Do you want to get FIRED?

Do you want to get FIRED?

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Well not “Fired” in the way that first occurred to you; I meant declaring yourself “Financially Independent, Retiring Early”.

Any serious discussion about Financial Freedom can never begin with money rather has to start with getting to know yourself and what you wish to do with your life.

Therefore to me, the biggest challenge to financial freedom is being able to “distinguish your needs from your wants with super clarity”. Understanding what we need to be financially free as against being happy – because happiness may be quite unrelated to your financial status.

Only yesterday, I came across an interesting paper by Morningstar titled ” The Comparison Trap” (it’s available on their site). Their conclusion is “where a person believes they stand relative to others has a much larger effect on happiness than their absolute income”.

“Keeping up with the Joneses” is embedded in American culture and despite we Indians boasting of an ancient and much admired spiritual tradition which asks simple living and high thinking of us, we don’t seem very different either!

“No matter how far someone has come in life, there always seems to be someone else who’s done more, has more, earns more – And this can affect the way people feel about their financial status. Income or wealth isn’t the be-all, end-all for a person’s financial well-being; there’s a huge emotional component, too”.

So, they ask; if a higher income can’t magically solve our financial malaise, then what can help? “Despite the powerful relationship between upward comparisons and (a lower sense) well-being’ they say ‘our research suggests that most people, in every income group, compare themselves with people they think are doing better than they are. In other words, most of us appear to be actively making ourselves feel bad about our own financial circumstances by always looking up at people who have more.” 

And all this whilst making us sulk in self-pity does not seem to drive us to save more either – how else could one explain the fact that,  42% of Americans have less than $10,000 saved for retirement? They seem to be totally addicted to consumption and turn out to be as poor as Indians – but only at a much higher level of income!

Therefore, although I was always clear that happiness was not entirely related to money I was never too sure – but now there was research to support.

Financial freedom or independence could mean different things to different people. However, it does seem that a lot of it has to do with the “state of your mind” as much as the money one has accumulated.

In a simple sense, it means “that you have enough wealth to live on without working. Financially independent people have assets that generate income (cash flow) that is at least equal to their expenses”. (Financial independence – Wikipedia)

Therefore, Financial Freedom to me is about having adequate resources to pursue your life’s purpose without excessive worry about money. I couldn’t put it across better than the great Bertrand Russell – but if there is one thing it does not mean to me i.e. “giving up working” because I have always differentiated between work and employment. 

Then there are those “Self Help Gurus” who go around preaching the “think rich, visualize being rich and you will get rich” mantra – basically what they are saying is “if you believe, you can, then you can”. I don’t remember a Warren Buffett or Bill Gates ever saying such rubbish or spending time visualizing stuff! The only guys who have become rich following this are those who are mouthing this escapist philosophy to you. 

On the other hand, not everyone shares Jack Maa’s enthusiasm for risking everything one has into a business. Most of us folks may be looking for a less risky path to life. Invariably, most of such chest-beating is the luxury of those to indulge in hindsight after achieving extraordinary success and have a star-eyed audience gaping at you.

To quote from another Morningstar paper: When More Is Less Rethinking Financial HealthOur current measures of financial well-being are flawed. If we ignore the emotional aspects of clients’ financial lives, we do them a great disservice. The fearful penny-pincher may be wealthy, but they are not well. Likewise, the blissful spendthrift may be joyful, but the instability of their economic state could easily lead to ruin. Financial wellness then must be defined in a way that includes economic and emotional health.

Therefore, financial independence has to be a balance between ‘financial well being’ in equal proportion with ‘economic stability’.

Just about everybody wants to become financially independent – so why do so few people get there? Well, simply because its bloody hard work to first achieve that balance and then go on to build the resources in order to make it happen.

KITNA PAISA CHAHIYE?

  • Are you worried about how the Fourth Revolution will treat you?
  • Do you want the ability to easily switch jobs without panic?
  • Do you wish to be self-employed?
  • Do you want to work because you want to and not because you have to?

IF YES! Then you have to develop the ability to survive without having to work to meet your living expenses. Save and invest for a corpus that will generate your lifetime expenses.

Of course, these living expenses whilst reflecting your ‘personal’ station in life should only provide for the minimal standard of living one can afford.

