED FINANCIAL STRATEGY
Contrary to popular belief, financial planning is not a one-size-fits-all process. Saving is just one piece of the financial planning puzzle.
Many factors determine the best approach for different individuals. Some of these include your financial goals, your timeline for these goals, and your income.
Sometimes, saving could be your best option, but other times, your answer may be investing. It’s up to your financial advisor to help you decide on the best approach depending on your needs. So, hire a financial advisor for a strategy that’ll help meet your financial goals.
8. HELPS CHOOSE THE BEST INVESTMENT OPPORTUNITIES
There are thousands of investment opportunities. But, only a few of these opportunities are the right fit for you.
Identifying the best opportunities for you is a complex and daunting task. It requires a lot of research and market knowledge. That’s where a financial advisor comes in.
After analyzing your financial goals and risk appetite, they’ll recommend investment opportunities that will help you reach your goals. They can help find the balance between risk and return on your investments. They can also act as a sounding board when new investment opportunities peak your interest.
Creating appropriately diverse portfolios requires a considerable amount of time and expertise. So, it’d be best if you were to hire a financial advisor to help you rather than go at it by yourself.
It’s even more meaningful for you to ensure your financial advisor is a fiduciary. [Insert link to the RIA difference page] This will give you peace of mind knowing that suggestions and guidance are based solely on your best interests and not on the what would be more lucrative for your advisor.
9. HELPS PREPARE FOR LIFE TRANSITIONS
You pass through various phases of life as you grow. Your finances play a crucial role in how comfortable you are in these phases. It’s vital to have your finances in order as you navigate through life.
A financial advisor will help you prepare for the expected transitions like retirement. They’ll also help prepare for the unexpected ones, like divorce. It’s their job to prepare your financies for unpredictable changes and plan accordingly.
GET VALUE BY HIRING A FINANCIAL ADVISOR
Have you decided to hire a financial advisor? The next step is finding the right professional.
A financial advisor will help with financial planning, investment decisions, and wealth management. An advisor who is a fiduciary will make sure all decisions are made in your best interest. It’s never too early or too late for professional financial planning.
F.I.R.E stands for Financial Independence, Retire Early. It is a movement that challenges conventional methods of working until 65 years and practitioners of the F.I.R.E method hope to be able to quit their jobs in their early 40s or 30s to live the rest of their lives on small yet disciplined withdrawals made from their investments.
The F.I.R.E movement is becoming increasingly popular because millennials and Gen Z investors are questioning the current consumerism-led template. For example, they are critical about taking a home loan, buying a car, working 9 to 5 for the next 30 years to repay these loans, accumulating enough wealth to retire in our 50s or 60s, etc.
This blog will explain the F.I.R.E movement in detail and give you a step-by-step guide to retiring in your 40s using the F.I.R.E method.
F.I.R.E Movement: The Beginning
The concept of F.I.R.E was inspired by the book titled “Your Money Or Your Life” written by Vicki Robin and Joe Dominguez in 1992. For Robin and Dominguez, financial independence wasn’t just an idea but a way of life. It was an existence built around self-sufficiency, moderate consumption, and control over one’s time. And seeking greater satisfaction from life outside the nine to five rat race.
It took the world more than a decade for the concept to sink in, the F.I.R.E movement. But now, the F.I.R.E movement has many disciples who extol the virtues of this approach.
Take, for instance, Pete Adney. He retired from his job as a software engineer at the age of 30 by spending only a small percentage of his annual salary and consistently investing the remainder in stock market Index Funds. Some of you might have heard of Pete Adney, who uses the pseudonym Mr. Money Mustache. From his website, he gives practical advice and motivation to fellow mustachians to build a life for themselves that’s free from financial worries.
Today, the F.I.R.E community has expanded beyond software engineers, including writers, bloggers, YouTubers, travel enthusiasts, podcasters, etc.
Younger generations are putting up a case that the traditional views are outdated. They are advocating the creation of a new rule book that asks people to live their lives on their terms. F.I.R.E movement appeals to such people as it gives them the financial breathing room to work part-time, do something that they enjoy, convert a hobby into a business, spend time with the family, etc.
In essence, when they use the word retire, it’s not to say that they have stopped working. Instead, they have happily retired to something else that they absolutely love.
As you have learned the basics of the F.I.R.E method, let’s understand how to set up a F.I.R.E strategy to retire early.
F.I.R.E Method: Setting Up Your Strategy To Retire Early
•The core tenets of a F.I.R.E strategy are simple.
•Start by saving 50-70% of your income.
•Show economic discipline by living frugally.
