The Not So Ugly Truth About Financial Independence

Published: October 28, 2014 at 9:35 am

A little more than seven years ago, my expenses dropped to ‘normal’ levels after my father passed away (post a prolonged battle with cancer). I  had been in a regular position for less than two years then and was taking stock of my cash flow and investible surplus (money net of all expenses).

Immature me, I remember asking my mom a dumb question: “Why did you and appa not invest more when you were younger?”

She answered without batting an eyelid: “We (both worked) never earned enough”.

That felt like a slap to my face. I must have insulted her deeply.

I now realize that I was asking the wrong question.

The financial health of a family depends on its investible surplus at any point in time.

When the breadwinners work for a living, a good part of the surplus ought to be invested and not spent frivolously.

After retirement, the surplus could be invested or used in full to enjoy the finer pleasures of life.

Investible surplus is defined as

Surplus = Income – Expenses.

Interpreting this simple equation is a tricky and often a touchy subject.

You get a surplus if
1) you earn much more than you spend
or if
2) you spend much less than you earn

Unfortunately, there is a problem. The ugly truth is that these two conditions are not independent in practice.

You can spend much less than you earn only if you earn much more than you spend!

Distribution in income levels causes inequalities in society. However, all is not lost for those who earn less.

Consider a family (couple + 2 kids) whose sole breadwinner is in the 10% slab (or lower) and is likely to be in the same slab for the rest of
his/her life.

Can the couple expect to be financially independent after retirement?

Yes, if they expect to maintain their current lifestyle in retirement (and not dream of anything above that).
Yes, if they invest as much as they spend until the breadwinner retires.

But how practical is that?

The couple has two kids to parent. There is more to parenting than just taking care of the basic necessities of children. A parent will have to
indulge the children at least once in a while. They will have to support the kids dreams.

What if they decide to buy a small house? What if want to take a holiday? What if they want to spend a little extra during festivals?

Do we tell them that such things are luxuries and a strict no – no for them, because they are not earning enough?

Do we tell that the pleasures that rich and the affluent enjoy are beyond them even if they wish for it sporadically?

Financial advisory has to be clinical but who would have the heart to say such things to the family?

I don’t have an answer. However, I think there is one thing that MUST be said to such families:

Invest what you can, but invest it right, and as early as possible in productive assets. Never touch your investment unless absolutely necessary.

I write this post in the light of recent reactions to the post detailing the real-life experiences of two people who are financially independent:

Balaji Swaminathan and

Rajshekar Roy

I am miffed at comments which suggest that their financial independence is only because of their high income levels. Miffed because they could have been spendthrifts, locked their money in fixed deposits and still be chained to the desk.

The primary reason they are financially independent today is because of their disciplined investing in aggressive assets.

Had they earned less, they could not have retired early. No question about that. That, however is not the point.

A disciplined person, who understands the value of investing in aggressive assets to the best of their ability is more than likely to be financiallyindependent when they stop working. That is what counts.

That is all that we can expect a breadwinner and his family to do, irrespective of their income level.

During the recently concluded IFA Galaxy meet, I was delighted to spend most the day with Subra. He narrated how the peon in his office has a corpus of a few lakhs (thanks to Subra’s counsel). When the peon learnt about the value of his corpus, he could not believe it.

Disciplined investing matters. Investing right matters. Financial independence is not an impossible dream. It is a dream that is far away.

Yes, the investible surplus determines the distance to the dream. Why harp on that?

We can only control the controllables, but control them we must, to the best of our ability.

That is the mistake my parents made. They never invested in a productive asset like equity to the best of their ability. The comfort with which they met ends during their earning years gradually withered away, thanks to inflation.

Aiming for eventual financial independence backed with meaningful effort is something that we all should strive for. Regardless of ourincome levels.

Not all of us can achieve early financial independence.

Not all of us can enjoy the same level of financial independence. Subra’s office peon cannot go on a vacation abroad.

That goes against the nature of our existence. Every aspect of our lives follows a distribution – a spread. ‘True’ equality is defined but its absence!

All this reminds me of this quote.

The worst form of inequality is to try to make unequal things equal – Aristotle.

Do share if you found this useful
Share your thoughts on this topic at the  Reddit freefincal_user_forum

Reach your financial goals like a pro! Join our 1600+ Facebook Group on Portfolio Management! You can now reduce fear, doubt and uncertainty while investing for your financial goals! Sign up for our lectures on goal-based portfolio management and join our exclusive Facebook Community. The 1st lecture is free!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!) or you buy the new Tactical Buy/Sell timing tool!
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 two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. 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 on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any kind of paid articles, promotions or PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps