Financial independence is the state when your passive income earns enough amount to cover up all your expenses.
Achieving Financial independence is not easy, it requires struggle, patience, sacrifice, and a lot of smart work. From the day, you realize the importance of financial independence, start working for it. The earlier you realize, the faster you get towards your goal. Lets read about what is it and how to become financially independent?
What Is Financial Independence?
Financial independence is the status where your passive income makes enough money to complete your monthly expenses. So in this way you do not have to rely on your primary income, you can resign from your job and start any new venture.
Financial Independence cannot be achieved spontaneously, it is a continuous process until you achieve it. The core path of achieving financial independence is maximizing ones saving and lowering his/her cost of living.
Passive Income is the earning you earn without doing any physical job. It can be done by investing in assets, real estate, mutual funds, stocks, bonds, royalty, etc.
The inflation factor also must be considered while becoming financially independent. The normal inflation rate is 5% so if your passive income is 10,000Rs then next year you will require 10,500Rs and 11,025Rs the preceding year.
State Of Financial Independence
Financial independence is a state where you spend less, increase asset base, and reinvest. This is the main principle to achieve financial independence.
This will be the ideal conditions of the different factors when you are financially independent
1. Asset Base
Assets are built over time when you invest. Greater is your asset base, more is the profit you can gain to achieve the state of financial independence. These assets are rent estate, stocks, annuity, bonds, fixed deposits, etc.
2. Asset Returns
Assets that you have accumulated over time generate you an income in some or other way. These returns can be in form of dividends, rent, interest, or the profit after selling the assets. These generally get credited to your bank account.
3. Passive Income
The income so generated can be used by you as an income. You do not work hard every day to earn this income, hence this type of income is said as passive income.
4. Required Expense
All your monthly expenses can be now met by the income generated passively. The lower is your cost per living, the lower is the passive income.
There will be multiple factors due to which your passive income may increase or decrease. Inflation increases at a rate of 5% per annum, so you need to keep investing. Higher will the return from your assets more is the money you can spend.
Process To Achieve Financial Independence
Majorly there are three steps, following which you can achieve your goal of financial independence.
These are not very easy steps, you need a lot of patience, sacrifice, and sacrifice to achieve each one of them
1. Pre-conditions For Financial Independence
Many aspire, but only some achieve financial freedom. It requires planning, patience, and productivity for one to achieve financial freedom.
The process of financial freedom starts with preconditions, which one must fulfill.
i. Emergency funds creation: – You need to have savings for the worst situations. This must include different insurances and cash. You must not have to take any extra money to form different investments to fulfill the needs.
ii. Debt:- Debt/loans can the biggest hurdle when you achieve financial independence. Keep it zero, because you have to make monthly payments to avoid penalties. There is a subtle difference between a middle-class man and a rich man in terms of taking a loan. Rich people take a loan to maximize their profits whereas middle-class men take a loan to but things they cannot afford. Hence, only one piece of advice keeps debt zero.
iii. Cushion Savings:– Emergency funds serve to act in case of worst conditions such as accident, health treatment, etc. But cushion savings are the saving one must secure in case of unexpected loss in passive income. In such cases, you should have at least have funds covering at least 6 months of your expenses.
Once you have decided to be financially free and now have completed the preconditions. It is the time that you start the implementation process in the journey of becoming financially free.
Only generating passive income is not the way you can achieve your goal to be financially free. There are certainly other factors you need to look upon.
i. Mind Mapping
Mind mapping is the logical step following which one can successfully reach financial independence.
a. Ideal Income Model
The ideal income model is a state where you save a sizeable amount each month, your income keeps rising, and you have a good lifestyle.
You save more than 50% of what you earn, and your lifestyle cost is very less. Hence, you keep investing the savings in proper places, and hence your passive income increases.
For Example: – If a person earns 1,00,00Rs a month, saves around 50,000 a month, and his income increases by around 10% per year.
So, in 5 years the savings of the person will rise from 50,000Rs to around 73,000Rs a month.
Hence this can be said as an ideal income model.
b. High Savings
Frugality or being economical with food and money will help you a lot with your goal.
Savings is the most crucial aspect of financial independence. Low savings will take you nowhere, you need to have high savings.
It is quite hard for anyone to save more than 50% of their monthly income. So we can advise you by starting with 10% of your income and increase it by 1-2 percent each month until you reach 50%.
The higher you will save, the faster you will reach your goal for financial independence.
c. Equity Investing
There are many investing options, which can give you high returns. But equity has been known to give the highest returns which may also extend 20% per year.
Equity is risky, we all know that. But investing in high risks even has a probability to give you high rewards. Investing smart and investing for the long term in equity will give you very high returns.
Inequity returns of about 12-13% are considered as good, but investing patiently for aa long period can also yield you return more than 19-20%.
Investing in equity is very convenient and simple. You can either directly invest in stocks or you can invest through the equity mutual funds. Both are quite similar but there are several equity mutual funds giving lower risk for the same equity.
