What is financial independence?

On 15^th August 2022, we will celebrate the 75^th anniversary of India’s Independence. After almost 100 years of unrelenting freedom struggle and sacrifices made by countless patriots, on this day in 1947 India gained her from colonial rule. On the 75^th anniversary of India’s independence, we like to bring to investors’ attention the importance of financial independence in their personal finances. Our independence came after a very long period of struggle and sacrifices by several generations; financial independence also requires hard work, planning, and maybe some small sacrifices.

Financial independence

It means “not having to work for a living”. Most of us have to work to make a living. We pay for our day-to-day living expenses (e.g. e.g. food, rent, EMIs, utility bills, children’s school fees, transportation, etc) from the income which we get from our job or business. However, a day may come when we are no longer able to work e.g. retirement. Some people may want to quit their jobs to pursue their passion, which may or may not generate income. How will you pay for your living expenses when you no longer have regular income from your work? If you are financially independent the income from your assets or investments will be able to meet your day-to-day living expenses.

Financial independence is for everyone, whether you are in a job or owning a business. Needless to say, you need to be financially independent after retirement because you will have no salary. Even before retirement, circumstances beyond your control can force you to leave your job and be without income for a period of time. If you have sufficient income from your investments, you will be able to meet your day-to-day expenses, without depleting your assets significantly. If you are a business owner, there may be periods where your income from your business is less than your expenses. You will then have to dip into your savings unless you are financially independent.

 Plan to achieve financial independence

You will achieve financial independence if returns from your assets are sufficient to meet all your expenses for the rest of your life. It is important to understand that assets are investments that can generate future cash flows either in the form of regular income or capital appreciation. Bank fixed deposits, stocks, bonds, mutual funds & real estate are assets because they generate returns in form of interest, dividends, rental income, and potential capital appreciation. You should always factor in inflation when planning for financial independence because your cost will keep increasing over time. The returns from your investments should be able to keep up with inflation.

To conclude

One important aspect of financial independence is that you should be able to maintain your lifestyle even when you do not have regular income from your work. Over years we get used to a lifestyle and you may find it difficult to change after retirement or when you are not working. You should start investing from a young age to achieve financial independence and also maintain your lifestyle after you retire. To choose ideal investment options from your regular savings that can potentially create wealth for you over long investment horizons. You should discuss your life-stage goals with your financial advisor and start investing according to your goals

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