The term “financial freedom” or “financial independence” can mean different things to different people. For some, this may mean having enough financial resources to cover their living expenses, while for others it may mean having enough money to meet their financial goals or life choices. Financial freedom can also mean reducing debt.
work backward. A financial plan is essential as it guides the management of your money and investments according to your income and liquidity.
It is also helpful in formulating an ideal asset allocation strategy to achieve your financial goals.
You can create a financial plan by first estimating the amount required to meet each of your financial goals based on the time horizon, assumed rate of return, and rate of inflation. Once you have these details, use an online Systematic Investment Plan (SIP) calculator to determine the monthly contribution required to meet each goal.
Start SIPs early
In the case of investing, the sooner you start the better since your money will have more time to grow and benefit from the power of compound interest.
Start investing in important financial goals, like your child’s retirement and higher education, as early as possible. By investing earlier, you can achieve these financial goals with small monthly contributions.
Also, going for the SIP mode as a regular investment at regular intervals creates financial discipline and ensures an average cost of Rs by buying more units at a lower NAV (Net Asset Value) during downturns or market corrections. It also eliminates the need to monitor the markets and time your investments.
Include EMI in the emergency fund
An emergency fund serves as a financial cushion you can rely on in the event of financial demands or loss of income due to illness or unemployment.
Ideally, this fund will cover your unavoidable expenses like tuition, rent, insurance premiums, and utility bills for at least six months.
The contingency fund must include all outstanding EMI obligations. This helps you pay off EMI obligations during financial stress and saves you from higher interest charges and late payment penalties. In addition, it protects you from negative effects on your credit rating.
Pay off the loan early if possible
Prepaying or foreclosing on loans, especially in the early years of the loan term, can help generate significant savings on overall interest costs. With multiple loans, you can save on higher interest costs by paying off the loan with the highest interest rate and/or longest remaining term first. Ideally, you should prepay the loan whenever you have a financial surplus, especially with higher-interest-rate personal loans, credit card debt, and two-wheeler loans.
Because home or auto loans generally have lower interest rates than other loans, you should consider your opinion of unavoidable financial goals and current market conditions when prepaying the loan. Don’t use your emergency fund or investments for significant financial purposes to prepay loans. This could force you to settle for a loan at a higher interest rate to deal with financial emergencies or to meet unavoidable goals.
You should also consider any associated fees (foreclosure or prepayment fees).
As per Reserve Bank of India policy, lenders cannot charge prepayment penalties on variable rate loans. However, you can charge these fees in the case of fixed-rate loans. Borrowers should only prepay loans if the total interest cost savings far exceed prepayment fees.
The Balance Transfer Facility allows a borrower to transfer their outstanding loan to another lender at a lower interest rate, reducing interest costs and EMI exposure. Borrowers with long remaining maturities should compare the interest rates on their existing loans with those of other lenders before deciding on a balance transfer.
The best way to compare loan rates is to use online financial markets. These online platforms allow you to compare interest rates offered by different lenders based on your income, credit profile, and ability to pay.
If other lenders offer lower interest rates than your current lender’s rates, ask your current lender to lower your interest rate. If your current lender denies your application, transfer your current loan to the lender with a lower interest rate. However, before exercising the balance transfer option, you should consider the prepayment fees charged by the current lender and the processing fees and other fees charged by the new lender.
Check the credit report regularly
Credit reporting agencies calculate credit scores based on your lending and credit card activity, as reported by lenders and credit card issuers. Any clerical errors made by the lender or credit card companies in reporting this information, or any fraudulent activity on your behalf, could affect your creditworthiness.
To make sure inaccuracies don’t affect your credit score, check your credit reports regularly. Any inaccuracies should be reported to the relevant authority or lender for correction. Regularly checking your credit report can also help you get pre-approved loans, credit cards, and balance transfer offers from various lenders.