How Millennials Can Take Easy Steps towards Financial Freedom

In the past two years, uncertainty and ambiguity seem to have become an almost constant part of our lives especially in the last two years. The current circumstances have proved the importance of maintaining some semblance of order in your finances to balance your way through these unprecedentedly difficult times. With the uncertain economic and employment prospects, as well as ongoing financial stress, financial independence or financial freedom is something we all desire.

Given that, millennials seem to have realised the importance of maintaining financial stability, and they aim to achieve financial freedom even as the external scenario remains uncertain and ever-changing. However, millennials have shown more inclination to pursue a life replete with travel and pleasure, and this desire has somewhat become the driving factor behind how they define financial freedom.

Financial Freedom generally means being able to live your life on your own terms. It's when you have complete financial control over your finances since you aren't stressed about how to pay your bills and are not feeling the burden of debt. Financial freedom also focuses on your long-term future by investing in mutual funds, enhancing your knowledge, and building an emergency savings fund for unexpected expenses.

Millennials, also known as the "tech-savvy generation," have similar goals as previous generations, including wedding expenses, child's education, luxury cars, long vacations, and buying a dream home. However, Millennials encounter a variety of challenges that previous generations did not. When compared to their parents or grandparents, millennials have distinct financial habits and hurdles. Many have faced obstacles to balancing their long-term financial responsibilities and needs.

Millennials must never lose sight of their financial goals, even if they are facing financial difficulties. You should successfully manage your finances in order to preserve financial stability, thrive through financial hardships, and achieve financial freedom. Millennials are the generation that has been hit by two major economic downturns, and some are gradually becoming the primary breadwinners in their families. This necessitates the fact that millennials should strive for financial security while also aiming to achieve financial freedom.

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Financial independence refers to the ability to be debt-free and self-reliant. It empowers you to reach your financial goals and allows you to make decisions free of financial constraints. Although millennials are well-versed in money management and have a sense of control over their income due to increased awareness and technological advancements, they still lack financial freedom.

Here are some easy steps that Millennials can follow to attain Financial Freedom:

1. Construct a Financial Plan

A Financial Plan is essential since it guides your money management and investment decisions based on your income and liquidity. It also aids in the formulation of an optimum asset allocation strategy for achieving your S.M.A.R.T financial goals.

There are various advantages to making a financial plan. To begin with, it assists you in admitting to yourself that you have future goals that must be addressed. Second, it aids you in developing a concrete plan for reaching your goal. You can start making a financial plan by calculating how much money you'll need to achieve each of your financial goals based on their time horizon, expected rate of return, and inflation rate.

To build a financial plan, it's a good idea to start by assessing your present financial situation. The simplest method to achieve this is to keep track of your income and expenses and create a budget. This will provide you with a more realistic picture of your finances and help you figure out what needs to change in order to achieve financial freedom.

You can also assess the kind of investment options accessible in the market to see if they are appropriate for you. After all, simply saving money isn't enough; you should aim to invest in a worthy mutual fund scheme to generate a wealthy corpus in the long run.

2. Start Early with Your Investments

In the case of investments, the earlier you start, the better because it gives your money more time to grow and benefit from the power of compounding. The magic of compounding will grow your money on its own, but you'll need enough time to accomplish considerable growth. As a result, you must begin your investment journey as early as possible to reach towards your destination of Financial Freedom.

The most effective strategy to instil this saving and investing discipline is to develop an effective habit of setting aside a particular portion of your money from your very first pay-checque. Start saving as soon as possible for big-ticket financial goals like a post-retirement corpus and your child's higher education. Investing earlier will help you meet those financial goals even with smaller monthly contributions.

Also, consider investing in mutual funds through a Systematic Investment Plan (SIP) because doing so consistently at regular intervals can help you develop financial discipline and ensure rupee cost averaging by buying more units at lower NAVs (net asset values) during market downturns or corrections. The easiest approach to ride out market volatility is to invest in a Systematic Investment Plan (SIP). This also eliminates the need to keep an eye on the markets and time your investments. Calculate the monthly payment required to reach each objective using an online SIP (systematic investment plan) calculator.

3. Prepare for Uncertainty

In these times of uncertainty, due to various dynamic changes around the macroeconomic events, having an emergency fund to make ends meet is essential. The financial challenges amidst the uncertain time give you the perfect impetus to account for such unexpected expenses and make provisions so you can avoid pitfalls.

An emergency fund acts like a financial cushion on which you can fall back during financial exigencies or income loss due to illness or unemployment. Ideally, an emergency fund must hold to at least 12-24 months of household expenditure, including loan EMIs.

An emergency fund will assist you in your EMI obligations during times of financial hardship, saving you money on interest and late payment penalties. It will also protect you from any adverse effects on your credit score. This will assist you in achieving financial freedom and maintaining financial security.

4. Don't Forget Your Insurance Cover

Other than the macro-factors like pandemics and recession, problems like medical emergencies can derail your financial stability in seconds. That is why it is important to invest in insurance plans that can help you maintain your financial freedom, even in times of uncertainty.

Contrary to popular belief, insurance is a vital aspect of financial planning. You must have an adequate insurance cover to indemnify risk to life and health. A life insurance policy protects your family's financial needs in the event of your untimely death, whereas a health insurance policy helps you pay for expensive medical treatments.

An adequate insurance cover cannot be treated as an option; it must be your priority. With the COVID-19 uncertainties and medical emergencies that many families went through in recent years, holding optimal insurance cover for both life and health is essential for your financial independence.

5. Reduce Your Debt Obligations

Due to heavy debt burdens, some millennials are living pay checque to pay cheque, but there is a way to get closer to financial freedom. Prepaying or foreclosing school loans, personal loans, consumer durable loans, and other types of loans, especially in the early years of the loan tenure, can result in significant interest cost reductions.

Ideally, you should prepay the loan whenever you have financial surpluses, especially for personal loans, credit card debt, and two-wheeler loans that come with higher interest rates. Refrain from using your emergency fund or investments earmarked for crucial financial goals to prepay loans.

You must ensure that you are spending within your means and not borrowing excessively. You need to maintain a balanced debt-to-income ratio of less than 40% and take concrete steps to reduce existing debt.

To conclude...

Your journey to Financial Freedom might become a lot easier if you follow these 5 steps and stick to them with determination. Always keep in mind that mountains do not move in a day. So, stay steady and committed, and don't get discouraged if you experience any setbacks along the way because Financial Freedom may be closer than you think.

The above-mentioned steps may guide millennials to financial freedom; however, some of them lack financial knowledge. Millennials should invest in their future and attain financial literacy to effectively follow these steps. Financial literacy will assist you to be prepared for any financial challenges in the future.

Financial literacy is an important life skill that allows you to understand the basics of investment and financial planning. If you are financially savvy as a millennial, you can make informed financial decisions in the future to maintain your financial stability and continue on your path to financial freedom.

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Organised into eight modules with 24 extensive videos, the "Certified Family Guardian" will help you with all the relevant tools and learning modules needed to get better at money management. It also offers a host of other benefits to help you make informed investment decisions. Read here for complete details...

So, if you wish to enhance your financial well-being and secure your child's financial future, you must enrol for the "Certified Family Guardian" programme today!

Warm Regards,
Mitali Dhoke
Jr. Research Analyst