FINANCIAL FREEDOM- FINANCIAL QUADRILATERAL

Did you ever felt insecure about your financial security?

Did you ever thought before investing or planning to start investing? Did you ever thought how to actually go about? Do you think enough before investing in a mutual fund /equity share?

I started investing in 2014 in stock market, but it took me months to realize where I am heading. It was after then that I created a system where I could align my expenses and investment towards wealth creation. With the desire to find a solution, I researched on different models to have a process that will help me achieve financial freedom. And today I am sharing this process with you all.

 Financial quadrilateral -An end to end road map to do goal based investing.

Let us first develop a general idea to consider all the four corners of Financial Quadrilateral i.e. Insurance, Emergency fund, Mutual fund (debt), Mutual fund (Equity). In the upcoming articles, we will discuss about each section in detail.

Let’s first ask ourself few questions.

Why do we need to study about money before investing?

Why not, just start a SIP in any mutual fund and all will be sorted?

“If you fail to plan, you are planning to fail!”- Benjamin Franklin

So, here you are! Let’s do it with proper understanding and with proper framework, so that our aim is fulfilled.

1. Insurance

Before we even think of investing a single rupee we have to protect our self from the problems that might come in our way to achieve financial freedom. In easy terms, we need to take care of risks which life brings in general such as medical emergencies. And taking Insurances will only help us to reduce these risks and here we will cover the two most important ones:

1.Health insurance- to take care of our medical expense during the time of any medical emergencies so that we are not worried about big hospital bills during any illness or surgeries. The insurance company will provide us cover that will would help us to pay for hospitalization expenditure.

Health insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly.

Source: Investopedia.com

2.Term insurance-We all know life is very uncertain still mostly we ignore this fact or mix this with investments. Insurance is for protection and to cover risk don’t mix it with investment. We all need to understand that these are two different things and need separate dealings.

Therefore, we should only consider term insurance as a tool to safeguard the family in case of any mishappenning with earning member of the family and not as a saving or tax saving product.

Term Insurance: A term insurance plan is described as a pure life insurance protection plan that can be bought for a particular time period and to provide utmost financial protection to the insured’s family in case of any contingency. As term insurance does not offer maturity benefit, it offers a lower premium rate as compared to the different life insurance policies.

Source:Policybazzaar.com

 Note: It is suggested that you currently do not lay emphasis on questions like how to choose the best medical insurance/term insurance?

We will discuss this in next article.

2.Emergency Fund

Moving ahead, “Emergency fund” for the unexpected and unplanned expenditure such as loss of job, major car/home repairs/medical tests. For such unprecedented expenditures we need a fund so that our long term investment doesn’t get effected.

An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly. Here are some of the top emergencies people face: Job loss, Medical or dental emergency.

Source: The Vanguard group Inc.

Note: It is suggested that you currently do not lay emphasis on questions like

How much do we need in the emergency fund?

Where to put your emergency fund?

We will see that in coming articles.

3. Debt

We need to identify & bifurcate money needs into two categories- Short term and Long term.

Why bifurcate? Why not just invest all money together?

Investment in different assets class comes with different risks and different returns. And for different time frame we need different products. Putting your money in Bank Fixed Deposit/Debt mutual fund is less risky than buying shares of company/Equity mutual fund but the return is also less. Here comes the concept of goal based investing.

• Short term money need could be buying a car, bike, a foreign trip which is due in next 2-4 years.
• Whereas, long term money needs could be retirement planning, planning for kid’s education, buying a house etc. which are generally more than 5 years.

For short term goals we need products which are less risky and give dissent amount of return. That is why, we should keep short term money needs in Debt Mutual fund/fixed deposit.

Debt Mutual Fund: A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds.

Source: Association of mutual fund of India

Note: It is suggested that you currently do not lay emphasis on questions like

• Could there be any alternative to it like Fixed Deposit?
•  Is there any Income tax benefits involve in Debt Mutual Fund over fixed deposit? Is it more risky than Fixed Deposit?

We will discuss them in coming articles.

4. Equity

For long term we need products which give good return and with time in hand this will mitigate the risk to a certain level as for higher return will require a little higher risk. Equity mutual funds invest in shares of companies and create a basket of 25-50 companies’ shares.

Equity Mutual Fund: An equity fund is a mutual fund scheme that invests predominantly in equity stocks.

Source: Association of mutual fund of India

Note: It is suggested that you currently do not lay emphasis on questions like

• Equity mutual is very risky?
• What are types of Equity funds?

We will discuss them in coming articles.

This is a one-time exercise which would position you better financially and will help you built the wealth you always dream of. This will take efforts and patience but will help you understand your saving and expenditure pattern. This will need to create a system to give importance to investment.

My favorite line from “Rich Dad, Poor Dad”- ‘Money is one form of power but what is more powerful is financial education. Money comes and goes, but if you have the education about how to make money work for you, you gain power over it and can begin building wealth.’

Allow me to develop this concept of Financial Quadrilateral over a series of 5 articles and create a process where we achieve financial freedom.

If you find that after all learning you are still not be able to achieve anything great, then you should contact a Financial Advisor for assistance.

For queries and suggestion please write at [email protected].