Today is India’s Independence Day, Are you really feeling Financially Independent?
We Indians are celebrating the 78th Independence Day today, 15th August 2024. It is a matter of pride that we are freed from the colonial rule that lasted around 89 years. My grandfather worked as a driver and drove trucks in Assam when the other famous freedom fighters etched their name in history. I still remember him narrating the story of driving a few guards from one military point to another. He had no other connections with the freedom movements other than this small incident.
He passed away at the age of 89, but his life was a true story of Independence. My narration of his story may not do justice to the life he led. According to me, he was the most independent man I have ever seen. He ended up creating assets beyond comprehension.
After driving trucks in Assam, he came back to Kerala and got a job as a personal driver for a manager of a production company. His job was to drive the boss from one factory to another, all over the country. This would be in the 1960s when the Industrial Revolution was kick-starting in India. I do not remember how much was his salary back then, but he ended up providing more than enough for his 5 kids.
10 years later he built his first home, and 15 years later he built his 2nd home as an estate with around 10 acres of land. In 20 years, he bought close to 25 acres of paddy field. I still remember going to the paddy fields and seeing how people did the harvest.
A few properties had to be sold to raise cash for patrimony, but the properties that are still left are worth at least 40 to 45 crores as per today’s market rate. I can only say what I have seen, I do not know if he held any other assets like gold or physical shares.
Just like he invested, he even taught his son (my father) to invest judiciously. My father improvised a bit and invested in Shares, Mutual Funds, Gold, and Bonds. He even invested in UTI, India Post savings schemes & Treasury deposits.
My only worry is — will I be able to match their investment returns?
Today’s macroeconomic situation is looking pretty bleak compared to 20, 40, or 60 years back. The consumption has exploded so has the pricing. People are earning more, but the net savings are way lower.
Even if you have a 2,00,000 per month take-home salary, it means nothing if you aren’t able to save/invest at least 60,000 p.m.
If you save 60000 every month, you will end up generating 6 crores at the end of 20 years.
The next question is, “Will 6 crore be enough to meet the demands after 20 years?”
This noticeable difference started after the IT revolution. The gradual but steady erosion of purchasing power, also known as inflation started showing its teeth from the 2010s. The rise in prices has now clearly offset their higher take-home salary. Two days back, I saw the news that Cognizant is offering 2.52 lakhs per annum for its freshers.
The offer letter I got back in 2006–07 was for 2.36 lakhs and I can say with 100% confidence that the rentals, groceries, vegetables, and prices were much more affordable 17 years ago.
Saving/Investing is one part, but the biggest challenge in becoming financially independent is debt. We will explore financial independence and debt in detail.
Financially Independent: My definition of financial independence may be totally different than popular norms. According to me, if your passive income is 50% of your active income, then you are on the right track to financial independence. For example, if your active income is 1,00,000 per month, then you need to have a passive income of 50,000 (50% of 100000) every month to stay the course. This will take your total monthly income to 1,50,000.
The advantage of passive income is that if it is coming from assets like mutual funds, stock dividends, or rental incomes then the appreciation of assets will be much faster than the hike in your active income. In another 10 years, your passive income may be 2x of your active income.
The 2nd step to attaining financial independence would be to increase your source of earnings. If you have opened up multiple sources of income, it is a huge advantage. If you have only one source of income at present, it may be a bit hard to understand right now. A quote might help.
“If you don’t find a way to make money while you sleep, you will work until you die.” — Warren Buffet
Debt: In India, the word debt is not that popular. The moment you say “loans”, everyone quickly understands. Having a bank loan is the biggest hurdle to your financial independence.
You will never have true freedom if your debt is above 25%. Going back to the earlier example for a person earning 2,00,000 per month, a debt of 50,000 itself is dangerous. Let me try to figure out the actual debt he may have.
- An independent villa for 2,00,00,000 i.e. worth 2 crores of which 1,50,00,000 is funded via a bank loan.
- A car worth 25,00,000 of which 20,00,000 is funded via a bank loan.
Assuming both the loans are for a 10% interest rate for a tenure of 20 years, then his monthly EMI would be 1,64,054. source
People around me are staying in a 2cr villa and driving cars worth more than 25 lakhs even without an assured income of Rs2,00,000 per month. The only way that is possible is by pledging wealth or by taking a loan.
Let me know in the comments below or DM me what is your monthly debt-to-income ratio. Is it below 25%?
On this independence day, take a step back and assess your financial freedom quotient.
Are you on the right track to generate passive income?
Is too much debt limiting your career choices?
Is the need for showing off actually costing you too much?
Is the bank working for you or are you working for the bank?
It is never too late to get your finances back in shape. When you take control of money even the time will work in your favor. Time is a friend when you have assets and an enemy when you have liabilities…
Happy Independence Day!