•Invest your savings wisely with a low-cost Index Fund.
And that’s it. Save more, spend less, and invest wisely. These are the three bedrock principles of any F.I.R.E strategy. Now, before we get into each of these in greater detail, it’s important for a F.I.R.E enthusiast to first establish the math.
The Math Behind F.I.R.E Method
You can do it by asking two basic questions. One, how much income do you need to sustain your lifestyle in early retirement? Two, how soon do you want to retire?
The second question is probably the easier one. So let’s focus on the first one.
To answer how much income you need to sustain your lifestyle in early retirement, you need to find out how much you can spend on a monthly or yearly basis. A helpful and often used rule of thumb around this is the 4% rule.
Now, what’s the 4% rule? If you retire with a kitty of, say, Rs. 5 crores, as per the 4% rule, you can use up to Rs. 20 lakhs annually. Another way of doing this is to reverse the rule. So, 4% when inverted comes to 25 times. Thus, your retirement corpus needs to be 25 times the amount you withdraw in the first year.
For instance, say you need Rs.10 lakhs for expenses in the first year of retirement. Then, 25x of that comes to Rs. 2.5 crores. It is the corpus you must have before you retire. Now, the focus and calculations were done in the 1990s by using numerous assumptions that are very specific to the United States.
For instance, the 4% rule was built on the assumption that your investment portfolio would grow at an average of 7% per year. But then, some of the variables might not pan out now, like the fact that the 4% rule was built to work reliably for 30 years.
However, if you retire at the age of 40 or 45, your retirement journey is a lot longer. Also, the 4% might be a bit high in that particular case. Another issue with the 4% rule is that it doesn’t account for inflation. For a country like India, it’s much higher when compared to highly developed countries like the United States. But the good thing is that you can make your version of the 4% rule on an excel worksheet. If you make one, you surely want to add inflation to it.
The whole point of doing this is to get your retirement number right. Nonetheless, with math out of the way, let’s understand each step of the F.I.R.E strategy in detail.
F.I.R.E Method Step 1: Save 50 -70% Of Monthly Income
Save anywhere from 50-70% of your income every month. It is much higher than the standard 15-20% saving that most people do. Realistically, saving 50% of the income might not be possible for everyone with some essential expenditures. The expenses list includes rent, food, child’s education, home loans, etc. But the idea should be to get as close as possible.
In that context, what can really help is a boost in your income. It can be done in many ways like taking up a part-time job or some extra consultancy work, asking for a pay hike, changing jobs for a better salary, reskilling oneself, starting a side hustle, etc.
F.I.R.E Method Step 2: Spend Wisely
The second step under the F.I.R.E strategy is “Spend Wisely.” So you identify what is essential and what expenses can be tagged as discretionary.
F.I.R.E enthusiasts have a lot of helpful tips on managing expenses. It includes driving a used car, using public transportation if you live in the city, considering renting instead of buying a house, making your own meals, cutting restaurant expenses, avoiding credit card debt, using them for rewards, etc.
Another area worth considering here is the importance given to passive income by the F.I.R.E community. Now, passive income can be of many kinds like dividends from stocks, interests from fixed deposits, blog income, YouTube channel monetization, rental from properties, etc. And passive income is something that F.I.R.E members are continuously striving for.
In fact, several followers use something called the FI ratio or the financial independence ratio. It’s the proportion of one’s monthly passive income to one’s monthly expenses. For example, if you earn Rs. 2 lakh as passive income and your expenses are Rs. 1.5 lakhs, then you have a FI ratio of 133%.
Generally, anything over 100% indicates that some real good progress has been made towards financial independence.
F.I.R.E Method Step 3: Make Prudent Investments
The third and final step in the F.I.R.E movement is investments. Initially, the F.I.R.E principles require us to invest as much money as possible. Here, a savings account is not something that fits within our investment description.
The FIRE movement requires its followers to give their money the best chance of growing, especially in developed countries like the United States. They use a low-cost Index Fund or Exchange-traded Fund (ETF) to do that job effectively. The funds mentioned above are getting bigger by the month in India as well. You can use them more smartly to achieve higher than benchmark returns.
Conclusion
F.I.R.E practitioners say that their new lifestyle is deeply gratifying and pushes them to be creative and collaborative. But most people don’t like the idea that the F.I.R.E strategy requires them to sacrifice too much of their lifestyle. So, financial independence is not that easy to achieve through the F.I.R.E strategy. In fact, the F.I.R.E strategy may not be suitable for everyone.
