Financial independence can be a good goal to aspire for, and even if you achieve partial financial independence, it may be good achievement. But, is the state of being financially independent as hunky dory as it is projected to be?
Well, there are no straightforward answers, and it depends upon what your idea of financial independence is. At the same time, there are several misconceptions, mostly about projection of an awesome life as one achieves financial independence.
Alas, it is not always that Utopian.
Like many other things, one needs to review assumptions and planning and act in accordance with it. At the same time, one needs to stay clear of certain misconceptions about financial Independence – while striving for it, and even while you have achieve it.
Here are some common misconceptions about financial independence.
1. Financial independence is same as early retirement.
The idea may sound very tempting, especially as you put in long hours of work often at cost of your health or family life. One may dream about spending endless hours gardening, or taking endless vacations amidst hills and beaches.
However, this is only partly true.
Financial independence is being in a state where all your future expenses can be taken care of by your investments.
You can choose to retire if you want.
You can choose to continue your current work if you want.
You can choose to change your stream of work if you want and do what you love (e.g. social work, writing, teaching, consulting etc.)
Financial independence is about choice. Retirement can be one of the options. But it may or may not be the best option. This choice can often be a function of your age, energy level and action you seek in life.
2. You’ll never need to work again in your life.
If you are truly financially independent then your investments should take care of your future expenses. However, achieving financial independence requires certain level of discipline in terms of saving and investing. This holds true even if you are financially independent.
But what if few months/ years into being financially independent your expenses start increasing? (e.g. you suddenly start taking lot of luxurious actions, or you upgrade your taste to expensive wines or there is some unforeseen emergency in your family which requires lot of expenses). In such cases your assumptions about your monthly expenses and the amount you’ll need in your lifetime will go for a toss. No?
Here comes the importance of prudence in spending, savings and expenses. The discipline which you need to achieve financial independence will need to continue even when you achieve it.
3. You’ll live happily thereafter
What is happiness? The answer to this question has been attempted by lot of philosophers since time immemorial. And you’ll probably agree – Financial Independence is not equal to happiness.
Innumerable things can burst the happiness bubble for a financial independence – health issues, death in family, complicated estate planning, issues with child(ren), government’s foreign policy (if that is your areas of concern!) and more.
When you talk of financial independence, you talk of time horizon of few decades at least. And it is a long time – with its own ups and downs.
4. Your expenses will not be different from current one.
With few decades of planning horizon, your nature of expenses may vary. Inflation a silent wealth killer. Cost of living may simply rise more than expected due to (more than) inflation.
Or maybe your lifestyle changes and you start developing a taste for more expensive things. (Lifestyle Inflation)
5. You’ll never need to look at your investments again
While you may consistently stick to your investment philosophy, it does need a periodic review. This may be due to chasing economic scenarios, or change in your priorities.
For instance, as you age your go-to investment may be debt than equities, because you prefer capital protection. Or maybe, you may want to get rid of your rental properties (too much of hassle?) and reinvest it in a mix of debt and equities.
While your objectives of capital protection and capital growth may continue, you need to review your investments periodically and take appropriate action (including lack of action!)
It’s great if you decide to strive for financial independence. And it’s great if you manage to achieve it (even partially. But at the same time you need to ensure that your financial independence is sustainable and one way journey, where you don’t have to look back.
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