Let me start by saying that I’m not a financial advisor nor an expert at this. But from what I understood, basic financial knowledge is not a rocket science and is essential for everyone.
Dave Ramsey is a well known financial advisor in the US and has helped numerous people achieve financial independence. His 7 baby steps are widely adopted among people around the world. Here is the Indian version of it.
1. Save ₹25,000 for Your Starter Emergency Fund
This amount will not sufficient for big emergencies, but it will give you a peace of mind and cover small unexpected events while you pay off your debts.
Dave Ramsey recommends to save $1000, which is around ₹72,000. But when considering PPP rate (purchasing parity power), it is approximately ₹25,000. That means something you purchase with $1000 in U.S will need only around ₹25,000 in India.
2. Pay Off Your Debts Except Home Loan
Dave Ramsey recommends debt snowball technique where you pay off your small debts first, which will motivate you to pay off bigger loans. Having said that, paying off loans with bigger interest rate first will be profitable if you are sure to be disciplined in the process.
3. Save 6 Months Expenses for Emergency Fund
Here you are completing what you started in step 1. Having 6 months of expenses in an emergency fund will make sure you don’t fall back to debt in case of a job loss or other emergencies.
Make sure to save it where it is easily accessible. Lot of experts suggests to save this in a separate bank account or in liquid funds.
eg: If your monthly expenses is ₹25000, then save 1.5L in your emergency fund.
4. Invest 15% of Your Household Income in Retirement
Household income is the total income of your house which includes your income + your spouse’s income + any other income from businesses or real estate etc. Make sure 15% of it is saved for retirement
You can save your retirement fund in
- Mutual Funds
Saving in EPF,NPS or ELSS mutual funds will also give you a tax benefit.
5. Save for Your Children’s College Fund
Make sure to calculate how much college education will cost when your child is 18. Normally it would be around 10–20 lakhs today, and after 15 years, it could be 20–40 lakhs. There is a huge difference between expenses in govt and private colleges. Please do your own research.
6. Pay Off Your Home Loan Early
This is the last step in achieving financial freedom. Pay off your home loan early, so you are completely out of debt.
7. Build Wealth and Give
Now that you are financially free, it is time to give money to those in need and build more wealth.
Theses steps are great for anyone, but doing minor tweaks based on your situation will be better. I would suggest these:
- A runway fund: An additional 1-3 months expenses in your primary bank account. This will make sure you don’t run out of budget and never have to touch your emergency fund for basic needs.
- Saving for house: If you don’t have a house, it is better to save for at least the down payment. I would recommend doing this after step 4.
- Retirement fund reliability: If you are just 25, saving 15% should be more than enough for your retirement but that might not be the case if you are already 40 or 50. In either case, make sure to do the math.
Like I said, I’m not a financial expert but I would be happy to help and provide small pointers for your financial success in case if you need help. You can DM me on twitter.
What step are you in currently?