This independence day, start your journey towards financial independence

Money is a tool that we can use to build for the future or spend away in the present. If we buy things today that we don’t need, one day we may have to sell the things we do need to stay afloat. There is a purpose for the money that we earn, whether we realise it or not. It is, therefore, very important to manage our money prudently and link it to our life goals.

One such life goal is achieving financial independence. Being financially independent means having dignity and security – it means not having to depend on anyone else to look after us financially – it means not having to work for a pay-check anymore.

FIRE movement

Recently many investors have started having the desire to retire much early than the typical retirement age. There has been the birth of a new movement called FIRE, which means becoming financially independent and retiring early. The FIRE movement started in the early 1990s with the book Your Money or Your Life by Vicki Robin and Joe Dominguez. Whilst the idea originated in the early 90s in the US, it took more than two decades for the idea to spread to other corners of the world.

4 per cent rule

With the FIRE Movement, the goal is to get to a point where you have enough money to take care of your needs and this will give you the freedom to pursue your passions. There is a basic rule of thumb associated with this movement called the 4 percent rule. This is the rule that is used in the US and it works for them because their economics is very different from the one in this country. According to that rule, a person needs to work hard and save up to 25 times their yearly expenses in their portfolio. Subsequently, they can withdraw 4% every year and manage expenses within this.

Unfortunately, there are some issues with this rule of thumb. Withdrawing 4% of the corpus may not work or be appropriate given that the return and inflation assumptions in the US are different from those in India. Also, between the time you retire and the time you die, there are a lot of unforeseen events that can take place. Therefore, adjusting the rule of the thumb to save a larger corpus to accommodate uncertainties and tweaking the withdrawal rate given the Indian scenario would generate more appropriate numbers for the India context.

This is not an investment recommendation, but more of a framework that can help you understand how to get started with achieving financial independence. This framework helps put our retirement goals into perspective. The point of investing is to accumulate enough funds that will provide sustainable income in retirement years. Therefore, it’s important to figure out where income streams will come from on retirement and also ensure that the income is sufficient to take care of monthly expenses with a healthy buffer kept for contingencies.

Today is the 15th of August and it marks the 75th Independence day of our freedom from a colonial past. There is no better time than today to start our journey to financial independence.

(The author is Founder and MD, Kairos Capital Private Limited. Views expressed are personal.)