Financial Independence – Simply Complicated?

Our generation believes in living in the present and frugality is a fairy tale notion. Financial Independence, though an over-used term, is not entirely understood. For most of us, financial independence means taking care of our current expenses and if we can save any bit after – it’s a bonus.

So what is the true meaning of Financial Independence? To put it in simple words – it means having enough income to pay your living expenses for the rest of your life without having to work full time. It is a state of living where you do not have to work anymore. When you are financially independent, you work because you want to and not because you have to!

While everyone wants to achieve financial independence, very few actually try to understand it’s significance & work hard towards achieving it. That is the reason why the more & more you earn, you are still left wondering why financial independence & security continues to allude you.

Usually, people confuse financial independence for retirement planning. It’s like thinking income and wealth are the same when they are poles apart. A person earning INR 1mn annually and saving INR 100k is much wealthier than someone who earns INR 10mn but saves nothing. The key to financial independence is to understand the art of wealth creation. It is far easier to lose a job than to wipe out a well-constructed portfolio of assets. Always remember, your wealth can’t fire you and it is much prudent to plan for financial freedom than think of an amount one needs to retire.

Before we talk about the most basic steps to achieve financial independence, we are making the assumption that you love what you do for a living or atleast you will soon by harvesting your skills, interests, resources and competitive advantage to produce results.

People often talk about using money to create wealth . But one needs to first have that money to invest which in return will create wealth. Therefore, the MOST important lesson in creating wealth is to SPEND LESS THAN YOU EARN AND INVEST THE DIFFERENCE EFFICIENTLYa principle that is easy to understand but hard to live.

Step one in achieving financial independence & creating wealth starts with the simple habit of SAVING MORE & SPENDING LESS. It’s equally important to generate more income, track your expenses and keep lifestyle inflation to a minimum. As a rule of thumb, save 50% of what you earn! The easiest way to do that is to transfer an amount equal to the one you spend to an account you cannot withdraw or transact freely from.

For example, say you earn INR 100k per month. When you spend INR 2000 on a dinner or INR 10000 on a weekend trip or INR 500 on a movie, transfer the same amount to your ‘untouchable savings account’. When you would have spent INR 50k and saved the same amount, you will have no more funds to withdraw from for more expenses that month which will act as a barrier to not spend more than 50% of your income.

Step two in achieving financial independence is to GET RID OF HIGH INTEREST DEBTS and AVOID CONSUMER DEBT (credit cards, car loans, home loans, etc). One should not start investing until all of the debts are cleared!  

Step three in achieving financial independence is to use the eighth wonder of the world to work for you – COMPOUNDING. To create wealth one needs to INVEST IN INCOME GENERATING ASSETS that compound your returns over the long term. This could be a real estate investment giving you rental annuity or equities or bonds paying you fixed interest rate or fixed deposit schemes like PPF or Gold. The idea is to create passive sources of income that work for you even when you are not. The obvious question now is – which asset class or asset allocation strategy provides the best returns??? The answer will obviously vary from person to person due to different risk profile of individuals and at what stage of life cycle they are at currently.

Just for reference – asset class like EQUITIES has a commendable track record to back its claims – 20% CAGR in the last 20 years. For example, INR 1000 invested in equity MF 20 years back is worth INR 38000 now – 38X in 20 years!!! Equities are highly tax efficient as well because they do not attract any tax if invested for more than a year. Also, unlike real estate one doesn’t need a good chunk of capital to make an investment. One can start investing in equity MFs with as low as INR 500/month.

In a nutshell, one doesn’t need millions to achieve financial independence. Amassing wealth and becoming financially independent is a slow process that takes time. You need to do small things every day like cutting expenses, generating extra income and investing the money efficiently & effectively. With time, effort & willingness; it begins to amount to something much much bigger and results in FINANCIAL INDEPENDENCE!!!


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