Financial Independence, a dream which keeps billions of people awakens overnight across the world. Financial Independence is one of the most discussed topics among the professionals who are struggling with their financial situations and wanting to do something, to eliminate their financial challenges. In order to eradicate their financial challenges, professionals go for changing their jobs frequently, many go for start-ups, entrepreneurship, side businesses, multiple jobs, etc. Struggling with financial challenges, everyday many new beginners start their journey of financial independence. But the success rate is very marginal. What does it means? More is the discussion, there are more misconceptions. So, what is Financial Independence? Definition is not important, although for the sake of ignition of the concept, will define it in this article. But the main purpose of the article is to introduce the basic concept of what it means to be a financially independent.
People define Financial Independence in several ways. I define Financial Independence as to retire early with enough passive income to afford all luxuries you have dreamed about. I would like to attract attention toward three important parts in the definition- early retirement, passive income and afford all luxuries. I believe these are three keys of the concept of financial independence. Let me explain one by one why I believe these three as the keys of successful financial independence.
- Generating Passive income
First and the forth most important key to achieve the Financial Independence is to build sources of passive incomes, which can take care of your need of luxuries. So, what is passive income? How to generate passive income? Passive income is income which is generated without your much involvement. This means you do not have to make much effort to generate that income. This does not means that passive income get generated automatically. It is your money, which you had invested earlier is working for you to generate that passive income for you.
So what does it means that your money is working for you to generate passive income for you? Does it sound something strange? You might have heard the saying from your parents or your friends to work hard to earn more money. Your bosses might have motivated you to work hard to earn more or get promoted, or a salary increment. Your companies might have policies of incentives or bonuses, based on your performances. All these motivate you to work hard for money. But none of them offer any opportunities to makes money work for you. Then, what offers to makes money work for you? It is your financial intelligence that helps you to make money work for you. That’s why before introducing this article; I had introduced about the concept of cash flow, which I termed as the king of financial intelligence.
So, now the question is how the Financial Intelligence can lead you to generate passive income for you and makes money work for you? I had already explained in the previous article that the people use their financial intelligence to invest their income in building assets for them. Assets generate passive income for them and maintain a rich cash flow. They don’t save their money simply in bank account. They invest their income in several assets building instruments like real estate, shares, stocks, bonds, businesses, etc. which generate passive income for them.
Now novices may wonder that they get the salary every month, so their job is an asset and is a source of passive income for them. No, it is not. Your get the salary only when you work and not when you leave the job. Your job needs your regular involvement. There is a simple way to check whether a source of income, for you, generate a passive income or not. Just stop working for a couple of weeks or for some months, if it keeps generating incomes for you, it is an asset for you and is a source of passive income. So from there onward, when I talk about passive income, don’t get confused with your income from a salary, which is not a passive income.
2. Afford all luxuries
What does it means here to afford all luxuries? Does it mean to buy everything existing in the world? No, it is not. Nobody is interested in buying everything in this world. Then, what does it means? I want to ask a question. You live in a house, right? Is it the house you have dreamed? If answer is not, then you are not in a Financial Independent state. Everyone is using some kind of luxury in their life. But the question is, are they using the luxuries they have dreamed? If answer is not, then they are not in the state of Financial Independence. So, here affording all luxuries means to afford luxuries which you are dreamed about, not just to meet your needs somehow. So if you want to own your own house, it is a house you dreamed about. If you use a car, it is a car you dreamed of. If you are going for a holiday, it is a place you wanted to spent time. In short, there should not be any financial challenges to afford luxuries you dreamed about.
So affording all luxuries depends on the lifestyle of a person. Depending upon the lifestyle of a person, the amount of passive income required will be different. The author of Financial Samurai, a leading business and economy website, describes the way to Financial Independence into following three interesting levels. Each level provides you a certain kind of lifestyle. I have tried to introduce these three levels in brief from Indian perspective:-
a) Budget Financial Independence: – In this level, you will be able to maintain a lower middle-class lifestyle. What does this means? This means that your passive income can afford you only lower middle-class lifestyle. In India, as per NCAER-CMCR-2010 report, household income ranging 3.5 – 17 lakhs rupees are considered as middle class. Based on this report, if your assets generate passive annual household income of around 5-10 lakhs rupees in India, then you are in this level of Financial Independence. In this level, you should adopt conservative lifestyle, as downturns may affect easily. Some of your family members need to work and focus on properly investing a large part of your passive income and keep growing your assets.
b) Baseline Financial Independence: – If your assets able to generate passive household income of around 15-25 lakhs rupees in India, then you are in this level of Financial Independence. In this level you have almost won the game, and you can avail upper middle class or lower rich category lifestyle. If you do not want to work again, then you just need to carve out some per cent of your investable assets to go swing for the fences. Here the term “swing for the fences” stands for attempts to obtain large returns, often in exchange for significant risk.
c) Blockbuster Financial Intelligence: – This is the real level of Financial Independence. If you have annual household passive income of 35 lakhs rupees and above in India, then you are in this level of Financial Independence. This level provides the most comfortable lifestyle to you. Now, you are able to follow your passion without worrying about money, and money will keep running behind you. In this level, money will work for you, and you do not need to work for money.
Please note here that annual household passive income value in each of the level is just an estimated amount based on reference with NCAER-CMCR-2010 report. However, there is no such fixed income level to be in a particular level.
3. Early Retirement
Official retirement age in India is 60 years, but the fact is people chose to work even after their official retirement age to meet their financial challenges. In most of the countries across the globe, retirement age varies between 60-65 years. As per WHO data of 2018, average life expectancy in India is just 68.8 years. This is much lower than the other developed countries like US where average life expectancy is 78.5 years, while in UK it is 81.4 years and in Japan it is 84.2 years. But this figure is even lower than 60 years in African countries like Nigeria, South Africa, etc.
The purpose of showing these data is, if I assume that someone able to build assets to generate enough passive income to meet their need of luxuries at retirement age of near 60 years, can we say this a real financial independence? No, of course not! What is the benefit of having the money at the age at which you cannot enjoy the money? It doesn’t make sense to attain financial independence at such an old age. Thus, early retirement is also an important key to financial independence.
Some financial advisors advice peoples that saving money on regular basis for your retirement will lead you to the financial independence. This is just a misconception. Saving money is a good habit and I advice it too. It will be able to manage your financial problem after retirement. But, it would not lead to financial independence. Financial Independence cannot be achieved by just saving your income but by leveraging your income to built assets which provides you much better returns at much faster rates. Here leveraging of income means to invest your income in several ways to built assets. This will enhance your chances to keep having recurrence passive income even during financial crisis. Depending on single assets is not a smart idea. It may go in loss at any moment of downturns as the market is changing so rapidly. However, I will discuss about leveraging income in details in my upcoming articles.
Conclusion of this is article is, if you are financially independent, you will be able to retire at an early age with a recurring source of passive income which can meet your needs of luxuries even after your retirement. You do not need to involve in meeting your financial needs. In others word, your assets will take care of your financial needs and desire of luxuries.
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