“I want to save money and then travel the world”
“I want to live life in the hills, without any worries”
“I want to follow my passion, but my finances worry me”
“I want to join an NGO and work pro bono, but I need to secure my family’s financial life”
What is the underlying thread connecting the above?
One of the possible answers is – the need for financial independence.
One hears the term – “financial independence” not too infrequently these days, and this is often used very loosely. There are lot of people aspiring for it – some with all seriousness, some with half baked approach, many others with academic disinterest. And it is often uttered in the same breath as talking about home loans, car loans, personal loans etc.
How do you define financial independence?
Financial independence can have different meanings for different people. But the underlying theme in all of these is reaching the level of wealth where investments will be sufficient to take care of all your expenses. Or at least a good chunk of it. (you may call the latter partial financial independence)
And what that ideal amount to achieve financial independence is?
There may not be any one right answer for this, but this amount, lest us say X, should be enough to meet your expenses – both planned as well as of unplanned nature. And thee amount will, in all probability, increase with time thanks to inflation (including lifestyle inflation!) and some major financial commitments (e.g. kids education, buying a house etc.). With around 5% inflation, your cost of living will become two-fold from current around 14-15 years down the line. With 7 % inflation, your cost of living will become two-fold in around 10 years. Factor in lifestyle inflation, these numbers can be worse.
So, for instance if your amount X, is say Rs. 50,000 a month then your investments should be able to generate that cashflow of at least Rs. 50,000 a month. If it is Rs. 500,000 per month, then your cashflow needs to generate that amount. And you need to account for inflation too.
Just to clear a popular misconception, financial independence is different from early retirement. In retirement you probably will not have a source of income apart from your investments. With financial independence, you can choose to work on what you like or are passionate amount even if the cashflow is limited.
(Read more about this on Financial Independence – What is the safe withdrawal rate?)
So, what all you need to achieve financial independence?
There is no rocket science about trying to achieve financial independence. But it does require lot of discipline and generous dose of patience.
If you have a decent source of income then it boils down to your behavioral traits. I’ll limit myself to 3 points for the sake of brevity.
- Have a target amount for various goals in your life & their timelines and work towards that. Primarily this will involve securing monthly expenses considering your lifestyle, aspirations and inflation, your primary residence, goals related to children and your health and wellness.
- Live below your means and invest money diligently (and this will mean staying off the EMIs as far as possible). Focus on both capital protection and capital growth is important.
- Have yourself adequately covered for any eventuality, which will mostly involve being adequately insured – having a term plan & health insurance.
What are your thoughts?
Originally published here