Equity gives you the convenience to start from as low as 500Rs per month. Even if you have quite high expenses or low earnings, you can still invest in equity.
d. Retirement Corpus
If you think retirement is long, you are wrong. Start saving for it as soon as you realize. Start early start small and your investments will grow big.
Each individual has a financial goal which they think will be required for them to complete their retirement peacefully.
As you invest in equity your asset base will grow and once your asset base is huge, it can be used to build the retirement corpus. The corpus will lead to streams of passive income and hence you will end your goal for financial freedom.
3. Stages Of Financial Independence
Financial independence is at all easy, and the thing harder than that is to maintain it and not getting carried away seeing a high amount of passive income.
There are stages which you should follow so that your financial freedom is peaceful and happy. You cannot sprint on to direct the third stage to achieve success, you need to patiently follow the steps.
i. Basic Independence
When your passive income sets to complete the basic necessity for life, then you have set to achieve basic independence.
But what are the things that come under the basic necessity?
- House Rent
- Utility bills (a light bill, water bill)
- Communication bills
- Transport cost
- Health expenditure
- Emergency cash
- Maintenance cost
Build an asset base such that the returns you get from it cover all your basic expenses.
Here the most important thing is to calculate your monthly expenses for basic needs because there are many things which you might think will come under basic expenses but they are not.
ii. Comfort Independence
Once you have completed the first step, then hop on to the comfort independence part.
This part helps you make your life simpler. It covers the parts which are not the basic needs but helps you in your basic core activities.
In a similar manner of basic independence, you need to build your assets base so huge that you can be able to cover the expenses for the following things
- Maid or worker working for you at home
- Basic shopping
- Vehicle expenses
- Some investments
iii. Luxury Independence
This is the final step in achieving financial independence. Once you have achieved the first two steps, you can now build a corpus for luxury independence.
Luxury is costly; hence you need to build an asset base greater than above two to complete this step 3.
So, what are the luxury requirements we tend to have
- Better and bigger Car
- Bigger house
- Party and celebrations
- More investments
Luxury is what everyone aspires and getting luxury in such a way gives you a sense of relief and does not make any burden on yourself.
Steps For Financial Independence
1. Follow The Famous 4% Rule?
The 4% rule is also said as “safe withdrawal rate”, it is the amount of money you could withdraw each year from your savings after you retire each year, and this is done without touching the principle.
This can be the first step for you while starting to achieve your financial independence because the rule helps you estimate the amount you need to save each year taking into account the numbers of the year after which you plan to retire.
To find out how much you need to save
- Find out your yearly expenses
- Then multiply into 25
Then this calculation can give you enough expenses to withdraw 4% each year. The amount you need to save each year will depend upon your annual income and the amount of year you plan to retire after.
2. Choose Your FIRE Lifestyle
FIRE lifestyle is a type of lifestyle you choose to live after you have retired and have achieved financial independence.
There are two types of FIRE lifestyle, leanFIRE, and fat fire.
There is no specific method to find out which lifestyle you should choose. Just try out and find which method suits you the best.
This approach for the FIRE lifestyle requires you to restrict yourself from most of the types of spending.
You need to spend less and invest more, this means you should forbid yourself from all the types of luxuries like cars, parties, long vacations, etc and therefore spending a low-cost life now to live a better life tomorrow.
In this type of lifestyle, you need not restrict all your luxuries.
‘Fat’ as in the title, gives us a rough idea that you can withdraw enough money to fulfill all your needs and desires.
If you have yearly spending of around 8lakhs, then you need to have an asset base of around 2 crores, from which you can withdraw at the rate of 4% per year.
This is normally the lifestyle everyone wishes for and you should save enough to fulfill all your needs after retirement.
3. Take Control Of Time
We know that Time is Money and gaining control over your time is often the most important thing you can do.
Spending your time, without any restriction can be the best definition for wealth even if you have not achieved your way to success.
If when you go for work, you feel pleased, happy and something like opening your birthday presents then you are just on the right track to achieve your goal
You work not for just earning money or pleasing someone else, If when you work you do not think about the leaving time and you are in complete love of the process and also love the product then you are one the luckiest people in the world.
4. Manage Your Money
This is one of the most difficult courses one could master. But as soon as you understand a process and get comfortable in it, it gets easier than you think.
If you don’t manage your money, at the end of each month you will be wondering where all your money went. This can turn your goal into a financial disaster. If you are married, then get your spouse on the same page and explain to her about the budget and everything.
First of all, write down your basic necessity and the money required to cover it. The necessities do not include partying or vacations, this is the set of expenses you have to pay each month.
Try to keep your monthly budget close to your basic necessities, and invest the rest of the money.
5. Cut Cost Mercilessly
Almost everyone overspends and they don’t even know about it. When you are making your budget, cut all your extra luxury costs, such as hotels, traveling, parties, etc. This sacrifice for a few years will make your life easier and comfortable.
Do conscious spending, if you do this you will realize the amount you need to make payments, the amount you have in your bank, the money you need to invest, and hence, you will spend comparatively less.
