Financial Independence

When someone achieves Financial Independence, they no longer need to work for money, but can rather focus on what they are passionate about; on what they believe in; on something that is of value to others; and even if they do not work on something they love, they need not work on something they hate. Imagine how much better the society will be, if most of us spent our hours doing what we do, because we wanted to, rather than because we had to.

Financial Independence – is when your net worth of your investments equals anywhere between 30-45 times of your current annual basic expenses. Another alternative measure is if your income from your investments (dividends / interest income / increase in net worth annually) pretty much equals your current annual expenses. This means you would be able to live off the investment income or withdraw an amount equal to your annual expenses for around 30-45 years without your corpus running out – assuming your corpus stays invested and grows at the same rate as inflation. Depending on the age you reach financial independence, and how long you expect to live, this threshold may vary. Say if you want to retire by 40 and expect to live until 90, you need 50X of your then annual expenses. But then, you might not necessarily retire – as in stop working – but may choose a less stressful job or make money doing something you like, even if the income is just about sufficient for your current monthly expenses. In which case, you may consider yourself reasonably financially independent even with about 30X of your then annual expenses.

Remember, there is no shortcut to success and there’s no get-rich-quick scheme except to work hard, increase your income, live below your means, increase your savings rate, invest regularly, and wait patiently for 20 years. If you don’t have 20 years of your working life left, or want to retire early, then you need to increase your income or invest a very large portion of your income. Otherwise, your only option is to reduce your lifestyle expectations.

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