Wealth Guide: 5 golden rules of financial planning to retire early in life

Financial freedom is generally defined as a ‘state in which an individual or a household has sufficient wealth to live on (maintain a pre-defined lifestyle) without having to depend on income from any form of employment.

Over the course of the last few decades, views on financial freedom have also changed with time. For our previous generation i.e. parents, grandparents – Financial freedom was synonymous with retirement savings and as well as leaving a pot of savings for children or grandchildren.

Increasingly for the millennials, financial freedom now means to achieve financial independence at the earliest and then having the freedom to follow their calling – experiment with a start-up, travel the world or enjoy the latter half of life in the company of their loved ones.

As Margaret Bonnano once said: "Being rich is having money; being wealthy is having time”.

Devang Kakkad, Associate Director – Wealth at Equirus highlights that financial Freedom is achievable if we follow few golden rules of financial planning:

1. Define Financial Goals:

Simply put, do the math – consider drawing up a retirement plan while being cognizant of maintaining / upgrading your current standard of living and future inflation.

Simplest way of calculating your required retirement corpus is by arriving at your current monthly expenditure and extrapolating the same over the next 20-30 years while keeping inflation in sight.

Once you’ve arrived at a figure that you feel is reasonable, it’s time to analyse your current savings and investments and figure out how much more money you will need to generate.

Once you are aware of the corpus you must aim for, you can then decide on the best savings and investment avenues open to you.

2. Asset Allocation:

Long-term financial goal is best achieved by following a disciplined asset allocation strategy. An ideal long-term portfolio involves a combination of multiple asset classes such as equity, debt, real estate and bullion.

The weightage allocation for each asset class should be a function of your risk appetite, time horizon and long-term financial goals.

Besides multiple asset classes, product diversity within each of these asset classes is equally important. Each asset class comprises of a broad variety of sub-asset classes, for example, a sub-asset class within equities will include large companies, smaller companies, growth funds, global equities among others.

To arrive at an effective asset allocation strategy, investors should start constructing a portfolio with a blank sheet of paper and total investment corpus in mind.

In practice, many individuals/investors already have some accumulated investments and may be biased to tweak their asset allocation strategy to justify their existing investments.

Hence, the role of financial advisors is also equally important while deriving the asset allocation strategy.

3. Benefits of Asset Allocation:

A well-thought-out asset allocation strategy helps investors construct a portfolio that closely matches one’s future return expectation/ financial goals while minimizing the risk and return volatility of the overall portfolio.

Asset allocation strategy also helps investors to benefit from diversification achieved through investing in diverse asset classes. There are always periods of relative outperformance between various asset classes.

Given that asset classes are not perfectly correlated or in few instances inversely correlated, investing in different asset classes helps the investors benefit in the long term.

4. Periodic review and re-balancing of your investment portfolio:

Regular portfolio reviews help investors to evaluate the performance of their investments vis-à-vis benchmark as well as expected returns.

Regular portfolio reviews also help investors to re-balance the portfolio if required to maintain the desired asset allocation, if the weight of one asset class has increased or decreased due to market movement.

5. Set up your Systematic Investment Plans, popularly known as SIPs:

SIP’s help to inculcate a disciplined approach of savings and investment. It essentially means investing a small amount of money on a pre-set date (say 1st of every month) into specific mutual fund(s).

Conceptually, SIP is the most time-tested and evergreen way of investing. It provides perhaps the most disciplined way of investing in equity and debt markets alike.

Conclusion:

In conclusion, financial freedom is largely determined by achieving the desired investment corpus. Asset allocation is the first step towards building a long-term portfolio that is aligned to achieve the investment corpus.
 
Once the asset allocation is decided, investors should consider constructing their portfolio in a phased manner.

Investors should actively evaluate investing through SIPs to increase their equity/debt market exposure and to build their long-term corpus.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)