What is Financial Freedom?

What it means to me:

Financial Freedom has been defined in various ways. For me, financial freedom means

1. Having an income in excess of the current needs of my family.

2. Having an income which will also meet the future needs of my family and me.

Is it really possible to plan very much in advance? I believe it is, though there may be extenuating circumstances in which your plan may fail. For instance war or natural calamity may alter all your planning.

How to achieve Financial Freedom:

You will need to use a spreadsheet and make some assumptions. To download a spreadsheet which will allow you to calculate the time you will take to reach financial freedom, click here. (Download to be made available soon!)

The assumptions necessary are:
1. Rate of inflation, long term.
2. Return on various asset classes, long term. Eg. Equity returns around 14% plus in my country, so I would go with that for my equity investments. Similar assumptions are necessary for the debt investments, liquid investments and property (real estate) investment.

You would also have to plug in your current and projected rate of saving and your current assets, that is, your current investments which you wish to hold for achieving financial freedom.

The third set of estimates you would need to plug in are the amounts you need at specific times for additional expenses which you would not be meeting out of the income from your assets.

You also need to bear in mind that you may not achieve all your objectives owing to the unpredictable nature of the equity markets. Conversely, you may do so well that you have money to spare! If you make conservative estimates, there is no reason why you should not end up with money to spare rather than in the poor house! But more on that later!

Track The Performance Of Your Investments

If you fail to track the performance of your investments, you are on track to fail in earning a reasonable return.

It really is that simple. How do you track the performance? The simplest and most elegant solution for your investments in India is mProfit, a investment performance tracker which allows you to track your mutual fund investments, your stocks, gold, bonds, PPF, NSS, real estate and what not. Get an extra 30 days of validity with this coupon code here - (Disclaimer: I have been using mProfit since the last 3 years and yes, I do earn a small commission on any sales through this link. If you do find a better software or online tool, let me know!)

With mProfit, you are on track to rebalance yearly, half-yearly, monthly or whenever you feel like it - (though I do not recommend that!). You can check the value of your investments as on any date you care to enter.

My next post will be on rebalancing and what it can do for you.

How soon can you be financially free?

Isn't this something which everyone asks oneself at some time or other? So I've decided to do the math and work it out. I hope it makes for interesting reading.
If you save 20% of your income before tax in a mutual fund which returns 20% per annum and if you consider inflation to be at 10%, how long will you take to be financially free? To truly answer that, you need to know what you will need to survive on when you retire and also you will need to know what your investments will earn after you retire. The answer isn't difficult to calculate with an excel sheet and here is a link to a FIRE Calculator which you can customise to your needs. I assume you wish to leave your corpus behind for your heirs, but if you wish to spend down to the end of life, you will need to make an assumption on how long you will live. Now that is a question that Aubrey de Grey has answered in his TED talk here and the answer could well be forever. So be warned, this is not something most financial planners will talk about.
Of course if you can master frugal living and save more (LEAN FIRE), or earn a higher interest on your investments, you could be financially free much sooner. Or if inflation is lower than you expected, then you would not need to save more or or for too long! 

The FIRE (Financial Independence, Retire Early) movement suggests a 3 to 4% rate of withdrawal to ensure assets last a lifetime, but that is calculated based on several assumptions:

    1. Assets will be invested in a 50% debt and 50% equity portfolio

    2. Stock market returns will continue at or around their long term returns, but these are hard to predict.

    3. You will not drawdown on your capital to fund your retirement but that depends on your portfolio returns.

    4. Your life expectancy will be around 100 years which may not be true according to Aubrey de Grey

So what does one do?

For one, if you can be flexible in curtailing wants in lean years, you could retire with a smaller corpus. Or if you can start with a LEAN FIRE, living a minimalist lifestyle, you could retire early. Or go the FAT FIRE way, saving 75% of your income and retire earlier. 

The most important thing though is to make a start with conservative estimates for inflation, rate of return and other variables not in your control. The idea is to have your savings outlive you and not vice-versa!

Here are some resources:

Investopedia