Checklist: 10 ways to help you manage your finances better

By Ranjeet S Mudholkar

Financial freedom is not necessarily having lots of money or having not to worry about finances. Rather it is the ability to take charge of one’s own financial life. The true rewards of financial freedom can well be an emotional strength to integrate all our resources in a process of continuous improvement and growth.

Needless to say, a certain level of strength and discipline in our financial life sets us free to pursue our true dreams. On the other hand, if we ignore financial integrity and discipline, we may fall in a rut of providing financial means to meet our day-to-day needs, not to talk of our various financial goals during work life and a sufficient nest egg in our old age to live a respectable life.

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The financial world is getting complex for individuals where the limited financial resources need to be managed judiciously to achieve our financial goals. The goals are expanding in number as well as their individual size. For example, we have goals of owning a house, providing for children’s education and marriage, and having a comfortable retirement as prominent ones.

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Each of these goals is becoming a challenge to achieve in adequacy. In addition, we have several aspirational goals like foreign vacation, luxury car, holiday home and club membership which today are to be provided for alongside one’s important financial objectives. The individual today has to meet a bouquet of financial obligations to maintain a lifestyle commensurate to one’s professional status.

The following are at the genesis of financial freedom and are necessary to inculcate the requisite rigor for optimising the available financial resources to achieve the ultimate goal of financial independence:

• Saving at least a third of our disposable income.

• Create a contingency fund to see through situation of job loss or medical setback.

• Borrow mainly to create appreciating assets like house.

• Invest the savings in a judicious asset allocation to suit one’s risk profile.

• Insure adequately income, living expenses and important goals through enough life insurance

• Prioritise financial goals and link investment maturities to goals

• Insure health and assets to protect against wealth erosion

• Bring in tax efficiency in all financial transactions

• Have a succession plan at all stages of one’s financial life

• Create assets which are income generating or cash convertible in old age

Financial freedom is truly liberation from constant worry to meet one’s financial obligations while living a comfortable life. This is best inculcated with professional help from a certified financial planner (CFP) practitioner. A CFP professional, in active consultation with a household, identifies and evaluates strategies to achieve financial goals, executes them and aligns by monitoring the continued appropriateness in changing financial environment and client situations.

The ultimate goal of financial independence during the retirement years is usually ignored due to wrong prioritisation and discretionary spending including that on luxuries during one’s working years. The improved medical facilities have extended the life expectancy meaning that one may spend a larger time in retirement than the working years. One may choose to work for longer years, but this itself defies financial freedom. A recent Wells Fargo Survey of Americans between the age 25 and 75 indicates that an alarming 37 percent of middle class Americans believe they would work until they are too sick or until they die. Another 34 percent believes retirement will come at the ripe age of 80. One-third said their retirement income will come from social security.

Unlike the US and other developed countries, Indian government offers no social security for those who have paid their taxes throughout their working lives. India will have the second largest population of senior citizens in the world in a few decades from now. The Global Age Watch Index ranks India 73rd in senior-care and an article in The Economist shows that India is amongst the worst countries to die in.

The prospects of continued financial freedom in old age have to be built in our working lifetime. The emphasis on right asset creation helps a lot in supplementing our post-retirement income. The Government of India has vide Gazette notification dated October 7, 2013 amended the Income-tax Act, 1961 with respect to Reverse Mortgage Scheme, 2008. It has made the reverse mortgage annuity tax free. Also, it allows payment to be made under the reverse mortgage till the residual life of the borrower, if opted from the specified annuity sourcing institution, against cap of 20 years if opted from the lending institution.

Financial freedom is the state of a financially emancipated mind which is facilitated by initiating right steps of financial discipline captured in the science of financial planning. It is the process of managing one’s finances which is steadily earned during the working life and which turns into a gift of financial independence for a life time.

The writer is working with Financial Planning Standards Board India (FPSB India) in the capacity of Vice Chairman and Chief Executive Officer. The views expressed here are personal, and do not necessarily represent that of the organization. FPSB India is the sole marks licensing authority for the CFP marks in India, through agreement with US-based FPSB Ltd