Ask yourself how much sacrifice you can make. After all, it depends on your goals, disposable income, and what you’re prepared to give up to keep your savings rate high. With some of the techniques on keeping income high, expenses low, and investments right, we are sure there are enough bullets in your chamber that’ll allow you to take a good shot at F.I.R.E or at least some version of it.
Different people interpret the term “financial freedom” in different ways. Some people interpret financial freedom as the freedom to buy what they want and when they want. For many, it could mean not worrying about how they will pay their bills or sudden expenses. For some people, it could simply mean becoming debt-free, while for others it could mean being rich enough to retire. While all these interpretations are somewhat correct, they are all half-baked answers.
In this blog, we will explain what financial freedom truly means. More importantly, we will also look at the 9 steps that can help you achieve it.
What Is Financial Freedom?
As ironic as it may sound, financial freedom is about control i.e. control over your own finances. So, one of the better ways to define financial freedom is to have enough residual income that allows you to live the life you want, without any worries about how you will pay your bills or manage a sudden expense.
In other words, financial freedom is not always about being rich and having a lot of money. Instead, it is more about having control over your financial present and your financial future. To give you the context, there are 8 different levels of financial freedom. These levels range from someone not having to live paycheck to paycheck to having more money than what a person will need in his lifetime.
One of the most interesting levels is the first level, where you are not living paycheck to paycheck. It is an interesting level because living under tight financial conditions need not be limited to the working poor. It can occur at all levels of income. Even a super-rich person might be earning and spending to the limits that he would be living under tight financial conditions. This is exactly why financial freedom is nothing but financial control.
Another noteworthy level is level 4 i.e. the freedom of time. It’s something many people aspire for. Freedom of time happens where your cash flows are sorted in a way that allows you to leave your job to follow your passion or spend more time with your family. But most importantly not going broke while doing so.
Level 5 is an interesting one and can be crudely expressed as the FIRE movement. FIRE is an abbreviation for Financial Independence, Retire Early, and is a lifestyle that is becoming popular in the West with people in their 20s and early 30s.
The concept of FIRE is around frugality with participants intentionally maximizing their savings rate by finding ways to increase their income or lowering their expenses. The idea is to save 50 to 75% of your income, which is then used to accumulate assets and helps in generating enough passive income to provide for retirement expenses.
You can pick your ideal level of financial freedom depending on your current situation and lifestyle. Your quest for financial freedom can be broken down into 9 essential steps. Some of these steps can be behaviors, tactical and strategic decisions. The more steps you can achieve, the faster shall be your journey on the path to financial freedom.
1. Understand Where You Are Presently
The first marker on the path to financial freedom starts with knowing where you are currently. This includes having a clear idea of how much debt you have, your accumulated savings, monthly expenses, your income, etc.
In other words, you need to know your personal financial statement with a fairly accurate knowledge of your income, expenses, assets, and liabilities. Once you have these numbers, you move to step 2 of your financial freedom journey which is writing your goals.
2. Pen Down Your Goals
Why do you need money? It could be to get rid of an education loan, trying to start a business, to travel, to plan weddings for your kids, for your retirement, and so on. As soon as you have enough money, these are the things that you want to fulfill.
Thus, money is simply a means to achieve your financial goals. But until you write down your goals, your money will be without a purpose and you will not know how to make the best use of it. So take a piece of paper and write down your top 5 goals that you would like to achieve over the next 1, 5, 10, and 20 years.
Also, ensure that while you are writing the goals, you are identifying SMART goals. It means goals that are specific, measurable, achievable, realistic and time-bound. For instance, a plan to accumulate Rs. 10 crore by 2050 to fund your retirement is an example of a SMART goal, because it is specific, measurable, achievable, realistic, and time-bound.
3. Track Your Spending
The next important step toward financial freedom is tracking your spending. You can do this in many ways like using a notebook or perhaps using an excel spreadsheet. You can also use the money tracker facility available on the ETMONEY app, which is an easy and effective way to track your spending. The app automatically tracks your expenses and categorizes them in terms of travel, shopping, eating out, etc.
This tracking of expenses is an important step towards financial freedom as it makes you more accountable. And also reveals many needless expenditures that you make merely on account of an impulse buy. If anything, an impulse buy is about losing control and works as an obstacle in your path to financial freedom.
Thus, it is important that you stay in control by religiously tracking your spending.
4. Pay Yourself First
“Pay Yourself First” means putting a specific amount of money in your savings or investment account before paying for anything else like bills, discretionary expenses, rent, etc.
This one act of paying yourself first has helped many people come closer to financial freedom. And the reason why this works is that it forces us to explore alternatives to limit your expenses.
