Introduction to Financial Independence
Hi!
I looked back at my old posts, and boy they are a rambling of my thoughts in a random order. So…
Let’s kick off week 3 by starting from the beginning. And you can’t control a thing if you don’t define it and name it. Here’s my attempt.
What is Financial Independence?
Here’s a definition of financial independence that I like:
Financial Independence (FI) is the state where one doesn’t need to actively generate income to pay for their current lifestyle.
Let’s dissect it and define stuff:
“… actively generate income …” - Most folks, when they work a job or run a business, are actively trading their time for money. This is active income. Many a times, this is a job they would rather not do.
“… don’t need to…” - This is the meat of the quote. Once you’re FI, you don’t have to work. Now you have options. If you like your job, you can continue it. If you want to be a couch potato, go ahead! (although I wouldn’t recommend it for health reasons). If you want to work 20 hours a day on your startup idea, good for you! What the quote says is that it’s your choice how you’d like to spend your time.
“… pay for your current lifestyle.” - So how do you pay for your current lifestyle! If you don’t need active income anymore, that means your passive income is funding your current lifestyle. Stuff like your accumulated money, dividends from stocks, royalties, etc. We’ll discuss this more in future posts.
FI is not optional
Gone are the days when we’d work in one company our whole careers, and then retire secure that we have lifelong pension to fall back on for our expenses. Companies now contribute a tiny amount for our retirement (a measly 6% of our income in India) and expect us to fund the rest ourselves. It’s up to us now to become financially independent and lead a life of dignity in our old age.
Why is FI not optional? If we retire unable to fund our expenses for the rest of our lives, we will need to depend on others to survive our last years. The Indian Government doesn’t provide an income guarantee yet, and it would be unwise to assume it will by the time we retire. So naturally, the responsibility to take care of us will fall on our kids.
This is especially cruel to our kids when we now have the tools and the knowledge to plan our finances well for our financial goals and retirement. If you have the means to save for retirement, you don’t have any excuse to not plan for it.
How do we achieve FI?
In the most basic terms, you need to earn more than you spend, and invest the rest to use after you retire. You can reduce the time to achieve FI by tweaking those three parameters:
Increase income - Improve your skills and grow in your career to rake in higher income. Or create avenues apart from your career to bring in money.
Decrease expenses - Reduce spending on things you think don’t bring enough value to your life.
Invest better - Find vehicles which provide better return on your investment, without significantly increasing your risk of losing it all.
Wrapping up
That’s it for now. A lot of the stuff I mentioned here deserve their own posts so stay tuned as I write more on FI and my financial journey.
Next week according to this schedule is a post on my personal FIRE journey. Join me as I reveal a bombshell decision which has created ripples in my journey to achieve FI!
Until next time!