Beginner’s Guide To Financial Freedom

Published: April 24, 2021 at 11:36 am

We present a beginner’s guide to financial freedom dispelling common myths and misunderstandings on the subject.

1 What is financial freedom (FF)? A period of time when a person is not compelled to work for a living. This means having enough money to pay for known and known expenses, recurring and one-time expenses and associated inflation.

2. Financial Freedom does not mean early retirement! Although commonly used by early retirement enthusiasts, financial freedom does not imply early or even normal retirement. Of course, FF for life is a mandatory requirement for any retirement, but FF does not always mean FF for life.

One can save up enough money to not rely on income for the next five years. Say you wish to give up a steady job to become an entrepreneur. You cannot expect to become profitable from day one. So you can give yourself 3-5 years to stabilize the enterprise. During this time, you do not care about the revenue from it. You already have enough saved up.  We now have mini-retirements too, where people take a break, unwind, ponder and then get back to work.

3 What is the difference between financial freedom and financial independence? Being personal finance, there are many ways to define this. Both terms are often used synonymously. This is mine. When you have your own source of income (for which you need to work), you are independent. When working is a choice, you are free.


4 How does one become financially free? For FF, after normal retirement (age 50 is the new “60”), you need to be investing an amount equal to expenses. If X is the total expenses that will persist after retirement as of today, then you need to be investing at least 60% of X in your retirement portfolio (including EPF contribution). Preferably you should invest 100% of X and increase this amount by 10% each year. See for instance: How should I invest to get Rs. one lakh a month pension?

5 How about early retirement? For early retirement, you need to invest at least 2X. For this to happen, either your income should high, or your expenses should be kept low. Ideally both! No debt too! This is a combination of luck, focus and discipline. This also applies to mini-breaks, as discussed in (2) above.

6 But I cannot invest that much. Does this mean I cannot achieve financial freedom? Well, you certainly cannot retire early, and you certainly cannot take mini-breaks. FF + normal retirement is still on the cards if you have enough time left – at least 15 years or more.

Let us not be naive here. Not everyone gets everything they want in life, but they can give it a shot if they want it badly enough. Even if they do not achieve their goals, they would still be better placed than if they never had the desire or the discipline.

7 I have been paying EMIs for most of my working life. Is there any hope for me? Yes, for normal retirement with FF, If you can invest more than X, at least your EMIs are completed.

8  I have wasted a decade of my working life without taking money management seriously. What should I do now? The same answer as above: maximise investing. Try to increase income if possible. Do not constantly “upgrade” your lifestyle. Do not compensate for lost time by taking on more investment risk. Compensate by investing more. That possibility may seem hopeless now, but things should get easier in the future if you stick to the plan.

9 I am a student and want to achieve FIRE as soon as possible. Should I start working asap? Do not start working unless your family needs the money. Focus on higher education, getting more skills. Even if this “wastes” a decade of your life after completing school, the potential to earn more later is typically higher. You can compensate for lost time later with higher investments. Plus, you will have enough skills to keep yourself occupied after “early” retirement.

How do I start my journey to financial freedom?

  1. Invest as much as you can (this includes PF contribution)
  2. Increase investments each year as much as you can
  3. Hit an asset allocation of 50-60% equity as quickly as possible. Do not exceed 60% equity.
  4. Plan how you would like to reduce equity allocation now.
  5. Invest like a machine each month without worrying about market valuations.
  6. Review the portfolio once a year, rebalance, find out how close you are to your target corpus. Redo your retirement plan with fresh inputs.
  7. Portfolio management always requires reacting to situations as they evolve. The more planned we are, the better we can react.
  8. Do not have too much equity exposure after your stop working. The asset allocation after you stop working has to be planned now!
  9. Put your head down and invest. Patience is the key.

Resources for early retirement

  1. Want to be financially free? Do not count on frugality! Worry about the sequence of returns risk!
  2. Free ebook: Early Retirement in India -How to Retire Early Safely
  3. The 4% retirement rule is wrong! Do not retire early in India (or the US) based on that!
  4. Can I retire at 40 with one crore in India? Early retirement feasibility check
  5. Beware of incorrect assumptions while planning for early retirement (FIRE)
  6. Check your progress to financial freedom with this formula!
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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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