Financial Independence

Incomes can be subdivided into Active Income and Passive Income. Getting paid by somebody you work, running your own business, or being self employed are all Active Income. One is required to put hours into the activity in order to maintain the same stream of income. The moment you cease to work or stop working, this income also stops.

 

Passive Income on the other hand is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it. In order for an activity to be considered passive, it has to be an activity in which the owner of it does not materially participate in. Income you earn without having to work a job is commonly referred to as Passive Income. Passive Income examples are Rental Income, Dividends, Bank Deposits, LTCG on Equities, etc.

 

Financial Independence means you have enough personal wealth to live, without having to work for basic necessities. Thus Financial Independence means the ability to manage money in such a way that you have sufficient funds to live your chosen lifestyle without assistance from others. Financial independence does not mean you need to retire. It only means you can freely pursue what you want in life irrespective of the income it creates.

 

Robert Kiyosaki said, “The key to financial freedom and great wealth is person’s ability or skill to convert earned income into passive income and/or portfolio income.” So one should focus on the passive income and spend time acquiring those assets that provide passive or long term residual income.

 

Age, existing wealth, current salary or income doesn’t matter – if someone can generate enough income to meet their needs from sources other than their primary occupation, they have achieved financial independence. However, the effects of inflation must be considered and calculated, else there will be a time when they lose their financial independence because of inflation.

 

If you’re using money like most, buying things on credit, making monthly payments, trying to put away a few bucks each month, etc. Then you’re doomed to end up broke. You have to put in the most effort upfront. Then after a while, you can relax into a wonderful lifestyle, giving you time for your loved ones, hobbies and even dreams which you have long since let go.

 

To effectively eliminate your debts, you have to use the military principle of “massing of forces.” This means you concentrate all available resources on one debt at a time. A quick rule of thumb would be to pay off your debts in order of their outstanding balances, working from the smallest balance debt to the largest.

 

It takes more than a few weeks to build real financial independence. You must develop and maintain a long-term view. If you live only for today’s gratification you will never really begin building a financially secure future.

 

A person’s assets and liabilities are an important factor in determining if they have achieved financial independence. Financially independent people have assets that generate income [cash flow] that is equal to their expenses. The only way to really achieve true financial independence is to own everything in your life and owe nothing. That’s real wealth.

 

So have a financial plan and budget, so you know what money is coming in and going out, have a clear view of your current incomes and expenses, and can identify and choose appropriate strategies to move towards your financial goals. A financial plan addresses every aspect of your finances.

 

Ralph Waldo Emerson once said, “What lies behind us and what lies before us are small matters compared to what lies within us.” What you have to determine is whether financial independence lies within you.

 

It takes hard work to achieve financial independence, which is probably one of the primary reasons why 95 percent of people don’t do it. Being able to work if you want to, or not work if you don’t want to, that is true freedom and you deserve to be enjoying it.

 

 

Cost of Delay

Procrastination means postponing what one is suppose to do now to another time. It’s a human nature to procrastinate.

 

People do realize the importance of investments but it is not a priority for them in the early stages of their career. We delay making investments as we think that we can always make up for the lost time once we start to earn more and thereby investing a higher amount.

 

If a person of age 60 start thinking about getting rich, it is unlikely he may succeed. If a person start thinking in 30’s or 40’s, there is a good chance he may succeed. But if a teenager starts thinking about getting rich, there is all probability that he will succeed, but why? It is because the teenager has the time in his side. Time is the single most important factor that stands between you and wealth.

 

Warren Buffett once said “I made my first investment at the age of 11, and I was wasting my time until then.” The thing is when we have time on our side, we mostly don’t value it.

 

In this consumption based economy, where we first fulfill our most exotic demands, that too by just clicking few buttons, and only delay our investment decisions.

 

However, making up for lost years in pce san diego investment is not easy, as the cost of delaying is enormous. Even one year makes a huge difference.

 

The costs of procrastination are more severe than we consciously understand, may be more expensive than all other costs combined. One reason is these costs are often silent and out of sight.

 

One may be tempted to think that cost of delay by one year will be losing the first year’s return only, but actually it will be the last year’s return.

 

Table_1: Annual Earning of Lump-sum & Systematic Investment at 12% CAGR

Years

Lump-sum [Return @ 12% CAGR]

Systematic [Return @ 12% CAGR]

