Imagine waking up every morning with the freedom to pursue your passions, without the looming worry of financial constraints. This isn’t just a pipe dream, it’s the reality of financial independence. Picture a life where your investments work tirelessly for you, providing a steady income that covers your needs, and you have the liberty to work on your terms. This article delves into the true essence of financial independence, debunking myths and offering a clear roadmap to achieve it. Whether you aspire to escape the paycheck-to-paycheck grind or desire a life where you control your time and money, the journey to financial independence begins with a mindset shift and practical steps. Ready to transform your financial future? Let’s dive in.

Definition

By definition, financial independence is “a state where you no longer need to work for money and can live comfortably on your investments and savings”

Explanation of Concept and Importance

The definition above needs some clarification before embarking on the journey of financial independence. First and foremost, “no longer need to work” does not mean you will become a couch potato, sitting and watching TV or spending time on social media while considering yourself lucky because your money is working for you. On the contrary, most people who have achieved financial independence never truly retire. A perfect example is Robert Kiyosaki, who retired at the age of 47 but never stopped working.

“No longer need to work” means that a financially independent person has a choice. They can opt not to work if they want, as they have their money working for them. However, because financially independent individuals have worked so hard to attain their current state of financial freedom, they often love to keep going and continue working. The only difference now is that the work they do is of their choice, on their terms, and to their liking. They have little or no fear of losing their job.

The second aspect of this definition is living comfortably. Financially independent people don’t necessarily live lavish lives with big houses, expensive cars, and constant travel. It means not overworking to make ends meet, not worrying about financing the basic needs, and free from constant worry about money. It is about having a sense of peace and contentment regarding one’s financial situation.

The last aspect of this definition is saving and investment. A person working towards financial independence is well-versed in investment. They understand that no matter how much you earn, it’s not the earnings alone that make you financially independent. It’s the savings, carefully invested, that make the difference between a financially independent person and one who is not financially independent.

Steps to Achieve Financial Independence

Change Your Mindset

Let’s debunk a myth right off the bat – achieving financial independence isn’t a far-off dream, it’s a tangible reality. But the journey doesn’t start with crunching numbers or making savvy investments. It begins within you – with a shift in mindset.

I’ve had the privilege of speaking to numerous individuals who’ve tasted the sweet fruit of partial or complete financial independence. When asked what sparked their pursuit of financial freedom, their responses were intriguing. It wasn’t about choosing the right asset class for investment, nor was it about calculating a magic number that would unlock their financial freedom. It was something far more profound – a change in mindset.

There comes a moment in life when you say, ‘Enough is enough.’ The constant cycle of living paycheck to paycheck, the gnawing fear of not having sufficient funds to live the life you’ve always dreamed of, or the dread of not having an emergency fund for unexpected expenses – these experiences compel you to take a hard look at your financial situation.

It’s a desire for change, a yearning for control over personal finances, a wish to break free from the relentless rat race, and above all, a determination to do something about it. That’s the real catalyst for the journey towards financial independence.

But what if you have a wish, but not a desire? The solution is simple – transform your wish into a desire by giving it a physical form. A wish can often be vague and nebulous, while a desire is clear and attainable.

The first step on your journey to financial independence should be to clearly articulate your goal. Write it down on a piece of paper and place it somewhere you’ll see it multiple times a day. This blog post isn’t about how your subconscious mind can turn your desires into reality – though rest assured, countless people have achieved their desires simply by writing them down.

Determining Your Financial Independence Number

The second step in achieving financial freedom is determining a number that covers all your routine monthly expenses, excluding your emergency fund. Let’s break it down with an example.

Imagine you are a married couple with three school-aged children, living in a rented home. Your list of recurrent monthly expenses would include:

1. Housing
2. Transportation
3. Food
4. Healthcare
5. Education
6. Childcare
7. Entertainment
8. Personal Care
9. Savings
10. Insurance
11. Miscellaneous Expenses

You need to come up with a specific amount that covers all these expenses. Only you can accurately calculate this number because you know where you have more, little, or no control over spending.

Suppose you estimate your total monthly expenses to be PKR 250,000. Now, factor in inflation at a minimum of 10% for the next 10 years and create a graph to visualize this.

This number represents the amount you need to achieve financial independence. It’s the amount you work nine to five to earn. If you had this amount at the start of each month, you could focus on things beyond money.

This figure will vary from person to person since everyone’s situation is different. However, some items, such as housing, food, and transportation, will remain constant whether you are married or single. Everyone aiming for financial independence should calculate this number, as all future steps revolve around it. Remember, this number does not include emergency funds. You can plan for housing, food, transportation, or insurance expenses, but emergencies are unpredictable. Keep your emergency fund separate from this calculation.

