Wealth Guide on Financial Freedom: The term ‘financial freedom’ can have different interpretations for different people. For some, financial freedom or independence would mean having adequate monetary resources to cover their living expenses. For many, it may refer to having enough money to meet financial goals or lifestyle choices. For others, it may mean getting rid of debt repayment obligations. Gaurav Aggarwal – Senior Director, Paisabazaar.com shares some tips on how you can achieve financial freedom:-
Make prepayments, whenever possible
“Prepayment or foreclosure of outstanding loans can lead to substantial savings in interest cost, especially if made during the initial years of the loan tenure. Hence, existing borrowers having financial surpluses should always try to prepay their loans. Those having multiple loans can start prepaying the loan costing them highest interest rate and/or having longer residual tenure. This will derive higher savings in interest cost,” Gaurav Aggarwal advised.
“One should also factor in foreclosure or prepayment charges, if any, levied on loan prepayment. Lenders offering loans on fixed interest rate usually levy prepayment charges. RBI guidelines have barred the lenders from levying prepayment charges on floating rate loans. Opt for loan prepayment or foreclosure only if the overall savings in the interest cost exceed the prepayment charges, if any, by a wide margin,” Aggarwal added.
“Also avoid using emergency funds or existing investments made for your crucial financial goals for prepaying loans. Doing so may lead you to avail loans at higher interest cost to tackle financial exigencies or for achieving unavoidable goals,” he suggeted.
Opt for balance transfer
Further, he suggests, “Balance transfer option allows an existing borrower to transfer his loan to another lender at a lower interest rate, leading to a reduction in his interest cost and EMI burden. Hence, borrowers having long residual tenures should compare the interest rates charged on their existing loans with those offered by other lenders. The best way to do so is to visit online financial marketplaces and compare the interest rate offered by various lenders based on your income, credit profile and repayment capacity.”
“If other lender(s) are offering lower interest rates than the ones levied by your existing lender, then request your existing lender to reduce your interest rate. If your existing lender rejects your request, then transfer your loan to the lender offering a lower interest rate. However, factor in prepayment charges levied by the existing lender, processing fees and other charges levied by the new lenders before exercising balance transfer,” he added.
Include your EMIs in your emergency fund
“The primary purpose of maintaining an emergency fund is to deal with financial exigencies or income loss caused by job loss, illness or any unforeseen situation. The size of this fund should be big enough to meet your unavoidable expenses for at least six months. Hence, include your EMI obligations for the next 6 months in your emergency fund. This would help you in continuing your EMI repayments during financial exigencies and thereby, save yourself from incurring higher interest cost, late payment penalties and any adverse impact on your credit score,” he opined.
Prepare a financial plan
“Having a financial plan helps in providing a direction to your money management and investment activities as per your income and liquidity. It also helps in devising an optimal asset allocation strategy for reaching your financial goals. Start this process by estimating the amount required to meet each of your financial goals on the basis of your time horizon, presumed rate of return and inflation rate. Once you have this information, use online SIP calculators to find out the monthly contributions required to achieve your financial goals,” he advised.
Begin investing early through SIPs
“The earlier you start investing, the more time your investments would have to grow and thereby, benefit from the power of compounding. Hence, try to start investing for your big-ticket financial goals like post-retirement corpus and child’s higher education as early as possible. This would help you achieve financial goals with much smaller monthly contributions. Opt for the SIP mode of investment as regular investment at periodical intervals would instil financial discipline and also ensure rupee cost averaging by purchasing more units at lower NAVs during market downturn or correction. This would also eliminate the need for monitoring markets and timing your investments,” he said.
Review your credit report at regular intervals
“Your credit reports list various activities related to loans and credit cards. They provide details related to your repayment history, your past and existing loan and credit card accounts, applications made for credit cards and loans, etc. As this information is reported by the lenders to the credit bureaus, any clerical error made by the credit card issuer or lender during the reporting or any fraudulent activity made in your name can reduce your credit score. The only way to detect such wrong information is to fetch your credit report at periodic intervals and report them to the concerned bureau or lender for rectification. Fetching your credit report at periodic intervals can also help you in getting pre-approved loan, credit card and balance transfer offers from various lenders,” he concluded.