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How Much Do I Need to Be Financially Independent? Research Team | Posted On Tuesday, December 03,2019, 05:41 PM

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How Much Do I Need to Be Financially Independent?



Financial Independence is having enough money to pay for your living expenses across life. It must not be confused with financial freedom which is having enough savings, investments and cash to afford the lifestyle you desire. While financial independence sounds great, it’s not that easy to achieve.

Before trying to achieve financial independence, you must understand what financial independence is. Is it buying a Mansion or a Private Jet? Well in simple terms, it’s living off your savings and investments with no debt at all. Living debt-free is easier than you think.

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How Much Do I Need to Be Financially Independent?

When it comes to financial independence, how much is enough? There are people with lakhs of rupees in their bank accounts or property worth crores and still make their spouse work. This is because they don’t feel 100% secure.

  • Financial Independence is not having to work for a living. Investment and non-work income cover living expenses.
  • Net worth is equal to or greater than the number of years left in your life. Let’s say your living expenses are Rs 10 Lakh a year. You have 30 years left to live. You need Rs 3 Crores for financial independence.

Money for Financial Independence:

The amount you need for financial independence depends on monthly expenses and the ability to manage healthcare expenses. Financial independence depends on the number of dependents and the power to support the kind of lifestyle you need.

How Do You Get Money for Financial Independence?

Well, you need passive income to compliment salary income. Eventually, passive income must substitute salary income. This is the secret to financial independence.

Shortcut to Achieve Financial Independence:

Well, life has no shortcuts to achieve success and there are no shortcuts to financial independence. However, people do this to achieve financial independence.

  • Making your spouse work so that you enjoy financial independence.
  • Shift to a cheaper area instead of living where family and friends are.
  • Move to a smaller house.
  • Take a part-time job or work on a passion project.

How Much Money is Enough for Financial Independence?

Let’s take a look at this rule of thumb for financial independence:

  • Save at least 25-30X annual expenses to achieve financial independence. Do note that this is not set in stone and open to debate. However, this is a good target to begin with. It depends on the age you target for financial independence, life expectancy and inflation and expected returns.

Let’s have an example to understand financial independence. You have an annual income of Rs 15 Lakhs and expenses of Rs 12 Lakhs. The rule of thumb for financial independence is 30X. You need Rs 12 Lakhs * 30 which translates to Rs 3.6 Crores.

How Can You Get This Amount for Financial Independence?

Well, you must first cut down on unnecessary spending and reduce annual expenses. Let’s say you bring this down to Rs 8 Lakhs from Rs 12 Lakhs.  When you use the 30X thumb rule, you get 8 Lakhs * 30 = Rs 2.4 Crores. Now, the target is Rs 2.4 Crores. This means that you can save Rs 7 Lakhs instead of Rs 3 Lakhs. This is a double benefit of a reduced target for financial independence and the ability to save more.

Can savings of Rs 7 Lakhs a year help you collect a corpus of Rs 2.8 crores? Let’s use IndianMoney investment calculator to find out. Well, if you invest Rs 7 Lakhs in equity mutual funds at 10% expected returns for 15 years; you get a corpus in excess of Rs 2.5 Crores. It might take you 17 years to achieve this figure on an expected return of 8%, common to conservative investments.

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