How much money is needed to achieve complete (or even partial) financial Independence in India is a question that any F.I.R.E. aspirant would be keen to know. Any probably have some number at back of their minds.
Few days back, I shared some thoughts on money needed to achieve financial Independence in India. Here I’ll try to answer (rather pose more questions!) some things about partial financial independence. The objective is not to give a number (no one size fits all solution exists) but the factors to consider while arriving at a number for partial financial independence. Like many other things, asking the right questions can be a good first step.
5 questions to ask before aiming for partial financial independence
Question 1 – What will your source of income be after becoming partly financially independent?
This can be a tricky question. Different activities can provide different incomes. While you may consider just continuing with your current work/ business, there might be many who may want to change tracks – like become an entrepreneur, become a consultant or freelancer, do teaching, work for a non-profit or NGO and so on. Each may have different payoffs, which may not exactly be in tune with your current income.
For instance, entrepreneurship may give negative cash flow for some time (or not kick off at all). Or maybe, something like volunteering may provide very little income or no income at all.
You also need to consider the best & the worst case scenario, especially if you are on your own. Hence you may experience variability in income which needs to be factored in.
Question 2 – How much money can your current passive income provide?
An investment of Rs 1 Crore can provide a pre-tax passive income of Rs. 50,000 per month at 6% rate of returns, Rs. 75,000 per month at 9 % and Rs. 100,000 per month at 12 %.
(I would suggest to be conservative with your estimates & have capital protection as one of your objectives)
Do your own math and understand what your passive income returns can be and will it be sufficient to cover your day to day expenses to an extent? As a rule of thumb your passive income + your active income should cover your expenses and provide enough budget to save and invest some amount.
And, what will be the affect of inflation? If you still manage to save some money via passive income and active income, then you may be able to manage inflation. .
Question 3 – What are your current expenses?
No financial planning exercise is complete without estimating your current expenses. Apart from current expenses you also need to factor in the effect of inflation, especially lifestyle inflation on your expenses. Else in few years you may start falling short, thanks to this beast named inflation.
And yes, one assumption is that you’ll maintain similar lifestyle post partial (or even complete) financial independence.
Question 4 – What are the major life event expenses?
Have your budgeted your major lifestyle expenses like buying house or kids’ education or wedding or “travel the world” vacation?
If not, you may be in for a nasty surprise when the expense actually needs to be made.
Question 5 – Are you sufficiently covered for emergencies?
Are you adequately insured? Or will any unexpected expense set your financial plans back?
As a bare minimum you should have a term plan and a health cover. While the cover depends upon your lifestyle needs and current financial situation, I would currently not recommend a term cover of less than Rs. 1 Crore or a health cover of less than Rs. 10 Lac.
You may choose other cover as personal accident policy or cancer care cover. However term cover and health cover are the most important insurance cover you should be having.
Let us consider a scenario
Suppose your current savings is Rs. 1 Crore and expenses are Rs. 1 lac per month.
Your Rs. 1 Crore can give a pre-tax returns of
- Rs. 50,000 per month at 6% returns (typically via fixed deposits), and
- Rs. 100,000 per month returns at 12% returns (typically by a good performing mix of debt and equity).
The latter just be enough to cover all your expenses as this point of time. But it doesn’t consider inflation (and hence rise in future expenses), major life event expenses. So, it may not be prudent to rely on this entirely, and you need to top it up.
What is this something that you can use to top up your income. Here are few things –
- Continue with current work (but with money not being the primary motive)
- Become a consultant in domain of your expertise (but make a realistic estimate of money you’ll make and timelines for it)
- Something like teaching – Full time or part time, in domain of your expertise
- Work with a non-profit or NGO (but not for free, as you are not yet completely financially independent
- Start a business (but be aware of costs & returns – hope for the best, but be prepared for the uncertainty in cash flows, at least for some time)
- Change the career track altogether (say, become a photographer or a writer or a fitness trainer – possibilities are endless, if there is a passion that you can follow and it can pay a bit!)
However, one key need to assess is the amount of money one can realistically make while topping up the passive income & will that be enough to meet your future expenses, manage expenses pertaining to different life events and save (and invest) from that money too.
The realities change for different people. For instance:
- Someone with a frugal lifestyle and no major life event expenditure planned (of already met) can achieve complete financial independence with say, Rs. 1 Crore,
- A family ( husband, wife, 2 kids) with an somewhat extravagant lifestyle (expenses of Rs. 200,000 per month) and savings of Rs. 5 Crore, but also wanting to save Rs. 1 Crore each (at current value) for – house, kid 1’s education, kid 2’s education, kid 1’s wedding & kid 2’s wedding (total of Rs. 5 Crore), may not be ready for partial financial independence, if they want to do say, work with a NGO or do teaching which may cumulatively pay much less tan their current monthly expenses.
A typical partial financial independence aspirant will be a person with a decent source of income and somewhat modest lifestyle. If you have low income, partial financial independence may be too far. If you have high income, you may, with some efforts be able to aim for complete financial independence.
To sum it up,
Partial financial independence is a good first step towards complete financial independence (and early retirement, if that interests you!) and getting your numbers and assumptions right is a good first step. This number may be different for different people based upon current savings, expenses, planned major expenses/ life goals and planned “life after partial financial independence”.