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Step-by-Step Guide to Achieve Financial Freedom – Loan Prepayment, Balance Transfer, SIP, and More

Samantha Green

Do you dream of achieving financial freedom? Read this step-by-step guide which lists various methods to attain this much coveted freedom.

It is every individual’s dream to be finally free by a certain age and retire completely from work. But before they retire, they want to secure their future financially. For some, financial security means to meet daily expenses and save for the basics of life. For some others, it may be to settle in life with their dream home, save enough for their children’s future education and marriage before they retire etc. For yet some others, it may be to get out of debt before they withdraw. But, achieving financial freedom requires a lot of discipline and hard work. Investing in hybrid funds, investing in mutual funds through SIP, investing in equity, doing balance transfer, and prepaying loans are some of the ways through which one can make considerable savings and attain the much desired financial freedom. 

Start Early To Be Financially Free

If you want to be financially free, start treading on the path towards it early. Begin with saving and investing early. Look at the following table:

Age of the investorInvesting TenureMonthly Savings Total Investment Amount at Maturity
30 years30 yearsRs. 10,000Rs. 36 LakhsRs. 1.5 Crores
40 years20 yearsRs. 15,000Rs. 36 Lakhs Rs. 88.94 Lakhs
35 years25 yearsRs. 12,000Rs. 36 Lakhs Rs. 1.15 Crores
45 years15 yearsRs. 20,000Rs. 36 Lakhs Rs. 69.67 Lakhs 

All the 4 people invest 36 Lakhs in the beginning. But, the one who invested early at the age of 30 gets a higher amount at the time of maturity, even though his monthly investments are lower than the other 3. Unfortunately, people don’t realize this and spend their entire salaries in their early ages.

Save Aggressively

One needs to set aside a significant amount every month to build a corpus huge enough to become financially free. In 2012, the US based Putnam Research Institute conducted a study. They found that asset allocation, fund selection, and portfolio rebalancing did not affect the final portfolio as much as the amount of savings. An investor who increased his savings every year got a bigger corpus than the ones who chose the best performing investments or altered their asset allocations annually. 

Loan Prepayment

Prepaying loans or foreclosing them can lead to considerable savings in the total interest paid. This is especially true if done in the early years of the loan tenure. Borrowers should always make prepayments when they have funds in surplus. Those who have several loans can begin prepayment with the one that has the highest interest rate or the one with a longer residual tenure.

While prepaying or foreclosing a loan, borrowers should consider the prepayment or foreclosure charges. Lenders providing loans with fixed interest rates levy prepayment charges, but the RBI has prohibited lenders from imposing prepayment charges on loans with floating interest rates. If the foreclosure or prepayment charges are higher than the amount one is going to save on interest cost, one should not opt for prepayment or foreclosure. Also, borrowers must avoid using emergency funds or money saved up for some vital financial goals to prepay their loans. Otherwise, they will end up taking costlier loans to meet exigent expenses or important financial objectives.

Balance Transfer

Balance transfer is the process of transferring the outstanding loan balance to another bank or financial institution to get better interest rates and also better features for the loan. All loans – auto, personal, home, gold, education, loan against property, etc. have a balance transfer facility. Borrowers must opt for a balance transfer at least once during the tenure of the loan. It can lower the interest rate and help one to save on the interest cost. It also helps in reducing the EMIs. 

Borrowers having lengthy residual tenures should compare the interest rates offered by various other lenders on their existing loan. They can check this online based on their credit score, repayment capability, and income.  If other lenders are offering lower interest rates, borrowers can request their current lenders to reduce the interest rates. If the current lender does not agree, then the borrower can transfer the outstanding loan balance to another lender who offers a lower interest rate. However, borrowers have to assess the prepayment charges that are levied by the current lender and the  processing fees and other charges imposed by the new lender. 

Include Your EMIs In Your Emergency Fund 

An emergency fund is usually kept for meeting unexpected financial expenses, such as hospitalization, job loss, or some unforeseen illness. So, people must also include their EMIs in their emergency fund, and the EMIs for the last six months must be included at-least.

Make a Financial Plan 

Having a financial plan helps people to judge how much they can invest according to their income. It helps in money management. One must start this process by estimating the quantum of money required to meet each of the financial objectives depending on  the time available, approximate rate of return, and inflation rate. Once this information is available, the monthly investment can be calculated using online SIP calculators.

Invest Through Simple Investment Plan

A simple investment plan helps people to invest a small sum regularly in the mutual fund scheme of their choice. A fixed amount is deducted from the bank account every month. The benefits of an SIP are as follows:

  • Convenience: It helps people to invest with financial discipline. One can start with an amount of his/her choice. It can be as low as 100 Rs.
  • Rupee cost averaging: The equity market is volatile, and when people invest through SIPS, they will purchase a higher number of units during a market low and lower number of units during a market boom. Thus, one reduces the cost per unit in the long run. 
  • Power of compounding: Due to rupee cost averaging, SIPs yield more money than lump sum investments.
  • Acts as an emergency fund: One can stop their SIP at any time and also redeem it at any time. The fund house has no role in this. So, SIPs act as a fund for exigencies.

Due to all these reasons. SIPs contribute greatly in achieving financial freedom.

Conclusion

Apart from the things discussed above, people must regularly pull out credit reports and evaluate where they stand. If the credit score is bad, it should be improved. Having a good credit score will help in securing better interest rates, will open more options for balance transfer, and so on. Read this step by step guide to achieve financial freedom through loan repayment, SIP, Balance transfer, and more and get on the path towards financial freedom.


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