Financial Independence – most people have no clue

The tag line of this blog says, “your journey towards financial independence”, and I had chosen it with a lot of thought. My idea was to have a blog that will be different from other blogs by focusing on the issues related to financial independence, sharing my experience with the readers as to how I went about it and finally show the readers how it can be done, preferably much earlier than the age of 58 or 60. I think a lot of the posts in my blog will help greatly in this but there is much to do yet.

One of the difficulties is to make people understand what exactly is Financial independence and why do they need it? Well, a simple answer to it is this – Financial independence means that if you stopped earning any active income from tomorrow onward you should still be able to do most of the things that you have planned for in your life. Now I understand, that for most of us ( and for me till last year ) this is not true. You will be completely lost if you do not get a salary at the beginning of January or do not have access to the business income that you depend on. Most of our expenses and loan repayments, not to speak of investments for the future, are made out of our Active income and if it stops for some reason, we will not know what to do.

This really is the crux of the issue – you do not need to be Financially independent for the purpose of early retirement only. Your need to be in the FI state is to make sure that even if something drastic were to happen which had an adverse impact on your ability to get an active income, you are still doing all right. If I were to ask you today if you are in your FI state or not, the answer for most people will be in the negative. Which is fine, because it very often takes nearly a life time to reach that state.

However, the problematic part is that we normally do not even know how we are doing with respect to being FI. In one of the earlier posts I gave a method as to how to estimate your retirement needs for a period of time. Many of you got back to me saying that it was a great tool, simple and very effective at the same time. Is it possible to put such a number on FI by some similar method. In other words, if we are able to put a number to FI state for your situation today, you would easily be able to figure out how far you are from the state.

Being in the FI state takes care of all our worries and stress to a great degree, as we are then focused on constructive things and trying to reach our overall potential, not just earn money. For many of us, we are in a job or profession, not necessarily because we love it but because it lets us earn an active income that is important for us to lead the life that we want to lead. Getting to a point where you are in the FI state will mean that such constraints do not exist and you can do something different if you wanted to. After all, there is only one life we get to live !!

OK, now that we have established the importance of FI and the need of getting some number to it, the next step will be to outline a simple method that can be used for the same. Let us do that in the next post.

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4 thoughts on “Financial Independence – most people have no clue

  1. It is dependent on two variables – level of your annual expenses and returns generated by your portfolio. As a thump rule, I would suggest:
    (100/real return = net of inflation) x estimated average annual expenses
    This would let you keep on living comfortably without depleting your assets.

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