How To Make More Money To Gain Financial Independence
If you want to invest more, you need to make more money, and for making more money you need to push yourself into getting more new things.
- Try and generate multiple streams of income.
- Try side hustles which can give you thousands off dollars each year.
- Start your own business, as there is no limit on the amount of money you can make through business
1. Invest In Yourself
You might invest a huge sum in different places but investing in yourself will be the most important one. As you keep learning and keep growing, you keep getting good results in your field and hence you get promotions.
Not only in your field, learn about investing, personal finances, lifestyles, etc. Read multiple books on personal financing and see how you get benefitted from it. Stay updated on the market conditions and search for some good deals in investing.
Attaining financial freedom is not a spontaneous thing, it is a process everyone needs to go through. At the end of the process, you will find your money habits more refined, more conscious and more sophisticated than before.
2. Start Side Hustle
A side hustle can be said as any type of employment taken by a person in addition to the normal 9-5 work. Side hustles can be a thing one is passionate about or something that interests you a lot. A side hustle is a freelance type of work providing you with an extra income.
Side hustles are just perfect for you if you want to become financially free. They make your task quite easy as you can completely invest that amount in different schemes.
The money generated from this side hustle will make a huge impact in the long term. So, keep hustling.
3. The SIP Route
If you do not have a large corpus and cannot invest a lump sum amount, then investing through systematic investment plans in equity funds can be very useful. SIPs also help bring disciple in the lives of investors who spending loads of money in varied places.
Let us take an example If you invest just 1000Rs of SIP giving 12% returns for about 30 years. You will have a corpus of 35.6lakhs at the end of tenure. If you have a good source of money and want regular savings then SIP can be the way you do that.
4. Find A Complementary Spouse
Unless your partner is equally disciplined, investment-oriented and willing for the financial independence, you cannot achieve what you are desiring.
Marrying the wrong person can put you in a pit hole from where you cannot go upwards. Your spouse needs to have some level of understanding for the reason why you want financial independence
You always need support from your home to achieve great heights and your spouse can be the biggest of them. Because no matter what happens out there, you will have someone to love you unconditionally and help in achieving financial independence.
5. Keep A Track Of Investments
You cannot leave your investments, once you have decided where to invest. Most of the investments depend upon the market conditions and fluctuate very often.
Review your portfolio often and keep an eye on the fluctuations happening in the market. Just because you have put a lot of time and effort for research and selecting the funds, be quite flexible and be ready to change your portfolio from time to time.
Your grades do not matter at all when you hop in the market. People not successful financially tell us that they need high grades to earn better and be successful.
6. Learning From Success
You fail, you learn, you win, you learn. When you invest, you learn many new things and you get experiences good or bad. Good experience makes you happy and bad experience makes you strong.
Once you have received good returns from your investments. You understand the process of how a company is selected or how a company performs in a long run. You also get experiences of spontaneous downfall where your investments had lost its value.
Every time you invest cannot be successful, because there will be a certain time when your investment will fail and lose in value. Be patient and look for investments unlikely to fail.
Keep your heads down, work tirelessly till you have achieved your goal to financial freedom. Your work will give your opponents the answer. No great person was made in a day, it requires years to achieve what the great people have today. It does not mean that you cannot achieve what they have, but you just need a lot of patience to take it from them.
Frequently Asked Questions/(FAQs)
1. What is Financial Independence?
Financial independence is the status where your passive income makes enough money to complete your monthly expenses.
2. What Are the Stages of Financial Independence?
The three stages for financial independence are the Earn, Save and invest.
3. What are the preconditions one needs to satisfy in the process of financial independence?
Creating an emergency fund, Keeping the debt zero and making cushion savings.
4. Which is a better SIP or lumpsum investment?
Depending on the amount of money you currently have for investing, any of them can be very useful for you.
5. What is side hustles?
A side hustle can be said as any type of employment taken by a person in addition to the normal 9-5 work. Side hustles can be a thing one is passionate about or something that interests you a lot.
6. Write examples of Side Hustle?
Selling items online, Driving on ola/uber, managing social media, blogging, content writing etc can be some of the side hustles.
7. Where should I invest?
Depending on your profile there are multiple options where you can invest. But equity is the best option as it gives the highest returns with some extra risk.
8. What cost come under basic expenses?
i. Basic expenses cover the following cost
iii. House Rent
iv. Utility bills ( light bill, water bill)
v. Communication bills
vi. Transport cost
viii. Health expenditure
ix. Emergency cash
x. Maintenance cost
9. How can I make more money?
Try and generate multiple streams of income or Try side hustles which can give you thousands off dollars each year or Start your own business, as there is no limit on the amount of money you can make through business.
10. What are the stages in your financial independence?
It mostly consists of basic independence, comfort independence and luxury independence.
Financial independence gives you a different level of freedom. Everyone seeks this but only a few of us receive, Start working for it as soon as you realize.
Less is the cost of living; more is the amount you can invest and earlier is the time you can attain financial independence. Many people retire before the age of 45 living a luxurious life and people at an age of 65 still working and struggling. Choose what you want to be and start working.