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How much money do you need to be truly financially free?

Financial freedom can be achieved by following good financial habits, proper planning and investing.

August 17, 2022 / 02:30 PM IST

Financial freedom is a term that is used loosely by most people. But in its truest sense, it has a very simple meaning at its core – it is about reaching a stage where you have enough money to take care of your expenses for the rest of your life without needing to work again. A stage where whatever you have accumulated to date will start generating growing income that will be enough for the rest of your days.

That is what true financial freedom is, though it may still mean different things to different people. For women, it might mean being able to handle their finances their own way. For someone young, it might mean having enough money to leave a job and travel for some time.

But in its truest sense, financial freedom means having enough money to never have to work for money again. That’s a nice place to be in, isn’t it?

But be reminded that financial freedom and early retirement are two different things. Financial freedom is about having enough money to have the option to retire early. While early retirement is about retiring with ‘enough’ money.

Some of you may have noticed that I have used the word ‘enough’ a few times already. And that is at the centre of the financial freedom discussion.

How much is ENOUGH?

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Some say that a corpus of 30-40 times of your current annual expenses is good for achieving financial freedom today. So, if your annual expenses (not income) are about Rs 10 lakh, then, using the 30-40x norm, a corpus of Rs 3-4 crore is what you need.

If I delve into the deep mathematics and scenario analysis of financial freedom, it will scare away half of the financial freedom enthusiasts. But let’s take a simple example.

Suppose you are a 30-year-old with a young family who wants to become financially free by the age of 50. Your annual expenses are Rs 6 lakh and you expect to live till 85.

You have 20 years to save money that will then be enough for the remaining 35 years of your life. Yes, that is your financial life equation.

Assuming variables such as 6 percent inflation, 7 percent post-retirement returns, and a 60-40 percent equity-debt portfolio during accumulation, you would need close to Rs 6 crore at 50 to say that you are financially free.

(Reminder: If you want to reverse-apply the 30-40x rule on this figure, then use inflation-adjusted annual expenses at retirement and not today’s figure).

But will Rs 6 crore truly be enough?

May be not. Why? A few thoughts:

• You need to save separately for your children’s future (education and marriage).
• Unless you plan to stay on rent, the cost of purchasing a house is not considered in this figure.
• This figure assumes regular annual expenses. But some expenses occur once every few years, like car replacement and house repair and maintenance, so those are separate.

• It’s also a good idea to have a buffer for unexpected and unplanned expenses which are uninsured. Like a health contingency fund that can come in handy in later years.

Risky assumptions

Unrealistic assumptions are a big risk that can derail financial freedom plans. Most people are unaware of how sensitive retirement planning calculations are for various inputs.

If you get overly optimistic and make assumptions (like doing a Warren Buffett and getting 20 percent returns yearly), then you will mess up badly. The worst is that you will mess up and run out of money when you are old. Scary scenario!

Also, you need to protect your corpus as you get closer to your pre-decided financial Freedom Day because it is then when a bad sequence of returns for a few years can really mess up your plans. Do read why you need to protect your corpus from market crash before retirement.

Also, remember that we Indians have a growing life expectancy. Unlike previous generations, which sadly didn’t live for long after retirement, for many of our generations, the number of years after retirement will be much higher. So, you really need to be careful about retirement or financial freedom planning.

Also read: Wish to retire at 50? Check your retirement readiness first

All said and done, you are now excited about financial freedom. Having enough money to never have a boss. A dream, no doubt. So how to go about it? How to achieve it?

How to invest for financial freedom

This isn’t going to be easy. To be fair, it’s not supposed to be easy or else every second person would have been financially free by now.

But it’s not impossible. Many people feel that to be financially free, you need to earn a lot. But that is not the full truth. Earning well helps. But it is not enough. Financial freedom can be achieved by following good financial habits, proper planning and investing.

Here’s what you should be doing:
• Be ready to save a lot. Just investing 10-20 percent of your income will not work. You need to invest a lot more.
• Find out (or take help from a good investment advisor) to get basic numbers in place – like how much you need to invest to retire at regular age of 60.
• Find out how much you need to save for other goals like children’s future, house purchase, etc.

• Now find out how much you need to invest if you were to advance your retire-at-60-goal to a more aggressive financial freedom at 50. Remember, this number will be much higher than what you need for retirement at 60.

Now analyse how much surplus you have.

Let’s say for your retirement at 60, you need to invest Rs 25,000 monthly. For financial freedom at 50, you need Rs 50,000 monthly. For other goals, you need Rs 30,000 monthly.

If your investible surplus is Rs 80,000, then you can pursue both goals, i.e., financial freedom at 50 and other goals simultaneously.

But if it’s lower, say Rs 55,000 only, then you will have to accept the reality.

Firstly, you need to invest for other goals with Rs 30,000. Then the remaining Rs 25,000 goes towards retirement (or financial freedom). This amount is good for retirement at 60 but not at 50.

If you want to still aim for freedom at 50, then you need to increase your surplus accordingly. And do you know what is the key to accelerating your financial freedom goal?

Read this: Secret formula to achieve your financial independence goal faster.

A friend recently confided that even after years of earning well, his personal finances didn’t look strong and all he ends up doing is paying EMIs and bills. This is a story that defines many.

But financial freedom is achievable. It’s tough, but possible if you know what to do. The math, as explained above, isn’t difficult to comprehend. You just need to pursue the goal and be willing to make certain changes in life to work towards it.

Once you do that long enough, then you will reach a stage when your assets and the reasonable returns that they generate will be more than enough to cover your living expenses for the rest of your life. And that’s not a bad goal to aim for.

 
Dev Ashish is a SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor
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