Financial Independence has in the last few years become a much-talked-about concept, and if I may say so, quite a misunderstood one. Basis my experience, it has meant different things to different people, which in itself is not a bad thing.
At its simplest, Financial Independence means “having enough money so as to never work again for the rest of your life”. But as you would agree, neither is life simple, nor is it as predictable and straight-forward as one would like it to be.
This effectively means that as you go along your life journey, your definition of what Independence means keeps changing as your goal posts keep shifting. We (me and my spouse) were no different as we embarked upon our financial journey more than a couple of decades ago.
At the end of nearly 25 years of this journey, we are wiser and much clearer about financial independence and wellbeing than when we started. That said, it is not rocket science, and it is something that everyone should aspire towards, not just for the financial security, but for the mental doors that it opens for you when you discover that you are no longer working for the money.
As I have written before, the 3 most important words I have uttered in my adult life have been not the cliched usual stuff, but actually “Be Financially Free”. Today as we enter the 75th year of India’s independence, the best gift that you can give yourself is to put yourself on the path to your financial independence.
Based on our journey, I share with you below a few simple principles that you can follow to get onto, and stay on this path. But beware, what is simple to understand is rarely easy to do, and requires discipline, patience and the ability to say no to your ego.
You would have heard this before, and if you are in your 30s, it might still seem that the future you need to plan for is very far away and there is still time. But what if I tell you that • You are likely to gainfully work (without burning yourself out) only for a maximum of 30 years, and given rapidly improving life expectancies, you are likely to live for at least another 35-40 years post that? • what this means is that for every day you live and earn, you have to live at least one more day when you are not earning. • So, your need to save a substantial part of your today’s income for your future is not a choice that you have, but a necessity.
Also, being consistent here is not only about saving regularly, it is also about not touching it impulsively. Treat your long-term savings as how you would treat your house. You wouldn’t sell that to satisfy your short-term impulses, would you?
Again, this seems simple and straight-forward. After all, how complicated can life goals be? But you will be surprised how mistakes get made here, and we too have made our share and learnt from them. Having a financial plan (you can go to a certified financial planner in case you need help) can help you bring clarity both in terms of identifying your goals as well as prioritizing them. A well-documented plan will also ensure that you do not succumb to any sudden decisions, especially those that are difficult to roll back.
My observation has been that young people, especially as soon as they are married and have secure jobs, feel that the next step is to buy a house. Don’t get me wrong, having an own house may be important, but the point here is more about where it should sit in terms of priorities.
My personal learning has been that in the first decade of your career, especially in today’s age, you should focus your savings on 2 things – • Invest in long term financial assets. • Invest in yourself, in making sure that you have the best possible skills that can take you forward in your career.
The time for a house (and other material assets) should come in the second decade of your career, once you have a tidy nest-egg as well as once your investment in yourself has paid off through a career that’s racing ahead.
This is one of the most easily understood but most difficult to follow principles. As your years go by, you will discover that you suddenly need a bigger house, a better car, a wider TV and a fancier holiday. While all of these will seem necessary, not all of them will be. When you have a money-tap that keeps filling up your bank account regularly, the most frivolous of wants can suddenly look like a need. But there cannot be a prescription here, only you can judge what is a genuine need vs a materialistic want for you and your family. Again, a good plan will let you know whether what you want is a need, and if you have planned for it.
While in some cases, leverage is not avoidable (eg. when you need to buy a house), in most other cases, it is and should be avoided. Leverage has two negative implications • Easy low-cost leverage allows you to think that you can afford something when you actually can’t (as per your plan). • Mishaps happen (Eg. an unforeseen job loss, or a medical emergency or the loss of a wage earner) and when they do, your loans act like chains on your legs, not allowing you to move forward towards your financial safety.
Getting debt-free early, and remaining so, is a key milestone towards reaching financial independence. Another way to look at leverage suspiciously is to go back to our earlier example of saving every day for a day when you will not work. When you take on debt that you cannot afford, you are actually borrowing from your future earnings and savings, thereby depleting your efforts towards achieving financial independence.
Last but not the least, as you get close to financial independence, it is important to remember that you have aspired for it for a reason. What is it? For us, the best part about financial independence has not been about achieving it, but rather about the freedom that it has provided us, allowing us to do the things that we like doing, while being secure in the thought that we are adequately prepared for our (still long) futures ahead. To paraphrase what a wise person has said, “Money cannot buy you happiness, but it can give you freedom. And freedom can give you happiness.”
At the end of the day, everybody has to retire. Becoming financially independent is your way of ensuring that you “retire” from your work life on your terms, with the freedom to do what you want post that. Achieving Financial Independence is both hard work and time-consuming, but unless you begin, you won’t get there. So, use the next 365 days to lay a strong foundation to raise your personal flag, towards your own financial independence.
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