“Financial Freedom is your birthright, provided you are ready to pay the cost”

Recently, a childhood friend came over to visit with his family. As we sat down to catch up with each other’s lives, we reminisced about our childhood days, how they were full of fun and freedom. However, during these interactions, he seemed worried…almost uncomfortable. I invited him into my study to have a drink, and that’s when he opened up.

He revealed that his life was great overall. He earns 10x the amount he earned before, moved to a bigger house, bought a bigger car, but the money that he earned was never enough. With job uncertainty looming in the background, he was worried about his finances. 

Upon observation, he seemed to be on a treadmill of earning more and spending more. However, his financial worries can only be solved by gaining financial wisdom

Financial wisdom is essentially an understanding of good financial habits that holds the power to put you on the path of financial freedom and help you experience true freedom – the joy of life. 

Further, research shows that 85% of people don’t want to continue their present job. If so, Why do they continue in a job they don’t like? The answer is: In pursuit of money. 

Hearing all this, my friend asked –  What is Financial Freedom?

“We all are in pursuit of happiness, which can only be experienced with a free mind. Freedom in life is a function of financial freedom. Therefore, financial freedom is the way to happiness”

I explained that Financial Freedom does not mean having a big house, a fancy car, and drinking Starbucks coffee every day. It is a complete juxtaposition. In financial terms, it is the state when your passive income takes care of your daily expenses without compromising on your standard of living. You can earn passive income through house rent, dividends, interest, royalties etc. Once you do, active income then becomes a choice. You, then, work for passion and not money. 

For example, assume your monthly expenses are Rs. 50,000 and your passive income is Rs. 70,000 per month. Your debt is zero, and you have bought health insurance to deal with any medical emergency. Now, given that you have your passive income covering your monthly expenses, would you choose to do what you don’t enjoy? No! You would undertake only those activities that ignite that passion within you. These activities could be music, dance, teaching, cooking, writing, vlogging, travelling etc.

If you are financially free, won’t you do what you love? And, if you do what you love, will you not experience joy?

Then, he wondered and enquired, How to achieve Financial Freedom? 

“The best thing money can buy is more money. First, build your investment assets and then enjoy the fruits of it.”

I disclosed to my friend that in 1996, I was earning Rs. 4000 per month salary. As I moved up, things were as good as they could be. When I came back from the USA in 2002 after completing my education, I was close to broke. But when I started earning again, I saved and invested my money with great discipline, and that led me to be financially free in the way I am today. 

There is no shortcut to achieving financial freedom. The adage “no pain, no gain” and “the fruits of patience are sweet” applies here too. Financial Freedom is built through a continuous cycle of earning, saving, and investing. As the years pass by, your active and passive incomes increase, the circle grows bigger. 

A combination of earning more, spending less and investing the balance is the way to achieve financial freedom. This may include delaying certain discretionary expenses such as an offshore vacation or eating at the best restaurants 5 times a week. While these current sacrifices translate to delayed gratification, it is absolutely worth the effort in the long run.

It is also important for these financial decisions to be taken collectively as a family. When you restrict expenses without explanation, Mahabharat is due to ensue. Being the sole earning member of the family, I advised him that he needs to sit down with his loved ones and discuss income streams, expenses, assets and liabilities. It would also help to inculcate good money habits in the children from the beginning by demonstrating that behaviour himself. 

However, investing your active income with discipline to reach such a stage where the income from your good assets pays for your bad assets (liabilities) along with your monthly expenses is the first step to financial nirvana.

Then, he asked, How to differentiate between good assets and bad assets (liabilities)?

The answer is simple. Anything which earns is an asset. Rest all are liabilities.

In simple terms, good assets are income-generating assets including dividend-paying stocks, rental generating real estate, high yielding bonds, royalty generating IPs etc., which can give you a regular income in good or bad times. Furthermore, investing in assets such as gold and gold Exchange Traded Fund (ETFs) can work as a hedge against inflation.

If you invest your active income in buying products/services that demand regular spending, you have invested in bad assets. Although they give you short-term pleasure, they hinder financial freedom. Buying expensive cars, second homes, a farmhouse, gifts such as jewellery or some other decorative art etc. fall in this category of bad assets. 

The passive income specified earlier needs to be generated by you by investing in good assets. Furthermore, given the compounding effect of investing, the earlier you begin, the better.

He enquired: How much money does one need to be financially free?

“Financial Freedom is all about having enough money to live a comfortable life and choose to do what you want to do; the amount does not matter at all”

The key is to analyze your expenses versus passive income. When your passive income from good assets generates the amount required to cover your expenses, you are financially free. For example, let’s consider your expenses are Rs. 6 lacs per year (Rs. 50,000 per month). If you invest Rs. 1.5 cr in a Fixed Income Product which generates 5% interest p.a., you will earn the amount (Rs. 7.5 Lacs) necessary to cover your expenses. The remaining excess money can be added to your capital to improve the passive income. Also, this is in addition to your active income as financial freedom doesn’t mean that you should stop working towards fulfilling your purpose in life.

The Way Forward

“Journey to financial freedom is a marathon, not a sprint”

Later, we continued to reminisce about the early days. But, the principle of a happy life was clear.

It is your birthright to become financially free. Irrespective of your savings, earnings, or profession, everyone can become financially free. It is just a matter of your capability to pay the cost in terms of delayed gratification, the discipline of saving and patience of investing. It is clearly a trade-off between the joy now or joy for a lifetime after small sacrifices made in the few initial years. 

Are you ready to pay the price for financial freedom

By Manish Bansal

Manish is the Managing Director of SME Value Advisors, a platform that connects businesses with curated professionals who can deliver solutions. You can connect with him on manish@smevalueadvisors.com.

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