Navratri: Nine steps to financial freedom

Navratri symbolises the triumph of good over evil. Spiritually, it is about self-purification and growth of our inner self. These nine days are all about bettering oneself. This can be a good time to put our finances in place. Here are nine steps one should take in life to improve her financial personality.

Save

Contrary to popular perception that income defines wealth, it is the savings that decides the wealth pool of a household. For someone who spends more than his or her earnings, indebtedness is inevitable. However, if a person saves first from her income, then there is a fair chance that she will succeed on the path of wealth pool creation. More one saves, the better it is.

Protect

Savings should be used to fortify household finances. Build an emergency fund equivalent to at least six months of expenses. This should also include payments such as home loan EMI (equated monthly instalments) and unavoidable payments such as school fee and insurance premium. Once an emergency fund is in place, do not forget to buy adequate term life, personal accident and health insurance. Health insurance should be bought for everyone in the house. This ensures that savings are not spent on emergencies.

Plan

Before planning to invest your money into productive investments, think of your financial goals. Knowing financial goals is like knowing the destination, which in turn helps to choose the right path and right vehicle. Financial goals should be smart – specific, measurable, achievable, relevant and time-bound. For example, arranging a down payment of Rs 20 lakh over the next three years for a house purchase is one such goal. Financial goals such as a child's education, house purchase, car purchase, retirement can be planned well in advance. Near-term small financial goals such as buying a smart-phone can be easily achieved with planning and investing.

Allocate

Clarity on financial goals helps to ascertain asset allocation. For financial goals due in the long-term, risky assets such as equities can be considered in a portfolio. However, if a financial goal must be achieved in the near-term, then investors must remain invested in fixed deposits and debt funds. Hence for funding retirement decades away, it makes sense to invest in equity funds. Though stocks are volatile in the short-term, they tend to reward investors in the long-term.

However, for risk-averse investors, allocation to equity can be taken using hybrid schemes. In a nutshell, asset allocation of an investor should depend on her risk profile and her financial goal.

Rebalance

After investing money in line with asset allocation, investors need to monitor her investments. As one moves closer to one's goal, allocation to risky assets need to be reduced. This can be done by selling equity and buying bonds, or simply allocating more to bonds and fixed deposits. This process of rebalancing must also be carried about if in the short-term, due to sharp moves in asset prices, allocation to a particular asset class deviates from the original asset allocation. Rebalancing also can be of great help, if an investor's risk-taking ability changes.

Liquidity

Investments need to be done taking into liquidity and cash-flow needs Though financial goals offer a good insight while deciding on the investments, an investor should note that her financial goals and risk profile can change over her lifetime. This can call for rebalancing or thinking afresh towards asset allocation. Sometimes, cashflow requirements change depending on changes in a financial goal.

Products involving high ticket size and low liquidity or long lock-in period need to be supplemented by liquid investments. Remember, though equity is a long-term asset class, investing through equity funds ensure interim liquidity at net asset value, which is a big plus.

Prudent borrowing

Though regular savings and converting them into investments from time to time helps achieve financial goals, borrowings cannot be avoided altogether. For example, for most first- time home buyers, home loans offer a helping hand. Borrowing must be done in a prudent manner. Though home and education loans are considered viable options of seeking finance, avoid going for high-cost personal loans or credit card debt for consumption. Buy today pay later is a buzzword in the world of YOLO – you only live once. Many are partying on borrowed funds. But that may not be the prudent thing to do. Ultimately, loans need to be paid, failing which they ruin the financial profile of a borrower and can cost him his peace of mind

Documentation

Investing and building a wealth pool is half the work done. Those investments need to be used for the purpose they are done. An investor must inform her family about the ways in which the family can easily access and obtain money from banks and other investments.?

So, keep your documents safe. Today, we live in the digital era and most of the time, only a mobile device knows where the money is. Sharing information about assets with family members is a must. Appoint nominees to all investments and update whenever required.

Writing a Will is prudent financial behaviour and should be done by everyone who has gathered assets and has dependent family members.

Seek advice

All steps mentioned above should ensure wealth creation over the long-term which can be used for rightful purposes. However, not everyone is capable of acting on her own. Sometimes individuals lack skills, knowledge, and time to achieve what they aspire. In such circumstances, availing services of professionals can be of great help. Financial well-being is no different, seek advice from investment professionals. It is a worthy investment.

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Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.

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