Three things to do to gain financial freedom

K. ARAVIND

We need to do a little planning so that we do not regret eating some of the seeds that we needed to sow for future income in the autumn of our lives. We are talking about planning for financial independence. Financial planning is no rocket science. All we need to do for financial independence is to prepare for a long journey.

There are three basic things we need to do for financial freedom. The first is life insurance. What if death comes calling a little early in life, quite unexpectedly? The rhythm of life of those who depend on us will not be the same as earlier. Those who renew their car insurance regularly should keep this fact in mind as well. The financial security of the family must be ensured so that the cost of living can be borne easily in the absence of the principal financial provider. That’s what life insurance is for.

Most people think of life insurance as an endowment policy or a moneyback policy or a ULIP. Insurance is for insurance only. Do not mix it with investment. That is why you need a term policy to insure your life.

If you decide to take out life insurance, the next step is to decide how much insurance you will need. The sum insured should be at least 10-15 times the current annual income. In case of untimely death, the family member should be able to invest a fixed amount every month from a fixed deposit or debt fund so that they can meet their expenses while maintaining their current lifestyle. That is why such a large amount of insurance is guaranteed. For a 35-year-old to take out a term policy of Rs.1 crore, it is enough to pay an annual premium of Rs.11,000 to Rs. 13,000.

What you need next is health insurance. A good percentage of people admitted to hospitals for treatment fall into debt due to lack of adequate financial planning. The increase in medical expenses is much higher than normal inflation. Health insurance is unavoidable as you are more likely to suffer from health problems due to lifestyle changes.

Those who think seriously about the future should take care to sow the seeds in the right place for future income. For a good harvest, sowing time, sowing method and proper waiting for harvest are required. The best way to plan and invest is to invest in equity mutual funds every month. The sooner you start, the more you gain.

You need to invest with future financial needs in mind. For example, suppose the annual expenditure of a 30-year-old is Rs.3 lakhs. Assuming an annual inflation rate of 7%, his annual expenditure at the age of 60 would be Rs.23 lakh.

The way to facilitate financial planning is to start investing as early as possible. The best way to invest in the long term is to invest monthly. If a 30-year-old who invests Rs.10,000 per month in a mutual fund gets 12 per cent return per annum, he make a windfall of Rs 3.5 crore when he reaches 65 years. This is the magic of long term investment.

To summarise it, if you have a term policy, health insurance and a monthly investment in a mutual fund, you have opened the way to financial independence.