Financial Freedom And Investment: Making Money Work For You – How much money do you really need to become financially independent? Financial freedom can be achieved by following good financial habits, proper planning and investing.
Financial freedom is a term that most people use loosely. But at its core, at its heart, it has a very simple meaning – you have enough money on hand to cover your expenses for the rest of your life without having to work again. There will be a phase where everything you have accumulated so far will start generating incremental income for the rest of your days.
Financial Freedom And Investment: Making Money Work For You
This is true financial freedom, although it may mean different things to different people. For women, this means they can manage their finances on their own. For a minor, it can mean having enough money to get away from work and travel.
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But in the truest sense, financial freedom means never having to work for money again. It’s a good place, isn’t it?
But remember that financial independence and early retirement are two different things. Financial freedom means having enough money to retire early. Early retirement is retirement with “enough” money.
Some of you may have already noticed that I used the word “enough” a few times. This is the crux of the economic freedom debate.
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Some say that a corpus of 30-40 times your current annual expenditure is good for achieving financial freedom today. If your annual expenses (not income) are around 10 lakhs, using the 30-40x criterion, you need a corpus of Rs 3-4 lakhs.
If I go into a deep mathematical analysis of economic freedom, it will scare half the economic freedom lovers. But let’s take a simple example.
Let’s say you are 30 years old and have a young family who want to be financially independent by 50. Your annual expenditure is Rs 6 lakh and you are expected to live till 85.
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You have 20 years to save enough money to last you the remaining 35 years of your life. Yes, this is your financial life equation.
Assuming variables like 6 percent inflation, 7 percent post-retirement income, and a 60-40 percent equity-debt portfolio, you’ll need around Rs 6 crore at 50 to say you’re financially independent.
(Reminder: If you want to apply the 30-40x rule in reverse to this figure, use inflation-adjusted annual expenses in retirement, not today’s figure).
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• This figure does not include the cost of buying a home unless you plan to rent.
• This figure assumes typical annual costs. However, some expenses, such as replacing a car, repairing a house, or making repairs, occur only once every few years, so these are special.
• It is also good to have a buffer for unexpected and unplanned expenses without insurance. As a health fund that may come in handy in later years.
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Unrealistic assumptions are a huge danger that can derail your plans for financial freedom. Most people don’t realize how sensitive retirement planning calculations are to various inputs.
If you are overly optimistic and make assumptions (like Warren Buffett does, making 20 percent annual returns), you will do very poorly. The worst part is that you run out of money as you get older. Terrible scene!
Also, you should protect your corpus as you approach your pre-determined financial independence day, as poor returns in a few years can really derail your plans. Read why you should protect your corpus against a market crash before you retire.
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Also remember that we Indians are living longer. Unfortunately, unlike previous generations who did not live long after retirement, many of our generation will have many years after retirement. So, you really need to be careful about planning for retirement or financial independence.
All said and done, you are now excited about financial freedom. There is so much money that there will never be a boss. A dream, no doubt. So how do you go? How to achieve this?
It won’t be easy. To be fair, it shouldn’t be easy, or every second person would be financially independent by now.
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But this is impossible. Many people believe that in order to be financially independent, they need to make a lot of money. However, this is not entirely true. A good income will help. But this is not enough. Financial freedom can be achieved by following good financial habits, proper planning and investing.
• Be prepared to save a lot. Investing only 10-20 percent of your income will not yield results. You need to invest more.
• Learn (or get help from a good investment advisor) to get basic numbers, such as how much to invest to retire at the typical age of 60.
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• Children’s future, house purchase etc. Find out how much you need to save for other needs like
• To reach your retirement goal by 60, find out how much you need to invest to achieve aggressive financial independence by 50. Keep in mind that this number may be higher than what you need to retire at 60.
Let’s say you want to invest Rs 25,000 per month for your retirement at the age of 60. For financial freedom at age 50, you need Rs 50,000 per month. For other purposes, you need Rs 30,000 per month.
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If your investable surplus is Rs 80,000, you can achieve both goals i.e. financial freedom by 50 and other goals simultaneously.
First, you have to deposit Rs 30,000 for other purposes. The remaining Rs 25,000 goes towards retirement (or financial independence). This amount is good for retirement at age 60 but not at age 50.
If you still want to aim for independence at 50, you should increase your savings accordingly. Do you know the key to accelerating your goal of financial freedom?
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A friend recently found out that despite earning well over the years, his personal finances are not very strong and he is paying EMIs and bills. It’s a story that defines many.
But financial freedom is possible. It’s hard, but it’s possible if you know what to do. Mathematics as described above is not difficult to understand. You must be ready to make some changes in your life to go towards the goal and work towards it.
If you do this long enough, you will reach a point where your assets and the reasonable income they generate will be enough to cover your living expenses for the rest of your life. And that’s not a bad goal.
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Find latest business news, Sensex and Nifty updates. Get personal financial information, tax surveys and expert reviews in the app or download the app to stay updated! A few years ago, a colleague and I hosted an internal webinar open to clients’ children. We wanted to do something like this because their parents want to start their senior life journey with a solid foundation.
In preparation for the webinar, we polled millennials ages 19-34 on several topics. One question we asked was their motivation for taking on this type of financial work.
The first is how “independent” they want to be of their financial advisors. I am amazed at the level of distrust they have in their financial advisors.
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The second was the number of people who wanted to achieve financial independence. Times seem to have changed. If this was ten years ago, I can guarantee that most of us would not be so familiar with this idea of financial freedom.
But I think this economic idea has spread enough in the media that more people are interested.
Depending on where you are, financial freedom may seem out of reach, especially if you’re just starting to climb the corporate ladder. When your income is low, it’s hard to imagine where your income will rise.
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There’s a reason many people aren’t motivated to save for retirement. The goal is so distant, the amount of money required is so great that you wonder why save for something so far away when you can spend money today and give yourself a better life.
To achieve financial freedom, it is better if we can achieve each difficult but achievable milestone first. Slowly but surely we can put ourselves in a better position.
Even if the money you have can’t generate recurring passive income, money can be very beneficial to your life.
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For example, if you have accumulated five years of annual expenses, this gives you several options.
Even if that much wealth doesn’t last forever, if you’re stuck in an industry you don’t like,
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