FINANCIAL INDEPENDENCE

Financial analysts stress the importance of gaining financial independence at an early age, especially among young 20-year-old industrial professionals. Financial independence is the key to early retirement and concepts are related. When a person does not achieve financial independence on time, it becomes difficult for him to retire early. To provide a comprehensive guide to understanding financial independence in early retirement, Chartered Accountant (CA) Rachana Ranade, recently spoke to a session on Thrive 2021 - a stock-based event and joint venture for Groww.

 

Financial independence means that instead of working for money, money should work for us. It explained as the organization known as 'FIRE' originated in the US, combining two basic concepts - financial independence and early retirement. FIRE is abbreviated, where 'F' stands for money, 'I' stands for independence, 'R' stands for retirement, and 'E' stands for early. There are two types of income, explains CA Rachana. One is the working income and the other is the income. Active income is what a person earns from a job, by putting real effort into the work. Although, income alone one can earn by not putting in any physical effort. Inactive income is mainly earned by equity investments etc.

 

Financial independence is achieved when two major conditions are met. First, if personal income exceeds earnings, then there is a chance for financial independence. Second, if a person is not fully dependent on a full-time job, but has other sources of income, then financial independence can be achieved. The US FIRE movement, which enters early retirement with financial independence, is based on three major parameters.

 

1.      Extensive savings: This means that one needs to save 50 to 70 percent of the income to save.

2.      The concept of saving: This means one has to think before buying anything. People should buy the necessities and the money should not be spent on unnecessary items.

3.      Generating income: The income a person earns by investing in other sources, other than employment.

 

How long will it take you to gain financial independence?

 

I do not know how many years I will retire from following a three-step process, according to the Fire method:

Step 1: Get your savings percentage

This means that one has to adjust a certain percentage of income in order to be saved. According to the FIRE method, it should be 50 to 70 percent of the total revenue.

 

Step 2: Calculate your retirement income

To know your retirement fund or retirement wallet, multiply your annual expenses by 25. If a person needs to know the amount of the annual deduction after retirement, multiply your retirement income by 4%.

 

Step 3: How long will it take you to win FIRE?

Enter your data such as savings, investment amount etc., and you will be able to determine your retirement age.

 

 

Some important points to keep in mind to save more and get my financial independence are as follows:

• Redirect your cash gifts or pocket money: Redirect your savings to a cash bank account

• Work plan: Plan your work in advance. If the plans are well done, one will have a higher chance of success

• Avoid or reduce debt: Use credit cards wisely and try to avoid debt as much as possible.

• Reduce your spending: The magic method is Earning - Savings = Expenses. This means that for the money you earn, you need to save first and then make the cost.

• Get your own insurance: Insurance is needed because one will never know the amount of money needed in any unexpected situation

• Create an Emergency Fund: An emergency fund is essential to keep you financially secure.

• Have a support plan: No matter how much one focuses on making one program work, always have a 'B' plan, if possible.

Another thing to consider is how you will spend your time without having to fill your days with paid work.

For example, will you pursue hobbies, volunteer or travel more? Without a plan, you may find that FIRE is not everything you hoped it would be.

"For anyone who is retiring it is important to know why they are retiring. This is very important for those who want to retire early," Harrison said. "Find out what will make your life meaningful and meaningful, so that your retirement can bring you happiness."