Do you want to become financially independent then you are in the right place. In this blog, I am going to share the 6 Step approach to become financially independent.
What is financial independence?
The question is very subjective as everybody has its own understanding and meaning of Financial Independence or Financial Freedom.
Can you tell me what financial freedom means to you?
Well, the answer lies in what we want to achieve in our life.
It could be earning 1 or 2 or 5 crores or any sum of rupees or paying off all your debts or having your own house in a big city or early retirement from your full-time job or anything…
But guys, that is not the correct meaning of financial freedom. These are only sub-goals or subsets of becoming financially independent. Financial freedom is much broader and wide in sense.
If you want to define it in simple terms then we can say-
“Financial Freedom is the stage of life where we can do what we love to do without worrying about money”.
It is freedom from mandatory and forced full-time jobs. It is up to us whether we work or retire from professional life. Now the question is-
Why is Financial Freedom important?
We know in the current environment of corporate culture, we start earning in the very early stage of our life. Most of us become a machine working 12-15 hours a day.
We tend to burn out at an early age of 45-50 years due to hectic and demanding jobs. We lose the real sense of happiness and life. We did not enjoy our life.
So, financial freedom becomes essential to get the real meaning of happiness and enjoy life or do whatever we like without worrying about money. So the next question is-
How to achieve Financial Independence or freedom?
Becoming financially independent is challenging and it requires sound planning and execution. It is a long journey but with a broad step by step roadmap, you can surely achieve financial freedom. So it is very essential to start early. You should even start planning about money matters even before you turn 18.
As you know, everyone has their own requirements so the journey to financial independence would also be different for different people.
And, I am going to share my own practical step by step approach to achieve financial freedom. While it may not be the best way but surely one of the effective ways to reach the destination.
So let’s Start our 6 step action plan to achieve financial Freedom –
Step-1: Calculate Your Financial Dependence Number (FDN).
Before embarking on a challenging journey of financial freedom it is the best practice to calculate your current Financial Dependence Number (FDN). This is the number which tells you the amount of money you need to maintain the current state of life.
So to calculate your FDN, firstly you calculate your monthly income after all the compulsory deductions like PF, NPS, Income Tax, Professional Tax, etc. or we can take your in-hand monthly Salary as your monthly income.
FDN is nothing but the monthly expenses which are essential to live the same standards of life. For our convenience, we can divide our Monthly expense into two parts.
Part-I: Survival Expenses
Under this head, we will consider those expenses which are unavoidable and essential for living a normal day to day life for our family like- House Rent, Groceries, Electricity, water, etc. This is applicable to all of us as we cannot survive without this.
Part-II: Special expenses
Not all people come under this category. This category includes expenses on account of special costs relating to specific expenses like – Education Loan, Home Loan, Insurance premium, etc.
So, once we calculate our monthly expense, we can calculate our own Financial Dependence Number ( FDN) as given below
For Example, let us consider
In-hand Monthly Salary of Mr A = Rs.60,000/- after all the compulsory deductions. So this is the monthly income of Mr A.
Further, the survival expenses of Mr. A are House rent = 8,000, Electricity/TV/Mobile bill = 2000, School fees = 5000, Grocery Bill = Rs.10000 and Medical = Rs.2000.
So his total survival expenses = (8000+2000+5000+10000+2000) = 27000.
Additionally, he also has a car loan of Rs. 8,000 per month which is his special expense.
So, Monthly Expense = survival expense + special expense = 27000+8000 = 35000.
Therefore, Financial Dependence Number of Mr A = 35000.
This is the monthly amount required to maintain the same standards of life.
Step-2: Calculate Your Financial Freedom Number (FFN)
After calculating your FDN, now is the time to calculate Financial Freedom Number. This is the magic number that would be your target to achieve financial independence.
If you achieve this number then you can retire early or enjoy your life without worrying about money or do whatever you like as per your convenience.
Calculating your Financial Freedom Number is very challenging and debatable because we cannot be 100 % sure that having a particular
amount of money, our future becomes secure.
There is always some amount of risk involved. But I would tell you how you can minimize your risk and tide over any unforeseen situation in future articles.
So firstly I will give you a general idea about how you can calculate your freedom number.
Before calculating FFN or the corpus amount we will have to consider your current age and the age when you want to become financially independent.
Our aim is to calculate the corpus fund that we need to maintain the same standard of living for the rest of our life. Further, we should also be able to handle important life events like- education, marriage, etc. of our family with the reserve fund.
So, What could be the ideal size of the corpus amount?
Let us understand this with the example of Mr A
For reference let us consider the current age of Mr A is 25 years and he wants to be financially independent by 45 yr.
So, no. of the year he has to achieve his goal is 20 yr.
Further, the question is how many years we need to survive with the corpus after retirement.
In India, the average life expectancy rate is about 70 yrs. As the quality of life has been improving with time, let us consider a life expectancy of 80 years.
So, we need the corpus fund to survive for at least 35 more years.
You can tweak your number as per your current age and time by when you want to become financially independent.
