Discipline, coupled with regular evaluation and review, can help you reach your destination of financial indipendence
Rahul Jain
The concept of financial independence is not new. It always existed and is something that all of us, as individuals, seek to achieve.
Simply put, financial independence or freedom means having enough funds to address all your goals and expenses overcoming the psychological fear of not achieving your financial objectives, being prepared for contingencies and living life on your terms, without having to depend on anyone for monetary assistance.
Reaching financial independence is akin to a long journey filled with several challenges along the way. This Independence Day, let’s see how you can overcome these hurdles and reach this all-important objective, with ease.
Carrying the Burden of Debt
Debt is one of the biggest roadblocks to financial independence and can derail even the soundest of plans, in no time. Debt drags you back emotionally and restricts the flexibility to channelise your funds towards attractive investments.
However, note that not all forms of debt are bad. For example, home loan and education loan help you create an asset and acquire skills needed for adding to your existing wealth in the long term.
On the other hand, life-style related loans not only result in binge spending, but also create a debt-trap that turns vicious with time.
You can easily avoid the burden of unnecessary debt by curbing your need for instant gratification and keeping peer pressure at bay. If you require a loan, by any chance, have a sound repayment strategy beforehand and avoid taking on more than what you can handle.
Cognitive Biases
Cognitive biases often lead to committing mistakes, jeopardising your goals in the process. These biases are a result of your inherent beliefs and thoughts that provide you with a false sense of comfort. Confirmation bias, herd mentality bias, and recency bias are some of the common biases affecting investors, across age groups.
The best way to overcome these is to adopt a rational approach and take into account long-term perspectives with your investment. Do not let your emotions cloud your judgement and have a holistic view of your financial position, risk appetite, and investment horizon, before committing.
Also, seek professional help, if required, as expert guidance often helps to see the big picture, delve deep into the root cause of your bias, and help in eliminating it.
Giving Equities a Miss
Adopting the SIP (systematic investment plan) route to kick-start equity investment not only helps you build wealth in a disciplined and sustained manner, but also helps you remain invested across market cycles.
Investors who continued their SIPs in equity mutual funds, following the sharp March sell-off, have gained significantly from the recent rally, where benchmark indices have recovered much of their losses. During the market correction, with a drop in NAVs, investors with equity SIPs, could also acquire more units at lesser costs.
Being Unprepared for Uncertainties
Exigencies in life, can catch you off-guard and thwart the most well-laid of plans. The COVID-19 pandemic is a case in point as to how such black swan events could take a toll on your finances and health. A big part of financial freedom lies in being prepared for such uncertainties.
Insurance is your most trusted ally while dealing with emergencies that can come knocking anytime. While a term plan provides your dependents with a large financial cushion in your absence and helps them take care of their needs, health insurance prevents out-of-pocket expenses and a dip in savings in case of a medical contingency.
On the other hand, a personal accident cover provides a sound back up in case a mishap impairs your earning ability.
Also, a critical illness plan helps take care of astronomical costs of treatment of a critical ailment that can wipe out a significant chunk of your finances in no time and impinge on other goals in the process.
To Sum Up
As evident, the road to financial independence is long-drawn and has various aspects. Discipline, coupled with regular evaluation and review, can help you reach your destination overcoming all hurdles you may face along the way.
(The author is Head Edelweiss Wealth Management)
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.