For instance, if what remains as allowable expenses is not enough for you then you would be forced to take some additional action. This can be reducing your current expenses by making small tweaks in your lifestyle or can also mean picking up a side hustle in order to supplement your current income. Either way, by paying yourself first, you guarantee that you are always putting money aside to invest in yourself and your financial future.
5. Spend Less
Money saved is money earned. But it’s not an equal equation wherein Rs. 1 saved is Rs. 1 earned. Because when you invest that Rs. 1 rupee, you end up earning a lot more.
Now, spending less does not mean compromising on your existing lifestyle or living a barebones life. Financial freedom is more about smart spending which can be done in many creative ways. Some of the common techniques include learning to make delicious food at home thereby reducing your eating out expenses. Setting up auto-debits so that you don’t pay late fees on your credit cards.
The mere postponement of a non-essential item by a couple of days can go a long way in reducing impulse purchases, which then moves you closer to financial freedom.
6. Pay Off Your Debt
Paying off a big debt supports financial freedom in more ways than one. After all, you have more future cash flow to work with. Your credit rating is strong. And most importantly, closing a loan lifts a massive weight off your shoulders.
There are two main methods of paying off debt. The first one is the snowball method where you pay off the smallest debt first. So basically get one tick mark in your checklist and then move on to the bigger debts. And the second method of paying off debt is the avalanche approach where you first pay off the debt with the highest interest rate and then move to the lower ones.
Both these methods work efficiently and if you have a pile of debt, you need to decide what works best for you. But there is no hiding the fact that getting rid of debt is one of the most crucial factors to achieving financial freedom.
7. Always Keep Your Career Moving Forward
Increasing your income – while keeping the spending levels constant or in check – is one of the fastest ways to reach financial freedom. This requires you to continuously work on advancing your career or your business.
For instance, your career and therefore your income can go on the ascendency faster with you learning new and valuable skills and increasing your value to your employer. If you are self-employed, it means working on growth strategies to keep your business moving to the next level.
So if you have been leaving your career progress to chance, then probably now is a good time to take stock of how to accelerate the process. This in turn will increase your income levels and take you closer to financial freedom.
8. Create Additional Sources Of Income
For the majority of people who are serious about financial freedom, a 9 to 5 job may not be sufficient. In other words, you might need to look beyond a job for building income. In fact, some financial experts encourage people to discover as many as five streams of income. So if you have a 9 to 5 job, then congratulations – you have one stream of income. Now, you have to identify four more!
Additional income can come in 2 ways. The first approach is active income i.e you trade time for money. And the other approach to building an additional income is to do it passively, where you do the work once and money keeps coming in an automated manner.
If you take the first approach i.e. trade your time for money then you are limited by the hours in a day, which cannot go over 24 hours in any circumstance. However, active income is very quick to implement. And it can get you started in no time with side jobs like becoming a freelance writer, driving an Uber, designing logos on Fiverr.com, etc.
On the passive income front, the typical activities that generate money for you will include selling digital content like e-books and courses, becoming an affiliate marketer, investing in stocks, etc.
9. Invest
The ninth and most future-looking step to attaining financial freedom is investing.
The first move is to invest as much as you can and as early as possible, therefore allowing the power of compounding to assist you. Next, increase investments each year at a percentage higher than your increase in income.
Another key thing to do is achieve an asset allocation of 50-60% in equities as quickly as possible. As a thumb rule, keep a 60-40 allocation between equity and non-equity assets. But feel free to change that ratio depending on your risk tolerance.
The next actionable step is to set up your investments in an automated mode using SIPs and don’t worry about timing the market. And finally, review your portfolio once a year, and don’t forget to rebalance your portfolio.
Bottom Line
These nine steps listed in this blog have different degrees of complexity and you might see some tasks come very naturally to you while others might require a lot more work. For instance, a number of people find tracking expenses, spending less, and investing a lot easier than, say, creating an additional source of income.
The more steps you can achieve, the faster shall be your journey on the path to financial freedom. It is a decision that you will need to make on the basis of what works best for you.
Financial gifts are often not on our radar when it comes to gifting our loved ones. However, they go a long way in securing the future of those we love, helping them accomplish their life goals and hence make for an ideal gift. Until a decade ago, your options were limited, but today there are multiple choices for you to choose from to show how much you care for your near and dear ones.
Health Insurance
Given the current times, health insurance is an absolute must. It reduces out-of-pocket expenses and keeps a family’s savings intact amid a health contingency. There are other benefits too. A health insurance plan ensures that your loved ones can efficiently address other crucial commitments.
