*7 steps to financial freedom*
There can be many strategies to achieve financial independence. Each technique has its own benefits and challenges.
The below article is based on my own experience and path chosen to quit from the richly paid and safe Government job.
The objective was to pursue my passion for equity research and help people to pursue their passion by assisting them to become financially free by providing good equity investment advice.
Being financially free leads to many good outcomes like being your own boss, satisfaction, happiness, and feeling contented and fulfilled. Life becomes full of gratitude. I feel blessed to pursue my passion
*What is financial freedom?*
Having enough money to live the lifestyle we want and growing wealth to take care of future requirements.
For this, you need to create a second source of income which can take care of not only monthly expenses but also other financial liabilities including the provision for erosion in the real value of money due to Inflation.
As a thumb rule, one should retire only when one has an amount that can get you monthly bank interest (post-tax) equivalent to at least double the monthly expenses. This source of Income is known as Passive Income which works day and night (even when you are asleep).
*Why financial freedom?*
There can be many reasons.
- The most pertinent being - getting retired after achieving the age of 60 years.
- To pursue your own business or hobby or dream.
- To become your own boss.
*Challenges in getting financial freedom*
The only challenge is how to repay debt and accumulate wealth sufficient to take care of your financial liabilities post-retirement.
*Steps to financial freedom*
1. Set Goals
The most challenging part is to set a date when you want to achieve financial freedom. This depends on the current savings, level of debts to be repaid, the age you want to retire, etc. Now, count the number of years left.
To find the Sum required post-retirement for given expenses per month visit the tool here https://www.smartverc.com/retirement-calculator
2. First to attack…
First to attack is credit card bills. Followed by other high-interest loans like consumer loans, personal loans, etc. Housing loans should be paid lastly as the interest rates are low on these loans. Moreover, the interest on housing loans allows us for savings on Income Tax.
Instead of credit card start using cash for smaller payments and debit cards for other payments.
3. Forced Savings
Forced savings work the best. Often we save what is left after meeting our monthly expenses. It should be the other way round. First, save and then manage your monthly expenses with the money left after saving.
The amount to be saved may vary from person to person depending on the lifestyle and other factors. This may require cost-cutting on your lifestyle, which can be painful at first but soon you will be habituated. Once you get stabilized with new reduced expenses then it is time to increase the amount of savings.
This cycle should continue as long as you are reasonably comfortable with your lifestyle.
4. Act cautiously on highly depreciating assets.
Consider two friends Anil and Sunil who joined the firm at the same time in the same Payscale with almost similar lifestyle expenses.
The only difference was when the first car they purchased.
• Anil bought a new car costing Rs 5 Lacs with a loan bearing interest rate of 10% pa
• Sunil bought a new luxury car costing Rs 15 Lacs with a loan bearing the same interest rate of 10% p.a.
After 10 years they both sold the cars, Anil for Rs 1 Lac and Sunil for Rs 2 Lacs (Luxury cars depreciate at a higher rate)
From here onwards both friends purchased the same model cars for the rest of their lives.
How it will make the difference (assuming both friends earned 15% returns by investing in stocks):-
a) Sunil will pay Rs 5 Lacs more on interest compared to Anil due to a higher loan amount. But Sunil will also get Rs 1 Lac more at the time of selling the car. Thus net impact will be Rs 4 Lacs. Returns of 15% till retirement i.e. 25 years will make a hole of Rs 1.32 crores.
_(Long term stock market returns are 15% per annum)_
b) Anil will start earning returns on Rs 10 lacs from the first day till the date of retirement, for good 35 years. This amounts to Rs 13.31 crores
*Overall Anil’s kitty at the time of retirement will swell by Rs 14.63 crores compared to Sunil.*
Mobiles and other electronic gadgets are a similar types of money drainers.
*5. Delay if possible*
Taking care of your assets like (Cars, Mobiles, TVs etc) can enhance their lives. Delay of even one year in replacing a car can save you tens of lacs at the time of retirement. The cost of maintenance is only a fraction of the cost of replacement.
If you can postpone buying a new car worth Rs 15 Lacs by one year you save about Rs 2 Lacs in the first year itself which can get you compound returns till retirement.
*6. Power of compounding*
Savings alone will not add up if you want to retire early.
One must take advantage of compounding.
Unfortunately, most people learn the power of compounding by paying never-ending EMIs, instead of creating wealth.
Compounding will help you multiply your money exponentially over a period of time.
With returns of 13% p.a. Investment of Rs 20 lacs turns to Rs 2 crore in about 19 years but 20 lacs to 4 crores will take only 25 years.
The second important thing to be well understood is the *effect of an increase in the rate of returns.*
With returns of 13% p.a. Investment of Rs 20 lacs turns to Rs 2 crores in about 19 years.
With returns of 26% p.a. Investment of Rs 20 lacs turns to Rs 16 crores in the same 19 years!
With doubling of Rate of return the final sum got multiplied by 8 times.
Thus investment must be made at the highest possible returns for the same level of risk with which you are comfortable.
To help you in calculations visit https://www.smartverc.com/investment-calculator
*7. Investment*
As far as the investment avenues are concerned apart from the stock markets there is no other avenue to earn higher returns so as not only to beat Inflation but increase your wealth in real terms.
In my opinion, you must keep investments in diversified assets like Stocks (percentage weightage should be 100 – your age), Bonds (about 20%), and Gold (about 10%). Investment in Gold serves two purposes; apart from returns (though low), you are able to buy happiness and satisfaction of your wife.
If you are new to stock investments then better it is to invest via Mutual Funds or hire the services of an advisor.
Even my iwn book can be a very handy tool : https://www.smartverc.com/book
How to select a good advisor?
Don't get lured into short term trading or Derivatives. As per Warren Buffett, Stock derivatives are the financial weapons of mass destruction.
To assess your risk-return profile we have developed a simple tool and within one minute you can find your profile visit https://www.smartverc.com/riskprofile
Based on your risk profile and the amount required at the time of retirement you can trade off on the required rate of returns.
Don’t forget to keep an emergency fund of at least six months' monthly expenses ready and health and life insurance.
By qualification, I am an Electronics engineer. In the early days of my job, I got interested in stocks. I realised that it is the fastest way to grow wealth. I can own businesses of my interest with the flexibility to switch from one company to another at the click of a button. But by the time the idea of quitting a job crept into my mind I found myself surrounded with a number of EMIs for the loans availed for two cars, and two houses. Steadily my desire to pursue my passion for equity research intensified. I wanted to be my own boss. I was willing to take risks. And there the journey began for freedom.
Wish you good luck.
A, K, Asnani
Author | Advisor | Coach | Mentor |