Let’s take the example of a mid-level corporate executive: their ‘personal’ standard of living has to correspond with their own resources and may not match up with that, they may enjoy as a result of various corporate perks.  Let’s say in my case they never included driving a Merc, taking a yearly overseas holiday or for that matter living in a duplex on Malabar Hill!

Remember, this is where you have to take a real hard look at your current lifestyle and differentiate your needs from your wants. It’s about building a safety net until the time you settle down to work and earn without the assurance of a predetermined salary.

That brings us to the “SAFE WITHDRAWAL RATE (SWR)”:

Its that part of your investment portfolio (expressed as a percentage rate) which you ‘expect’ to withdraw in the first year (of your retirement), increased by the ‘expected’ rate of inflation, for every year over your lifetime – remembering not to run out of money during your (or dependent’s) life. 

The other assumptions you will need to work out this SWR will be; the expected year of retirement, the expected lifespan and the expected rate of return on the savings which you should invest.

Like everything else which involves economists, even the SWR has been subjected to raging debate – something which I believe can be simply ignored considering that, the SWR is any way subjected to so many variables that occur in an uncertain future. I will, therefore, begin work on my plans using an SWR of 5% per year and adjust it as I go along and review my plans on a yearly basis.

One of the most famous promoters of the F.I.R.E approach in life, “Mister Money Mustache” retired at 30! He now blogs extensively to tell his readers how to do it and to convince them that, financial freedom does not only happen to lottery winners or those lucky few who inherit a fortune from a distant aunt.(Click here to go to his personal finance blog).

Many years ago, The Washington Post carried an interview of Mr. Money Mustache in which he said “embrace challenge and shun convenience for its own sake. Ask, “Will this really make me happier in the long run?” about all life decisions. Realize that happiness comes from accomplishment and personal growth, rather than from luxury products. Seek out voluntary discomfort as a way to become stronger, rather than running from it. Develop a healthy sense of self-mockery, and acknowledge that you are a wimp in many ways right now (and only by acknowledging it can you improve). Practice optimism. And of course, ride a bike.” Click here for the full interview

Financial freedom, therefore, eventually boils down to recognizing how much is enough and when to say enough. A great book to read on this is “Enough” by John C.Bogle. 

“John C.Bogle is the legendary founder of Vanguard Mutual Fund Group and the creator of the first index mutual fund. He has been passionate about helping investors build wealth in the right way and has led a tireless campaign to impart common sense to the investment world. He has in the process very closely seen how destructive an obsession with financial success can turn out to be. In this book “Enough” he puts this dilemma in perspective.” 

You should reflect on what brings you happiness, what is the minimum amount of facilities and resources that you may need for this, what are your strengths (and weaknesses) and how can you use them to your benefit. Its fine to seek help from professional advisors and mentors but in the end, you should know that it’s not the quality of their advice that is important, as much as the quality of self-understanding you achieve. To me, our journey to financial freedom begins when we identify those things in life that really matter. Only then can we understand how we want to live our lives and what resources we’ll need to do so.

There is a long ‘to-do list’ but here is the list of cardinal sins – Commit them and you can kiss any possibility for your financial freedom goodbye.

  • Not having S.M.A.R.T financial goals
  • Not having an “Emergency Fund” set aside
  • Spending beyond your means
  • Not saving enough and investing what you save
  • Building up expensive debt especially credit card debt and missing on monthly payments
  • Finally, disrespecting money with stupid ideas like money is not important in life as it cannot buy happiness, etc.
There is no magical trick and it will not happen overnight!

You need to begin with a written plan articulating the financial value of your goals that you are committed to.

Most importantly although one is made to believe that a financial plan is some sort of an off the shelf product (which you can get made for a hefty fee), it’s a process which remains a perpetual ‘work in progress’ considering that one has to review, adjust and update it at least annually. This review has to (1) reevaluate your goals for adequacy (2) make sure that your savings are on track (3) your investments are yielding expected returns.

Readers should read the previous posts on this blog (available in the ‘Personal Finance’ category, to gain an extensive conceptual understanding of the life planning process) whose ultimate goal is to help our millennials “to achieve financial independence”. CLICK HERE for these posts


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