So, what’s your number?

Select The Asset Class

After reprogramming your mindset for financial independence and carefully estimating your financial independence number, the third crucial step is to select the asset class that will generate your desired monthly income.

Returns on assets vary by asset class, and it’s essential to understand these differences. For example, in Asia, a rental property such as a house or a shop typically offers a monthly return of about 0.5%. So, if you own a shop worth PKR 10,000,000 (1 Crore) and rent it out, you would receive around PKR 50,000 per month.

Investing the same amount in a mutual fund might yield a 1% monthly return, which is PKR 100,000. In contrast, a fixed deposit in a bank could offer a 1.2% monthly return, giving you PKR 120,000.

Here’s what you need to do next:

1. Choose the Right Asset Class: Decide which asset class aligns best with your preferences. If you seek both monthly returns and capital appreciation, a property might be a good option. On the other hand, if you prefer higher monthly returns without capital appreciation, consider mutual funds or fixed deposits.
2. Calculate the Required Investment: Determine the total investment needed to cover your estimated monthly expenses (EME) and achieve financial freedom.

Here’s a breakdown of different asset classes and the investment required to meet a monthly financial independence figure of PKR 250,000:

This table demonstrates how much total investment is needed to achieve financial independence with different asset classes. If your monthly financial independence figure is PKR 250,000 and you choose property with a 0.50% monthly return, you need to save PKR 50,000,000 (5 Crore) to get a monthly return of PKR 250,000. Conversely, investing in a fixed deposit would require only PKR 20,833,333 (2.08 Crore) to reach the same goal.

Calculating this number is crucial in your financial independence journey because you can’t hit a target you can’t see.

Have you calculated your number?

Optimizing Your Financial Triangle

Achieving financial independence is akin to mastering the art of balancing a three-sided scale: income, expenses, and savings. These three elements form the cornerstone of what I like to call the ‘Financial Triangle.’ It’s the strategic manipulation of these factors that can lead to the accumulation of an investment nest egg capable of generating returns sufficient to cover your monthly expenses.

There are countless strategies to tweak this triangle to your advantage. Some advocate for a steady income approach, advising you to minimize expenses and maximize savings. Others suggest prioritizing savings, and then investing any surplus funds. However, it’s crucial to recognize that wealth accumulation is not a one-size-fits-all journey. Each individual has unique strengths—some excel at generating income, others are adept savers, while some have a knack for cutting costs. Yet, a common thread among those who have achieved financial freedom is their commitment to investing and establishing a passive income stream that liberates them from monetary concerns.

I advocate for what I call a ‘reverse engineering’ approach to financial planning. This method starts with the end goal in mind: investment. To invest, you need savings, and to save, your income must exceed your expenses. Therefore, the most critical step towards saving more is earning more. If you’re currently living paycheck to paycheck with little left over for savings, you’re not alone—many find themselves in this situation. The key question is: are you actively seeking ways to increase your earnings? Whether it’s acquiring new skills or starting a side hustle, taking proactive steps toward enhancing your income is pivotal on the path to financial freedom.

Remember, earning more is just part of the equation; cultivating habits of saving and investing are equally important. If you’re wondering where to begin, my advice is straightforward: focus on increasing your earnings first, then channel those extra funds into savings and smart investments. This approach will set you on a firm course toward achieving your financial goals.

Create Your Financial Plan

Antoine de Saint-Exupéry once wisely stated, “A goal without a plan is just a wish.” If your goal is to attain financial independence and you’re committed to making it a reality, then the time for action is now. You don’t need endless hours of planning; simply following these four strategic steps can set you firmly on the path to financial freedom:

1. Project Your Expenses: Estimate your monthly expenses for the next decade.
2. Determine Your Investment Needs: Calculate the investment required to cover these projected expenses.
3. Choose Your Asset Class: Decide on the type of assets you want to invest in.
4. Refine Your Financial Triangle: Optimize the balance between your income, expenses, and savings.

If you’re uncertain about how to proceed, consider downloading the complimentary template provided by the Circles of Wealth team. This resource will assist you in:

• Calculating your monthly expenses and forecasting them for the next ten years.
• Determining the necessary investment to cover these expenses.
• Estimating the required investment based on the past decade’s yields from the top three asset classes (applicable for the US and Pakistan only).

Alternatively, if you’re well-versed in these concepts but need guidance on skill-building, don’t hesitate to schedule a session with the Circles of Wealth team for personalized career counseling.