Man is born free but everywhere he is in chains – Jean-Jacques Rousseau
Confucious advised to choose a job you love and then you will never have to work a day in life. Quite true! Sadly, reality is always a bit different. Most people I meet feel stuck in a job. Ideally they would like to do something different, something they love, something at their own pace. However, family responsibility, a desire for financial security forces many of us to continue with our regular job – that we might hate. This is where the concept of financial freedom comes in. We freed ourselves from British rule in 1947 but we won’t be truly free unless we are financially free.
What does financial freedom mean?
To live our life with dignity, we need the freedom to choose what we want to do, when we want to do and how we want to do. When we don’t have to work only for financial reasons. This freedom to choose comes from financial freedom.
Anatomy of our expenses
Before we assess how much we need for financial freedom, it will be a good idea to look at our expenses. If we analyse our expenses, they can be categorised into three types:
- Recurring monthly expenses – These are our regular expenses that occur every month (food, utility bills, clothes, annual travel etc) and will continue to happen. We have a very good idea about how much these items cost.
- Confirmed non-recurring expenses – These are mostly one-time expenses that will certainly happen (like child’s college education, marriage). We have a reasonably good idea about how much and when will we need the money.
- Non-confirmed non-recurring expenses – These are mainly expenses that may happen in future but we are neither aware how much they will cost or what time they will occur (medical expenses).
Important prerequisite – Get rid off all the debts!
Most of us have debts in the form of home loans, car loans etc. When we talk about financial freedom, one of the prerequisites is to be free from any financial debts. This is a must.
How much money is needed to be financially free?
We can simply calculate the corpus needed as below:
Financial freedom corpus = (Life expectancy – current age) * recurring annual expense+ present cost of confirmed recurring expenses+ buffer for non-confirmed non-recurring expenses
Financial freedom does not mean abdicating work altogether
In our calculations, we haven’t assumed any income during the phase you choose not to work for money. If you are financially free, you will be able to choose to spend your time the way you want to spend it. While this may mean no regular job but it can still lead you to earn money by doing something that really inspires you. When you are free from any worries, in many cases, you might be able to earn even more. That will be the icing on the cake!
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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