Financial independence – an alternate example

The human mind is normally biased towards the context that it sees for itself. I understand this well as I am a serious student of management and behavioral science, but still fall prey to it from time to time. When I was speaking to one of my blog readers today, she said that while my posts were quite informative, my examples always centered around people who are having about 10 years to retire etc. There is a point she has in this, though a lot of my case studies do have people with younger profiles.

Anyway, since I wanted to do another case study on FI, I have now decided to change it from a personal example to one of people who I know quite well. Except the change in names all the data is factual. These are as follows:-

  • Ravi is 35 years old and lives in Kolkata with his wife and 2 children. He is in a stable job but would like to know about his FI number.
  • At present Ravi owns a home through loan for which he is paying about 5 lacs a year. He needs to pay for another 10 years.
  • His children are 3 and 6 years old. Ravi wants to plan for the elder one to be an Engineer and the other one to go for some graduation in an attempt to try for IAS etc.
  • His estimate of children’s schooling and other expenses is to the tune of 3 lacs per year.
  • His other expenses are 5 lacs per year today.

In order to figure out his FI number, Ravi will need to identify the different goals and estimate the expenses for these in today’s terms. Here is how he can go about it in a simple manner.

  • Retirement expenses, assuming he lives till 80 and current expenses are X will be 45X. Note that X here is 5 lacs.
  • Schooling for both children for 12 years ( actually 14 for the younger one but let us keep it simple) is 0.6 X x 12 or 7.2X.
  • College for older child doing Engineering is 3X
  • College for younger child is 2X
  • Marriages for both children are 3X each, total of 6X
  • Foreign vacations 4 times will be 4X
  • Asset replacement over the next 45 years is assumed to be 6X. This includes buying of 2 cars during Ravi’s lifetime.
  • Home loan repayment will amount to 10X

Now if we add up all of these, we will see that the FI number Ravi will be looking at today is 83.2X. Putting back the value of X we get the FI number for Ravi as 4.16 crores. Many of you will think that this is a very low figure but remember, this is the money he needs today. Obviously, this amount is going to be invested and will keep growing as Ravi continues to withdraw from his investments for the various needs.

Getting back to reality now – Ravi did not have 4.16 crores or anywhere close to it. He had about 1.4 crores which was actually quite good for a 35 year old. I told him that he was 1/3 of the way there and with some good plan he may be able to make it in the next 10-15 years or so.

Which really raises another pertinent question – how does the FI number change with time? Will it reduce or grow larger? Think about it and figure it out for yourself. I will soon write another post on the same.

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5 thoughts on “Financial independence – an alternate example

  1. Hello Sir,

    These numbers indicate an ideal scenario where one would have the requisite number already in the bank. More often than not, it is almost impossible for a large majority to have these at 35 years of age. In my view, it would be helpful to have an illustration where the following would be captured.
    1. Goals – Current Value, Time Horizon, Inflation corrected value
    2. Current assets and their allocation towards goals.
    3. Gap analysis and plan to mitigate the shortfall towards the goals.

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    • What you are talking about is Goal based investing, which is already described quite adequately in my blog through several case studies. You can go through it. FI is a different concept and tests your extent of readiness in case you do not have an active income from tomorrow for whatever reason.

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  2. Sir, Assume that Ravi has the required corpus of 4.5 CR today, May be he is on overboard on real estate and have 3CR in real estate and remaining 1.5CR in debt/equity etc. My point at the status of FI what should be the right asset allocation.

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    • The 4 crores plus needed for FI should be available as cash and not RE etc that cannot be converted into cash easily. This has got nothing to do with asset allocation. Deployment of this cash is another matter, we will discuss it next.

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      • Sir, So you mean other than house he lives, he should sell RE as well and keep it as cash the 4.5CR ?? RE might give some 3-4% every year as returns in terms of rent in addition to appreciation of RE. Is not it. So why cannot he just focus on cashflow and really bothered about 4.5CR as cash..

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