This post is about my personal journey of achieving financial independence and the flexibility I get in life with this hard earned privilege. My intention behind this specific post is to touch as many lives as possible and help them visualize the immense power one gets when one is in control of their own actions. Before I write ahead, I must clarify that financial independence must not be considered as retirement from employment or worldly pleasures. On the contrary, it should be considered as a Big Daddy standing with you to take care of your financial life so that you can do what you like to do rather than being forced by the pay check provider.
I have been very fortunate and blessed in life. I got good guidance from my family on how I should start on my academic journey and subsequently upon the initial career ladders. These were my first step on to the ladder of life and taking them right made a big deal. Wrong initial steps could have resulted in a completely different future, i.e. my present.
I completed my education as a Chartered Accountant and landed in a steep learning exposure job role at an age of 22. I won’t go more into my professional life as it is on my Linked In profile. Within my first year of employment, I had firmed up my first key life objective. Time period 10 years. I want to be financially free on or before my 32nd birthday. This required a few key ingredients:
- A well paying job
- Investing (not saving) for life beyond a decade
- My financial journey must not come at the cost of sacrificing my current life
- And a truck load of luck to let this happen.
When I look back today, it appears that all the pieces of my life puzzle so far aligned well and I did achieve what I wanted to by age 32. It was year 2014 when I relocated back to India after around 8 years stay in the UK. I was financially independent and was doing what I loved to do rather than what my employer wanted me to do. Having said that, both often aligned. When the driving force for your daily activity is not the thought of the bills to be paid, you can be more productive and enjoy what you do.
How I reached
When I got my first paycheck, I was in an eternal state of bliss. It had a pre-decided spending need. I clearly remember the thrill of buying a smart phone back in those days, some other super cool music gadgets, first vehicle and so on. Once the initial spending frenzy was over, spending for current consumption had to fight its allocation against spending for future. I had to ensure that both have a fair share of the wallet. However, future spending was first prioritized in my budget as a mandatory expense.
Readers may wonder what would be future spending versus current spending. An amount which I do not consume today and invest for my future is the money I will consume in future. The more I allocate for the future, the sooner and better would be my state of financial independence. At times I was ridiculed by my friends and colleagues on my views about the coming future and a financial plan to gear against it. They would prefer current rather than future. My views were always, I love my present, but I am also aware that future is coming. The only way to avoid future is by leaving this human body and post that nothing matters. But if that is not the idea, better allocate funds for the future.
Bit by bit and year by year I kept on investing funds. I saw some really interesting events which shook my financial boat momentarily during my wealth accumulation decade, e.g. the Great Financial Crisis, the Taper Tantrum and a few other minor bits all along. The two things I kept on doing during each such moments of crisis – Keep adding more to my future kitty and DO NOT EXIT. If I was not in the bus, I would be on the sidelines. And being on the sidelines wouldn’t have helped my cause.
Soon the first decade was over and supported by my luck, I could see the mathematics aligning. I could see my investments compounding decently year on year. I was and I am still working but my accumulated investments / wealth is showing better outcomes than my active earnings. Each year on an average, my wealth adds more to itself than I add to it as a topup. As if there are a few people working for me and adding their savings to my wealth. I can see money creating money.
Keeping expenses in Check
My first mantra for a prudent financial life is keeping my expenses in check. It is extremely easy to squander one’s hard earned wealth in a few moments. At the same time one must not sacrifice on the current life style. If you look around, you may find how soon and in a stealth manner one’s expense basket creeps up. A few examples include :
- An extra car which may not run even once a month or upgrading to a higher class even though your existing machine is in fit condition and is still relatively young / modern.
- Luxury gadgets, mobiles, cameras, laptops, tablets, watches – adding to one’s existing stock of items in closets
- Those multiple extra pairs of shoes, clothes, accessories which never get their moment to be worn even once in a year;
- An extra (or even more if you are lucky) vacant house or put on rent. You can live in one place at a time;
- Peer pressure on multiple impulsive shopping to extravagant holidays.
Keeping expenses under check may at times also get closer to being categorized as being a miser. This is where finding the right balance and avoiding wastage is what one must aim towards. A rupee saved is a rupee earned.
Saving versus Investing
People save but do not always invest. The money saved in bank accounts, fixed deposits, traditional insurance plans are not an investment. Investment is something which should grow significantly more than the inflation rate. Savings may grow perhaps at prevailing inflation rate or even lower. The implications are dire for a saver. Without being told, their money’s power is stolen by inflation each year. To generate wealth, one must invest. Being overly conservative will only mean that one would need a lot more amount of savings to reach their financial independence goal. The table below will give you an insight on the monthly investment amount needed to reach an assumed target value of Rs. 1 crore (10 million) in 20 years. The figure ranges from as high as Rs. 34000 if your assets generate 2% yearly return to as low as Rs. 4,000 if your assets generate 20% yearly return. Each level has its own set of pros and cons. It is here where one must consult a finance expert to chart out an optimal mix to suit their needs.
Early bird gets a worm. This applies greatly to financial freedom. The earlier one starts in their life, the quicker one achieves financial freedom with lesser amount being invested over a period of time. The picture below speaks a lot about how baby steps taken early enough can help one reach his goal. Waiting for a later date may make it extremely challening to reach your desired goals.
Let me take an example of a person who needs Rs 1 crore (10 mn) on 65th birthday. With an assumption of 10% growth rate in investments, the table below shows how much monthly investment is needed if the person started investing from as early as 25th birthday to as late as 60th birthday.
If I make it a double edge sword, how about if one starts investing early with as much amount as possible. This is what I did.
Asset Allocation & Diversification
In addition to generating wealth, one must also have a risk management plan to protect the wealth from being depleted. Many of the risks impacting the erosion of wealth aren’t in one’s control. These include a local event like a failed monsoon to a world-wide event like the COVID 19 pandemic. The only process which has proven its mettle over time is Diversification & asset allocation. These are two huge topics needing a complete article to do justice. Investing one’s wealth across all asset classes helps in taking advantage of their strengths. These include Equities, Real Estate, Precious Metals and Debt. Even within an asset class, investing across geographies could help in managing a localized event. Examples including investing in overseas equities or where affordable / possible real estate. You could read our post on Geographical Diversification here > Geographical Diversification – A Key Risk Management Strategy
Let me re-emphasize the importance of luck in achieving financial independence. Luck is perhaps under-appreciated and people attribute their success purely to their skills. At the same time, importance of hard work and self discipline cannot be side lined. The starting point for a rapid financial independence journey is a good take home income. I have more so often seen exceptionally talented people struggling to get earn well. As a result, they are unable to break rat race with most of their income getting used to meet their daily ends. But remember – unless one is specifically targeted by the God / Goddess of Luck, one may not “always” remain unlucky. Hence, continued efforts will eventually pay off when it gets aligned with one’s time to be lucky. ‘Apna time ayega’. At that time, the plan to accelerate your financial independent journey should be ready for execution. Till then, keep on taking smaller steps. I always say this > it is never too late AND every little bit counts.
I would love to end this post with my passion statement > let us become financially independent. Where possible, I would love to be of help in helping people achieving this goal.