Now, Amount of fund required after 20 years to maintain the same standard of living = 35 times of the Current yearly expense
But there is a catch here i.e. the value of money would not be the same after 2o years considering the inflation.
What would be the inflation after 20 years?
Well, the historical inflation rate of India in the last 20 years was around 6 %. So let us consider the same trend that would continue for another 20 years.
So, the value of Corpus after 20 years considering the inflation would be around 4.71 Cr.
You can use our Retirement Corpus Calculator to calculate the Financial Freedom Number.
Further, if you want, you can also add the probable expenditure for the important and major future life event like higher Education of children & marriage etc as per your requirement.
One more important point is we have calculated the FFN assuming you have sufficient medical and life insurance cover for you and your family.
So the financial freedom number (FFN) of Mr A = 4.71 Cr. that is a very huge amount even after 20 years.
For our convenience lets break-up the amount on monthly basis.
The amount would be 4.71/12*20 = 1.96 lakh per month which is also huge for normal people.
But the good news is you need not to save 1.96 lakh per month. Even if you are able to save 50000 per month you can still achieve your dream.
Well if you save 50000 per month and can generate 12% return then you can accumulate around 5 crores after 20 years.
Similarly, if you save 62000 per month and can generate a 10% return then you can accumulate around 4.74 crores after 20 years.
And so on..
You can use our SIP Investment Calculator to get an idea of the investment required to achieve the goal.
I have taken a moderate return of 12%. If you are able to achieve more return… then you need to save less and if your return is less than 12% then you need to save more. I think most of you agree with me that a 12% return is not very difficult to achieve if you invest wisely.
Now as we have calculated the monthly amount required to become financially independent by the age of 45 years, I will discuss how you can achieve your dream figure in the next few steps.
Step-3: Track Your Expenses.
Once we calculate the Freedom Number, we know the magic number that we have to achieve to become financially free. So the next step would be tracking all your monthly expenses.
Well, this is the most important step that everyone misses out. So if you are going to start the journey of financial freedom, tracking of monthly expenses is the most crucial step.
It could be an eye-opening for you as we know where the money is coming from but don’t know where it is actually going.
For tracking the monthly expenses you can use any apps or software or even a simple excel sheet would be sufficient. You can divide your expenses into two parts as I have discussed in Step 1.
Believe me, just by tracking your expenses you would be able to manage your money more efficiently and cut the unnecessary expenditure and save at least 10 % more. I am saying this with my practical experience.
Further, you can also use it to measure your progress toward financial freedom.
Step-4: Track Your Savings
- Save at least 50% of your income as saving 10%, 15% or 20% would make your dream of financial freedom unachievable.
- Follow step-3. Just by following the above step, you would be able to save an additional 10%.
- Save more in the early days as that was the time when we had less responsibility. We can also benefit with the power of compounding if we start early.
- Live a simple life or the way you want to live after retirement. You can’t live a luxurious life and achieve financial freedom at the same time unless you are born with a silver spoon in mouth.
One more thing you remember that this is not a short-term goal, it is a long process. So just saving one or two months is not the solution. You have to think about the long term and implement the same lifestyle for several years to achieve financial independence. So don’t cheat yourself.
Step-5: Track Your Income.
As we have discussed above, we have to save at least 50000 per month with a 12 % annual return to achieve your dream. If your return on investment is less than you have to same more.
We know the return on investment is something that we can not guarantee. But our monthly income is something that we can guarantee for some extent if you have a regular job or income. So that is the target we should keep in our mind.
You should try to get handsome increment in your income with time and save more so that your journey to financial independence becomes easy. Some of the tips to raise your income are.
- Invest in Yourself. By investing in yourself you can acquire new skills which in term open a new door of opportunity for you and finally will reflect in your paycheck. So keep investing in yourself, keep working those extra hours, etc.
- Passive Income. Try to develop some skills and invest your time in the way that you can generate some passive income even if you do not work after some time. This will also make the financial independent Journey Easy. Some of the ideas are making Online Courses, YouTube, Investment on Commercial Space, etc. I will also share How to generate passive income in a separate article in the coming days. Just Remember
You become financially free when your passive income exceeds your expenses. – By T. Harv Ekar
- Start Investing. Once you earn money you should be able to manage them properly otherwise its value will diminish with time. So start investing your money wisely for a maximum possible return. Some of the investment opportunities are the Stock market, real estate, business, mutual fund, etc.
I will also share How to invest wisely in a separate article in the coming days.
Step-6: Never forget to track Step-1 to Step-5.
Last but not least. You should review your progress on a regular basis. Regular review is important because as time passes your earnings, expenses, responsibilities changes and so is the requirement.
So it is very essential to keep track of your progress and modify your strategy as and when required keeping in mind the age when you are going to become financially independent.
So, at last, I would say just “an honest start of the journey to financial independence is half the battle won” so start today and keep going and going … until you reach your destination.
Best of luck for the most adventurous journey.
Thanks for reading our blog and stay connected for more updates.