When was the last time you woke up one fine morning and felt happy and light, free from the daily rigmarole? You must have felt this way when you were on a holiday — and that’s because you were far away from your daily stressful routine, and enjoying a day free from those daily target/deadlines.
Now imagine waking up one fine morning and feeling happy and light but this time you’re not on vacation — it’s just another regular day of the week. There is a sense of calm, and you have more control of your life. What you are now experiencing is what comes when you have achieved financial freedom.
What is financial freedom? Is it that top of the mountain that one can only aspire for but never conquer? Is it the gold at the end of the rainbow that everyone is chasing? Or is it what it means to be in control of one’s life? The truth is financial freedom differs from person-to-person.
For US financial adviser and author Susan ‘Suze’ Orman, “A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life”. For Robert T Kiyosaki, businessman and author of ‘Rich Dad Poor Dad’, “Financial freedom is freedom from fear”. For celebrity life coach Tony Robbins, financial freedom is “working because you want to, not because you have to”.
The simple meaning of financial freedom can be having more time to do things you enjoy, and more time to spend with family.
Increasing work-related stress, a reduced working life, growing life expectancy, nuclear families, and a fast-changing world — all these are making it difficult to keep up with the breakneck speed at which life is moving. These are some of the reasons which make financial freedom more crucial than ever. Take, for example, the concept of FIRE (financial independence, retire early), which is gaining popularity with the younger generation. It is a movement defined by thriftiness and very high savings and investment. In FIRE, you save up to 70 percent of your income, retire early, and manage expenses through small withdrawals.
To achieve financial freedom, firstly you need to identify the level of financial freedom you want to achieve. Remember that feeling of bliss and liveliness while waking up in the morning? Financial freedom can be stratified into eight levels, and each one of us may target a particular level depending on our goal(s) in life. They are:
One: Saving & Investing — For some who spend as much as they earn, financial freedom would mean having a good emergency fund and saving some money each month. If you are young, this might be a good starting point.
Two: Debt Free — I have encountered many who have taken expensive loans to meet their short-term goals. For them, being debt-free is a form of financial freedom.
Three: Comfortably Saving — Not being too frugal, yet saving 30 percent to invest for long-term goals can be a form of financial freedom for many of us. When I started my own business, this level was my first target of financial freedom.
Four: Work-Life Balance — Some define financial freedom as maintaining a work-life balance; when you get time to take regular vacations, and pursue some of your wants or likes or hobbies, it could be regular workouts at your local gym, or playing a sport with friends, or learning a musical instrument, etc.
Five: Long Break — For some financial freedom would mean having enough investments and an emergency fund to take a long break from their job to pursue that dream of a startup, or to go for a world tour.
Six: Bare Minimum Retirement Financial freedom could also mean having a good amount of accumulated wealth to retire in a smaller town than where you are currently residing, with all goals covered with a low padding. This was my second target after I achieved level three.
Seven: Maintain The Pace — Financial freedom could mean to retire and maintain the current lifestyle. For this a sizable corpus is required to maintain everyday expenses, and have all goals covered with a good padding to tide over the worst-case scenarios.
Eight: No Slowing Down — Retiring with ample margin of safety, with enough of wealth to maintain the current lifestyle, to have all goals covered, to have money to go for exotic vacations, and even to leave for the next generation/charity is also a level of financial freedom.
Once you have identified your target level of financial freedom, the next step is to prepare a financial plan to achieve it. Set clear, actionable goals, and work towards achieving them. Don't get intimidated by ‘Financial Planning’, or other heavy jargon. Financial planning is more of a behavioural aspect than an intellectual one.
Morgan Housel’s ‘The Psychology of Money’ is a seminal work on financial planning, and an example from it is good to understand the importance of financial planning. Ronald Read made headlines all over the world when he died in 2014. He was among the 4,000 of almost 3 million Americans who died that year, who were worth more than $8 million. Read worked at a gas station fixing cars for 25 years and swept floors for 17 years. This former janitor had left $2 million for his stepchildren, and more than $6 million to a local hospital and library! The 'discipline' Read followed was to save the maximum he could, invest in good blue-chip stocks, and he remained patient with his investments.
My point here is that financial planning is a discipline. A discipline put to your spending, and your investments. This discipline gives you a sense of confidence that you can achieve your targeted financial freedom in time. Financial planning is a behavioural aspect, which can lead to financial freedom. Ronald achieved Level 7!
As we celebrate India’s 75th year of Independence, let's set a target level for financial freedom, and work towards it. Let’s begin the journey of being the Ronald Read of our lives.
Parimal Ade is co-founder, InvestYadnya.in Twitter: @AdeParimal. Views are personal, and do not represent the stand of this publication.
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