Financial independence, while aspired my many, may not be everyone’s cup of tea. One of the reasons for this is lack of enough savings- which serves as the raw material for financial independence.
This lack of savings, in turn, is often an outcome of stagnant or income increasing at a steady but minuscule rate (just to match the inflation rate!).
And cutting corners don’t work beyond a point.
Can the two – modest savings rate, but desire to achieve financially independence – coexist?
Theoretically yes, if
- you give it enough time (few decades!), or
- reduce your needs to an extent that you need very less money (can you?), or
- get windfall gains/ paranormal profits from your investments (what’s the likelihood?)
Given these circumstances, financial independence may be goal too far. Maybe far enough to dissuade many from the pursuit of financial independence altogether.
PARTIAL FINANCIAL INDEPENDENCE
What is partial financial independence?
Partial financial independence is a life stage wherein your investments can take care of your basic day to day expenses, but this amount is way short of what you may need to take care of your expenses over your lifetime.
If may be able to take care of your daily expenses like food, clothing, shelter, occasional indulgences like food, travel, movies etc. But it may not be enough if you are looking to go on a foreign vacation every year, have major planned expense (like kids’ education or wedding or buying a home) in future.
In such case you will need to top up your income with something – That something can be your existing job or something else that you love doing – e.g. teaching, consulting, freelancing, writing, NGO work etc.
The beauty of pursuit of partial financial independence is that it can be pursued by almost anybody with a decent source of income. It can also be a good initial goal in pursuit of a subsequent goal of complete financial independence.
Benefits of partial financial independence
- One can achieve partial financial independence even with an income that is not too high but savings rate if OK. Of course, you need a somewhat predictable source of income to begin with.
- Being partially financially independent may provide flexibility in terms of work you in case you hate your routine and are looking for a way out.
- Partial financial independence may provide some cushion in case you are out of job for some time.
- Things may eventually get better, and maybe, you can soon achieve complete financial independence in future.
- You can have significant control over your time. And maybe find ample time to pursue hobbies and interests.
- If you choose to continue in existing job, you may not fear your boss – because your financial life is not just dependent upon your employment status..
Things to ensure before chasing partial financial independence
- Have a number in mind. What is the amount X that can give you financial independence? And what is the amount (a % of X) which can give you partial financial independence. What are your assumptions in planning your finances? What returns are you chasing on your investments?
- You need to have a plan in place – You can’t just stop working because you have achieved partial financial independence. Remember, you have just achieved partial financial independence and not a complete financial independence, and you need to top up your exiting passive income with an active income.
- You have some skills and interests in addition to your area of work. You just can’t quit your work and hope do consulting or teaching if you neither have a liking for them, nor skills.
- You need to be sufficiently insured – Health insurance & term life insurance if you have dependents) to begin with. You may want to evaluate more insurance cover, as needed.
- You should not start falling prey to lifestyle inflation. It can derail even best of your financial plans!
- Your investments should be generating decent returns & need to be by and large liquid in nature. Ideally it should be a healthy mix of debt and equity (with objectives of capital protection and capital growth).
- Some expenses can set your financial plans back. Beware of them.
(You may also be interested in understanding the prerequisites for financial independence)
Financial independence for many is an ideal case scenario. This can be daunting for many people who wish to pursue financial independence, but don’t get started on this “impossible” task.
While partial financial independence may not be able to match the “awesomeness” of financial independence, it may be a good first step.
What are your thoughts?