What is Financial Independence?
Hi!
I started this blog to document my journey towards financial independence. But in the last 20-odd posts I didn’t provide my perspective of what FI is. In a previous post I described the goals I wanted to achieve with FI, but that doesn’t really say what it is.
Here goes what I should’ve written six months ago (has it already been that long?), but better late than never!
What dis Financial Independence?
Financial Independence is the state where one doesn’t need to actively generate income to pay for their current lifestyle.
The emphasis is on need - you can continue to work and earn money even after attaining FI. But even if you don’t work, you can fund your current lifestyle.
When FI, all your future goals are funded, like retirement, children’s education, etc. This funding could be via passive income like dividends from stocks / businesses, gains from investments or royalties.
FI doesn’t require that you be obnoxiously wealthy. All you need is passive income enough to sustain your monthly expenses for the rest of your life. That was easy to write, but getting there is the hard part. But that’s a topic for another post.
Why should you be FI in India?
India is a place where work-life balance is difficult to achieve for most jobs. Folks work 9-12 hours a day in stressful and demanding jobs. Some of us don’t have a set 9 to 5 - folks here are expected to accommodate colleagues in other time zones, so there’s no concept of night and day here.
The root cause is that, at least in urban India, the societal expectation is to keep working for as long as possible. We don’t take things easy anymore, and leisure and socializing is frowned upon. Siestas are now only available for SBI employees.
We also have this emphasis on traditional life goals, like buying a house as soon as possible, take care of our parents and fund our kids’ higher education and wedding. Most twenty-something folks can’t afford all this with an entry-level salary, so they get saddled with loans. This brings in the worry of figuring out where the next EMI is going to come from if they lose their jobs.
It’s going to be a while before we get a sustainable work culture and practical goals, so the next best way is to figure out how to break away. Fund the goals, and drop out of the rat race.
How being FI helps
Take control of our time
Work is trading our time for a paycheck. If the job doesn’t add value to our lives, we better work towards freeing that time up. We only have one life to live - we don’t need to spend it just surviving.
Once we have our time back, we can do worthwhile things while we’re able to, not when we’re old and weak. We can work on that passion project we never had time for, instead of slogging away at a 9-5 working on something dull. We can spend time with our loved ones. We don’t need to wait till we retire before connecting with our kids, when they’ve already got on with their lives. We can also travel at our own pace, traveling to offbeat locations when we’re young. No need to cover Europe in a week, no leave approvals needed.
Reduce uncertainties in our lives
Once we’re FI, we don’t need to worry about our financial responsibilities as much as we did before. There’s no stress about where the next EMI is going to come from - we’re already debt-free or have the money allocated for it. We don’t need to worry about layoffs or downsizing; we can just walk away when we want to.
With stresses gone, we can work on improving our health to lead better lives.
Financial Independence is for everyone
Like I mentioned before, FI doesn’t mean living extravagantly. All we need is having enough to live our current lifestyle.
That “enough” depends on how much we spend. If you want to live king-size, you better have a large investment corpus or lucrative sources of passive income. But if your current lifestyle is frugal and you’re happy, you don’t need a huge corpus. Each person’s way of defining the life they want to live is different, so the money needed will vary.
While not simple to implement, FI is possible with some planning and work. It can be achieved by a combination of:
Increasing income: Income levels are rising in India, especially in tech. Working on upskilling to bag that high-paying job will boost chances of achieving FI. Another way is to build more sources of income, which doesn’t need much of your time.
Decreasing expenses: Cutting down on luxuries and optimizing purchases can help decrease the monthly expenses required, and lower the corpus needed to achieve FI. A rule of thumb is to save about 50% of income, so that you save an amount equal to your expenses.
Wrapping up
Knowing the enemy is half the battle won. If we know why we want to be Financially Independent, the journey is less intimidating. All we need is a financial strategy, and consistency to inch closer to that goal.
Until next time!