This is a warm welcome to the Proud Millennial in you who is aspiring to achieve remarkable things in his life, Backed Up with a strong intent to secure Financial Freedom throughout his life and to ensure the same for his heir.
Financial Freedom is a powerful and alluring word that has kept mankind revolving around it for centuries. It’s like a glittering stone that we all love to have with us, and many have already earned it with their Discipline, Hard Work, Patience, Planning, and Continuous Learning. And they all proved that any of us could achieve it if we are willing to go that extra mile to learn and explore the ways which would help us to achieve the goal of Financial Freedom in a systematic way.
The Author and his Friends are trying to educate and show to our followers the world of opportunities around us that influenced our lives positively and opened the door to Financial Freedom, which we wish could have been learned earlier. And we would like to share the same with you all with a strong belief that it could add a good value to your knowledge and help you to achieve Financial Freedom.
India is a nation rich in tradition, culture, resources, and ecosystem backed up with a growing and fruitful economy capable of taking us to great heights, and we are all proud to be part of this great nation and are bound to contribute to the growth of our nation. India has a literacy rate of 74.04%, as per the 2011 Census (Source- www.knowindia.gov.in), which is a good figure and we could be even higher by the time when the new Census data will be out. A proud thing to know. But there is something alarming and keeps the economy bothered and worried is the Financial Literacy of our countrymen, which is merely 24% (Source- Times of India article on “Why encouraging Literacy in Finance matters” dated 11-Sep-2020). And that figure is disappointing, we in this modern era with the technology at our fingertips are entitled to Improve Financial Literacy by ourselves and share the knowledge we have with others to build a Financially Literate society.
Financial Literacy Plays a crucial role in our Path to achieve Financial Freedom. We have been talking about Financial Freedom multiple times by now and at least a few might have been thinking about what Financial Freedom means. By Financial Freedom we mean to say our Financial Position where we have a regular and reliable source of income to meet all our planned expenses and emergency expenses to a good extent from the capital we have. Dreaming to buy a Ferrari car with a Capital of Rs.1000/- doesn’t make sense, it will only be a fancy dream if you don’t put that effort into building your capital. There is no shortcut to becoming a millionaire overnight other than winning a Lottery Ticket/ Lucky draw or any such thing which is a game of luck only. So the first thing to note is to build our capital well enough so that it could give ample returns to meet our expenses. We shall in detail discuss various methods to earn good returns from our capital in a later chapter.
We once again proudly welcome you to our step-by-step journey in Learning Financial Literacy that paves the road to the world of Financial Freedom. Make sure you are on board with us….
There is a saying “A Penny Saved is a Penny Earned” but according to me “A Penny Saved and invested is the Pennies Earned rationally”
The unprecedented global crisis caused due to the COVID-19 pandemic helped me realize that the younger generation needs to acquire the skill of Financial Literacy. So, what is financial literacy? Financial literacy is the effective management of financial instruments, which could be either pocket money for students or any personal budgeting and investments to create wealth.
Financial planning is the key ingredient and is believed to be one of the unavoidable skills which are important for wealth creation. FP is a step-by-step approach to meet one’s life goals.
A financial plan acts as a guide for life’s journey. Essentially, it helps you be in control of your income, expenses, and investments such that you can manage wealth and achieve your goals. It is a process that should be visited continuously for the process of long-term wealth creation and also for your financial goals which could include buying a car, home, foreign trips, and various other necessities.
Why Financial planning?
- To beat the rising inflation which reduces the value of money.
- To Keep an Emergency Fund to survive in any indiscreet situation. (12 months expenses + EMIs)
- Risk management (Life insurance + Health Insurance )
- Tax Planning (Tax on Equity And Debt)
- Cash Flow Management.
- Retirement planning.
Mistakes to avoid in Financial Planning
- Not Starting Early!!! Don’t have enough money to meet your goals this is the right to start your financial planning the earlier the better.
- No personal risk management. (Do not mix up an investment with insurance)
- Acquiring a high debt. (Avoid using credit unnecessarily)
- Disproportionate allocation of one asset class i.e imbalance asset allocation.
- Do not enter into investments with tax-saving objectives.
The focus should be on personal finance where proper Investments should be committed based on individual financial goals, time, and risk profile. Risk Profile depends on the type of investor you are, it could be either Aggressive, Conservative, or Moderate based on your nature.
Why should you Invest?
Why Invest? Investing ensures long-term wealth creation. It also acts as an additional source of income through certain means mainly dividends and the magic of compounding is astounding.
Eg: Imagine you are earning 6 LPA and saving ₹ 20,000/month, At the end of your 20-year career you will be left with ₹1.789 crores. (Excluding Tax and Expecting a 10% Increment every year) .
After 20 years of hard work you are left with approximately ₹1.8 crores and with the rising inflation, you know how many more years you will survive with no other source of income.
On the other hand, instead of keeping the money idle, you Invested it in any investment option which is going to give you 12% interest pa. At the end of 20 years, you will end up with ₹ 4,26.95.771 crores. Which is almost 2.5 times your initial amount, How cool is that?
Where to Invest?
Where to invest? Having figured out the reasons to invest the obvious question is where? There are different asset classes to invest in that you can choose, each with distinct characteristics and benefits.
The Allocation should be purely based on Needs and Wants and risk profiles.
Different asset allocation classes are
- Fixed income Instruments (Fixed Deposit, Corporate Bonds, Government Bonds).On average Return from fixed-income assets varies from 8-10%
- Investing in Commodities (Gold, Silver and precious metals)
If we consider the last 20 years, gold and silver had turned out to be one of the best investment
Options with a compounded annual growth rate of 8% and from the previous example after 20
Years the corpus would have grown to 3.3CR rupees. Investment in gold can be done by buying gold physically or through gold exchange-traded funds(ETF)
- Equity (Stocks or Mutual Funds)
Investing in stocks means you have to purchase shares of publicly listed companies through the stock Exchange in India either the Bombay Stock Exchange(BSE) or National Stock Exchange(NSE). Equity investments have the most outperforming interest rates ranging from 15-20 %. But it comes with high risk. Taxation on equity investments is 10% of the gains if stocks are held for a period of one year. Some of the best-run Indian companies have given a CAGR of over 20%.
- Real Estate
Real estate investments involve buying and selling lands and houses. The sources of income include a capital appreciation of the invested amount when the land price goes up and rental income. The cash outlay in real estate investment is usually quite large
Power Of Compounding
From the above image see how an investment of just 3000 rupees per month for 30 years with a compounded annual growth rate of 12% turns to 1.05 CR. This is the magic of compounding.
- Invest First and spend the remaining amount (Create SIPs in Mutual funds or ETFs i.e automate your investments)
- Create Passive income sources. (Capital appreciation+Dividend Income)
- It’s smart to diversify your investments into different asset classes and its termed asset allocation, so choose asset based on your risk appetite
- Risk and Return go hand in hand i.e high returns are only possible with high-risk asset allocation classes.
- Only a Disciplined investment approach will help you to achieve your financial goals. Also monitoring and rebalancing the asset allocation regularly (once a year )is perceived as essential. The One thing which Initially mesmerised me during this journey was the magic of compound interest. Please refer to the below image which illustrates the Power Of Compounding.(An SIP amount of just 3000 for a period of 30 years would turn in to 1.05 crores)