Starting from young age, most individuals are instructed to get an education and then a job. After landing a solid job, the recommendation is to save a small percentage of each salary for years until retirement.
The underlying assumption is that we should all follow the same linear path from elementary school until retirement, spending most of each day at work, trying to climb the ladder, to get a raise, to buy a bigger house, to fill it with more stuff that wasn’t necessary to begin with. Only after retiring there is room to explore, relax, or spend time with family.
Most individual trade their time for a pay cheque, and then spend the majority of each salary on acquiring material possessions. As the spending budget bursts, many individuals desire a larger pay packet, which requires longer hours and more responsibilities at work, which means even less time to enjoy the additional income. It’s a vicious cycle that often continues in perpetuity. You might call it the time-money paradox.
Instead of material possessions, I prefer freedom. Freedom to change careers, start a business, take some time off, or travel the world. It’s not about what I choose to do, it’s about having the freedom to choose.
Financial Freedom is the stage where you can maintain your present lifestyle without depending on your regular income at any age. I would like to break the stage in financial freedom into two parts.
- Temporary Freedom
At some stage of your career you create a pool of savings. You might invest your savings in a diversified investment portfolio to produce a regular stream of income. Or, you might start a passive business on the side, creating another stream of income.
Your freedom grows alongside your savings. Eventually, you will have enough money saved to feel comfortable switching jobs, starting a business, travelling, or any number of other activities that are impossible to achieve while working full-time. These can be major life changes, but they are not permanent. Your freedom is temporary until your income exceeds all your desired spending.
- Permanent Freedom
At this stage, your total non-employment income exceeds your total expenses and you no longer require a steady salary. You likely have a reliable side business and/or a large investment portfolio producing a substantial amount of income to maintain your present lifestyle.
Financial freedom does not mean that you retire early to a life of leisure (unless that is your desire). It’s about having autonomy and independence in your daily routine, allowing you to design a better life while spending your time, money, and energy in a more meaningful way. If that includes starting a new business, great! Doing meaningful work while getting paid is my definition of a win-win.
Steps in financial freedom journey
Here are the steps to make sure you achieve financial freedom and remain in that stage.
Create Insta-emergency fund
The first step is getting kick start to your journey towards financial freedom. The goal is to save an amount equal to your one month’s salary first. Sell unused items, close unused accounts. Give yourself a deadline of one month for this step. Here speed is key.
Here you need to do a reality check of your current financial position. Manage your resources with budgeting. Track your income visa vis expenses. Get rid of overspending
Get health insurance for self and family with minimum 5 lakhs cover over and above your employer’s insurance policy. The insurance policy provided by the employer will last till your employment. Continuation your own policy will give benefit like no claim bonus, free health check-ups etc. As a thumb rule buy a life insurance policy equal to 12-15 times of your annual expenses or 8-10 times your annual income. Alternatively, you may insure according human life value calculation by a professional financial planner.
Getting out of debt
First sort your current debts in order, starting with highest interest rate and so on. For example, from credit card withdrawals to home loans. Pay off minimum due of all the debts first. When done with the expensive debts move to next highest interest rate debt and so on. If some of your investment yield is lesser than the current loans, it makes sense to pay off those loans by liquidating those low yield investments.
Build emergency fund
Keep saving 5% of your income till you build a corpus of emergency fund equal to 3 to 6 months of your income depending on your job security.
A relatively new approach that emphasizes investing with the objective of attaining specific life goals. Goal-based investing (GBI) such as saving for children’s education etc. Keep saving 10% of your income with earmarked investment with time horizon matching goals.
Build retirement fund
Keep saving for your retirement from 10% to 20% of your income with mix of debt and equity. Your debt investment gives stability to the portfolio and equity brings growth. Invest 5%- 15% of your saving in gold preferably in demat form. The ratio of equity investment should be according to your age. As a thumb rule the percentage of equity portion of investment should be 90 minus your age. For example, if your age is 55 years, your proportion of equity investment should be 35% (90-55).
Plan Succession of wealth
Would you want your properties to be sold and the proceeds distributed among your heirs according to the succession laws and not as per your wishes?
We spend all our time planning creating wealth through estate, stocks and gold. Aren’t all these efforts partly aimed at leaving behind a rich legacy for our loved ones? You need to bequeath it to someone, preferably through a proper will.
Luxurious financial freedom
Having achieved full financial freedom your next level is to achieve luxurious financial freedom.
When you have enough passive income to spend more freely for an enhanced lifestyle, that is what I call luxurious financial freedom. It’s the point at which your income exceeds your expenses by a comfortable margin, allowing you to increase or decrease your spending given your desired lifestyle. You might call it financial freedom level 2.
This last stage is a concept that is rarely discussed or achieved. However, it is more important to stay mindful about your finances. If you are not mindful about your finances, there is fair chance of being slipped into old pattern of finances.
Happy financial freedom!