Achieving financial freedom and becoming wealthy is one of the major life goals of almost every other Indian.
In this article, I will explain how you can go about from achieving financial freedom to being wealthy. Before moving on, let us understand what financial freedom actually stands for.
What Is Financial Freedom?
Financial freedom refers to a state in which your passive income is more than your expenses.
How Do You Get Financial Freedom?
Financial freedom can be achieved in 2 ways.
- Either by decreasing your expenses.
- Or by increasing your passive income.
When you are accustomed to a particular lifestyle, it becomes somewhat difficult to decrease your expenses. And, I am not talking about luxury lifestyle.
Now, the only other option left is to increase your passive income.
Also Read : Asset Allocation by Age or Goal
How Much Money Do You Need For Achieving Financial Freedom?
I cannot exactly tell how much money you would require for achieving financial freedom. The reason, it all depends on your passive income and expenses. If your existing corpus is generating a passive income that’s higher than your expenses, you are financially free.
For example – Suppose there’s a person with monthly expenses of 50,000. Such a person would require less money than a person with monthly expenses up to 1,00,000.
Now coming back to the main point – how to go about from achieving financial freedom to being wealthy in India?
Also Read: Early Retirement in India
From Financial Freedom To Being Wealthy
Let me take an example to help you understand the concept in a better manner. Ajay is a 30-year old man who wants to achieve financial freedom by the age of 50. Having monthly expenses of 50,000, he wants to maintain the same kind of lifestyle after age 50. We will have to take certain assumptions like inflation, life expectancy and returns on your current investments et cetera.
I am not taking into consideration other major goals such as child education, child marriage, home purchase, and so on. It’s so because Ajay is sure that he would be able to fulfill these goals by age 50.
Inflation – 6%, Life Expectancy – 85 Years, Returns on investments during accumulation phase – 9% and Investment return post-retirement period – 1% above inflation.
(The other assumption which I have taken is that Ajay`s wife is of the same age. Moreover, I have not bifurcated the returns on the basis of equity and debt. In fact, I have considered total returns of 9% on the investments)
Value of 50,000 after 20 years at 6% inflation would be 1.6 Lakhs. It means that Ajay would require 1.6 Lakhs per month for his expenses.
So, Ajay would require around 5.70 Crores to maintain these inflation-adjusted expenses of 1.60 Lakhs per month. And that too another for 35 years (As we have taken life expectancy of 85 Years). A corpus of 5.70 crores is enough for financial freedom at age 50 for the next the 35 years.
The investment required to achieve this 5.70 Crores in the next 20 years would be 90,000 per month. (Assuming returns of 9%.)
Also Read: Financial Planning for Family
What if Ajay invests 1,10,000 per month instead of 90,000?
How much of a difference would an additional 20,000 make in Ajay`s life at age 50? Ajay is already done with asset allocation for the achievement of financial freedom. Yes, you got it right! He can park this additional amount into equity mutual funds.
Assuming 12% returns, this 20,000 per month would generate an additional corpus of 1.90 Crores after 20 years. Whereas the corpus generated would be around 1.50 Crores if we assume returns as 10%.
Now, Ajay does not need this extra amount at the time of his retirement. The reason is that he has already provisioned for his financial freedom by investing 90,000 per month.
So this extra amount would remain there in equity only. Do you realize that this 1.90 crores will soon become 5.90 crores assuming returns of 12%? And, 1.50 Crores will turn into 3.90 crores in another 10 years. Yes, just 10 years!
Now you can imagine how high the returns would be if this amount remains invested for another 10 years. This was scenario 1 of going about from achieving financial freedom to being wealthy.
Let’s get started with scenario 2 now.
Ajay did not want to sit idle after the achievement of financial freedom. He wanted to pursue his lifelong passion. After age 50, Ajay started his own business and he was able to drive some profit out of it. Though the income was not that great, it helped him manage his monthly expenses quite well. He was pretty sure that he would be able to manage his monthly expenses for the next 10 years. Plus, it all seemed harmless as he was enjoying it very much.
He did not touch his investments for another 10 years. As mentioned earlier, the corpus of 5.70 crores has been already generated. If this corpus of 5.70 crores is invested for another 10 years, it would become 13.50 crores. (Assuming 9% rate of returns.)
Are you not you feeling wealthy already?
The retirement corpus required at age 60 would be around 7.70 Crores. It’s so because the monthly expenses would increase from 50,000 to 2.90 Lakhs. But, you would be having a surplus of 5.80 Crores, Right!
Double income couples have an added advantage here. Even if one of the spouses continues working, the monthly expenses can still be managed without any hassle.
For some people, scenario 1 may seem easy. Since they would be having some surplus for investment even after setting aside funds for financial freedom. Others have to acquire a skill which can be utilized to maintain the monthly expenses for a few years. Otherwise, you must convince your spouse to work for some more years (If your spouse is working) after the attainment of financial freedom.
This was my personal view on going about from achieving financial freedom to being wealthy. Without a doubt, I may have missed on some other important methods which you can definitely help me add.
Till then, Happy Investing!