Value_1

Earnings_1

Value_2

Earnings_2

0

5,000.00

0.00 5,000.00

0.00

1

5,600.00

600.00 5,600.00

600.00

2

6,272.00

672.00 11,872.00

6,272.00

3

7,024.64 752.64 18,896.64

7,024.64

4

7,867.60

842.96 26,764.24

7,867.60

5

8,811.71

944.11 35,575.95

8,811.71

6

9,869.11

1,057.41 45,445.06

9,869.11

7

11,053.41

1,184.29 56,498.47

11,053.41

8

12,379.82

1,326.41 68,878.28

12,379.82

9

13,865.39

1,485.58 82,743.68

13,865.39

10

15,529.24

1,663.85 98,272.92

15,529.24

11

17,392.75

1,863.51 1,15,665.67

17,392.75

12

19,479.88

2,087.13 1,35,145.55

19,479.88

13

21,817.47 2,337.59 1,56,963.01

21,817.47

14

24,435.56

2,618.10

1,81,398.57

24,435.56

15

27,367.83

2,932.27 2,08,766.40

27,367.83

16

30,651.97

3,284.14 2,39,418.37

30,651.97

17

34,330.20

3,678.24 2,73,748.57

34,330.20

18

38,449.83

4,119.62 3,12,198.40

38,449.83

19

43,063.81

4,613.98 3,55,262.21

43,063.81

20

48,231.47

5,167.66 4,03,493.68

48,231.47

21

54,019.24

5,787.78 4,57,512.92

54,019.24

22

60,501.55

6,482.31 5,18,014.47

60,501.55

23

67,761.74

7,260.19 5,85,776.21

67,761.74

24

75,893.14

8,131.41 6,61,669.35

75,893.14

25

85,000.32 9,107.18 7,46,669.67

85,000.32

26

95,200.36

10,200.04 8,41,870.03

95,200.36

27

1,06,624.40

11,424.04 9,48,494.44

1,06,624.40

28

1,19,419.33

12,794.93 10,67,913.77

1,19,419.33

29

1,33,749.65 14,330.32 12,01,663.42

1,33,749.65

30

1,49,799.61

16,049.96 13,51,463.03

1,49,799.61

31

1,67,775.56 17,975.95 15,19,238.60

1,67,775.56

32

1,87,908.63

20,133.07 17,07,147.23

1,87,908.63

33

2,10,457.67

22,549.04 19,17,604.90

2,10,457.67

34

2,35,712.59

25,254.92 21,53,317.48

2,35,712.59

35

2,63,998.10

28,285.51 24,17,315.58

2,63,998.10

36

2,95,677.87

31,679.77 27,12,993.45

2,95,677.87

37

3,31,159.21

35,481.34 30,44,152.66

3,31,159.21

38

3,70,898.32

39,739.11 34,15,050.98

3,70,898.32

39

4,15,406.12

44,507.80 38,30,457.10

4,15,406.12

40

4,65,254.85

49,848.73 42,95,711.95

4,65,254.85

41

5,21,085.43

55,830.58 48,16,797.39

5,21,085.43

42

5,83,615.69

62,530.25 54,00,413.08

5,83,615.69

43

6,53,649.57

70,033.88 60,54,062.64

6,53,649.57

44

7,32,087.52

78,437.95 67,86,150.16

7,32,087.52

45

8,19,938.02

87,850.50 76,06,088.18

8,19,938.02

 

As in Table_1, if a 20 year old, makes a onetime investment of Rs. 5,000 and earns 12% p.a. return, then on retiring at 65, the total corpus will be Rs. 8,19,938/-, provided the money is untouched for 45 years.

 

If he does the same at the age of 21, his total corpus will be Rs, 7,32,087/- when he retires at the age of 65. The cost of delay in one year of investing is Rs. 87,850/- i.e. the last year’s return and not Rs. 600/- the first year’s return.

 

This difference become more enormous, when the investment of Rs. 5,000/- is done regularly i.e. annually. The retirement corpus will be short of Rs. 8,19,938/-. That is a steep price one has to pay for a single year of procrastination.

 

So to make the compounding work for us, we got to start early. The next best thing to start early is starting now. We also need to remain disciplined and make regular investments.

 

Compounding will only work if we allow our investment to grow. The results will seem slow and small at first as most of the magic of compounding returns comes at the very end.

 

Be patient…

 

EMI vs SIP

In this consumption based digital economy, the ability to borrow seamlessly through credit card culture and EMI’s are very dangerous as it leads to impulsive spending and over borrowing. Spending the money you have is one aspect, but spending the money which you will earn in future is other.

 

These are the most expensive borrowings and come with 18-20% cost, and if it is on your credit card it will be 24-30%. No investment can generate that kind of return.

 

EMIs work through decompounding effect. It breaks the total amount into a small denomination of Rs. 1,000 – 2,000 per month. This conversion factor is the main culprit, as this small denomination seems like paltry sums, and one doesn’t calculate the costs involved. All one thinks is whether that sum sounds payable and if it does, the deal is done and huge interest burden in committed to.

 

All these borrowing are short term borrowings, i.e. for 6-18 months only. So if you can delay or defer these spending till that time and in return start saving the same amount, you will end up creating a spending account, which in other words can be called the Reverse EMI Fund or the Good EMI. Visit our lawyer site to learn more.

 

All these funds should be accumulated in the short term debt fund. The idea here is not to generate substantial return but some return which has a stability of a fixed income. So instead of spending in EMI you are doing a SIP.

 

Whenever you feel like buying something, see if there is enough money in your spending account. If there is, just withdraw and buy what you want, else wait. Do remember not to treat this as savings, as this is an Expenditure Fund. Instead of interest expense of 18-20%, you end up with 6-7% extra earnings, thus making a huge saving of 25%.

 

It all sums up to that if you post-pone your casual expenses you create money and if you pre-pone them, you destroy it.