You can give an individual health plan or buy a family floater plan. The latter offers covers to all family members at a cost-effective price point. If you are in a metro where hospitalisation costs are high, it’s recommended to buy a health plan of INR 10 lakh.
Compare different policies and go for the one that best fits the requirement. If your loved one already possesses health insurance, you can gift a top-up plan. The benefits of a top-up plan kick in once the sum insured in the basic plan gets exhausted. Top-up plans are cheaper than regular health plans and widen the cushion net.
Health Insurance Taxation
Health insurance not only prevents out-of-pocket expenses but also lowers tax outgo. The table below highlights tax benefits offered by health plans under Section 80D:
Stocks
Investing in robust stocks for the long term can help generate inflation-beating returns and build a corpus for key goals such as children’s higher education, marriage, etc. While earlier gifting them was a tedious task, today it isn’t. Because of the introduction of electronic delivery instruction slips by the Central Depository Services (India) Limited (CDSL), you can easily present stocks.
Gifting stocks is also a prudent way to introduce your loved ones to invest in capital markets for long-term wealth creation. Many brokerage houses offer this facility, whereby you can easily gift stocks to your family members and friends. You can select the stocks and the quantity you want to give and transfer them with just a few taps.
If the recipient doesn’t have an account with the brokerage house, the same can be opened quickly before accepting the gift. Indian stock markets have several multi-baggers adding which to one’s portfolio can augment riches in the long run. Investing in these stocks can have a multiplier effect on wealth creation.
Stocks Taxation
Stocks are taxed based on their holding period and under the head ‘capital gains’, which are further classified into long-term capital gains (LTCG) and short-term capital gains (STCG). Equity shares sold within 12 months of purchase fall within the purview of STCG that is charged at a flat rate of 15%.
On the other hand, stocks sold after 12 months fall within the purview of LTCG. LTCG up to INR 1 lakh don’t attract any tax but gains beyond that are charged at 10%.
Life Insurance
The lynchpin of a financial plan, life insurance protects the financial interest of your loved ones. They also help accumulate funds for various short and long-term goals. You can gift a term plan that will ensure people close to you are not in a lurch in case of an untoward incident. A term life insurance policy offers a high life cover at an affordable premium.
You can also contemplate gifting an endowment plan or a unit-linked insurance plan (ULIP). Endowment plans offer death and maturity benefits. On the other hand, ULIPs serve the twin purposes of investment and insurance. In ULIPs, a part of the premium provides life cover while the other is invested in capital markets to earn returns.
Life Insurance Taxation
Just like health insurance, investment in life insurance also helps lower tax outgo. Premiums paid towards life insurance plans qualify for tax exemption under Section 80C of the Income Tax Act. Maturity benefits received are fully exempt under Section 10(10D).
Enroll in an Online Course
Knowledge is the shining armor in one’s knight for sustainable wealth building. It helps one make prudent choices and mitigates the threat of falling prey to mis-selling and making impulsive decisions. You can enroll your loved ones in online courses by financial institutions to understand several aspects of finance and investment.
Financial institutions, including brokerage houses and asset management companies, have come up with various online courses on personal finance and stock market investment that help decode the multiple aspects in a simple and lucid manner.
Participating in these courses go a long way in honing financial knowledge that can help your near and dear ones better plan their finances and investments to achieve financial goals.
Mutual Funds
Mutual funds have rapidly made their mark in the Indian financial landscape. They have witnessed increased participation from retail and institutional investors. Offering diversification, mutual funds help invest in different stocks in diverse segments.
Systematic investment plans (SIPs) are a prudent vehicle to invest in mutual funds as they imbibe disciplined savings habits and help stay invested across market cycles. While you can’t transfer mutual fund units from your account to another holder, unlike stocks, you can start a SIP for your minor child.
You can purchase units in your child’s name, and you can continue making payments until your child becomes major. Once your child turns into an adult, fresh KYC needs to be done, and your child can benefit from the investments made by you.
Mutual Fund Taxation
Mutual funds are taxed based on the type of fund and their holding period. Equity funds where the holding period is more than 1 year are subject to LTCG. If sold within a year of investment, the gains are subjected to STCG tax.
LTCG tax of 10% is applicable on gains beyond INR 1 lakh. On the other hand, STCG tax is charged at a flat rate of 15% if the fund is sold within one year of investment.
For debt funds, LTCG is applicable if the fund is held for three years or more. If sold after three years, LTCG tax of 20% is levied. On the other hand, if sold within three years, STCG tax is levied as per the applicable income tax slab.
