Most people use the term "financial freedom" loosely. But, at its core, it has a very simple meaning: it is about reaching a point where you have enough money to cover your expenses for the rest of your life without having to work again. A stage in which whatever you have accumulated to date will begin to generate growing income sufficient for the rest of your days.
True financial freedom is that, though it may mean different things to different people. For women, it may imply being able to manage their finances in their own unique way. For someone young, it might mean having enough money to leave a job and travel for some time.
But, in its purest form, financial freedom means never having to work for money again. Isn't that a lovely place to be?
But keep in mind that financial freedom and early retirement are not the same things. Financial freedom is defined as having enough money to retire early. While early retirement is concerned with retiring with "enough" money. Some of you may have noticed that this is at the heart of the financial freedom debate.
Some experts believe that a corpus of 30-40 times your current annual expenses is sufficient for achieving financial independence today. So, if your annual expenses (not income) are around Rs 10 lakh, then a corpus of Rs 3-4 crore is required using the 30-40x rule.
If I delve into the deep mathematics and scenario analysis of financial freedom, half of the financial freedom enthusiasts will flee. But consider a simple example.
Assume you are a 30-year-old with a young family who wishes to be financially independent by the age of 50. Your annual expenses are Rs 6 lakh, and you plan to live until the age of 85.
You have 20 years to save money that will be sufficient for the next 35 years of your life. That is, indeed, your financial life equation.
Assuming 6% inflation, 7% post-retirement returns, and a 60-40% equity-debt portfolio during accumulation, you would need close to Rs 6 crore at 50 to declare yourself financially free. You must set aside money for your children's future (education and marriage). • Unless you intend to rent, the cost of purchasing a home is not included in this figure. This figure is based on annual expenses. However, some expenses, such as car replacement and house repair and maintenance, occur only every few years and must be budgeted for separately. It's also a good idea to set aside money for unanticipated and unplanned expenses that aren't covered by insurance. As in a healthcare contingency fund that can be used in later years.
Unrealistic assumptions are a major risk that can derail financial freedom plans. Most people are unaware of how sensitive retirement planning calculations are to various inputs.
If you are overly optimistic and make assumptions, you will fail miserably. The worst-case scenario is that you will make a mistake and run out of money when you are old. That's a terrifying scenario!
Also, as you approach your predetermined financial Freedom Day, you must safeguard your corpus because a bad run of returns for a few years can derail your plans. Read why you should protect your nest egg from a market crash before retiring.
However, financial independence is attainable. It's difficult, but it's doable if you know what to do. As previously stated, the math is not difficult to grasp. You simply need to pursue the goal and be willing to make certain changes in your life to achieve it.
If you do this for a long enough period of time, your assets and the reasonable returns they generate will be more than enough to cover your living expenses for the rest of your life. That's not a bad goal to have.
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