How to Become Financially Independent

Once upon a time, there lived two young farmers, Mehnat and Hoshyar, both growing rice in their plots of land. Growing rice is not easy. One must anticipate the rains correctly and plant the seeds before the season’s rainfall begins. If the rains are delayed then the planting could go waste. Tending to the rice requires many many hours working with bent back in the fields standing ankle deep in water. Rice requires lots of water, which again means rain.

One day Hoshyar sold half of his rice land and with the money he earned, bought a few acres on higher ground. To everyone’s surprise, he announced that he planned to grow mangoes there. The villagers laughed at him, saying mango trees take years and years to mature and require lots of care. But Hoshyar was firm. He bought 500 saplings of Alfonso mangoes from the nursery and planted them.

The villagers were correct. For many years, Hoshyar and his wife had to work harder than before, tending to the small rice plot and also the growing mangoes. But their labors finally literally bore fruit and they harvested their first crop of Alphonso mangoes after four years. The second year’s crop was even better. Soon, Hoshyar was producing export quality mangoes and earning dollar incomes. He sold his remaining plot of rice land and expanded his mango cultivation.

While other rice farmers continued to toil in the hot sun, Hoshyar’s mangoes now require little attention and regularly yield bigger and better harvests. Hoshyar and his wife have hired a manager to run the farm and now find themselves with the time and money to pursue their real interests. He wants to become a photographer and she wants to starts a crèche for the children of manual laborers.

Hoshyar and his wife have discovered financial independence by generating a stream of passive income from a mango orchard that requires very little of their time. The rest of this chapter is about this intriguing and yet popular topic — financial dependence. I want to help you understand what it means and how you can achieve it for yourself through systematic planning, saving and investment.

What is financial independence?

You are said to be financially independent when you have enough income to pay your living expenses for the rest of your life without being employed or dependent on someone else for income. Income that you earn without having to work a job is commonly referred to as passive income.

Bill Gates mentor, the legendary oracle of Omaha, billionaire-philanthropy Warren Buffett, became financially independent early in his life. He understood that saving money and then investing it wisely was the key to financial independence. He put it thus: “Do not save what is left after spending, but spend what is left after saving.”

In October last year, Jack Maa, the billionaire co-founder of Alibaba, surprised everyone by announcing his retirement at the young age of 54, in order to focus is time and attention on educational philanthropy. He understood the difference between struggling with a salary all of your life and becoming financially independent through successful business practices and investments. “Profit is better than wages,” he said, “for wages can make you a living but profits can make you a fortune.”

Let me share some examples of financial independence to help you understand its nuances.

Mr. A is clever, creative and enterprising. His first company, a gaming enterprise, was a big success. Instead of wasting his resources on trying to make it even bigger, he just sold his start-up to a corporation for $100 million. He then invested that money to create 51 sources of passive income for himself, including land, fixed deposits and royalties. Mr A realized how much money he needs to be happy, and made his plans accordingly. He is now financially independent.

Mr B earns rent from six duplex apartments he owns, 10 shops in a marketplace, a petrol pump and two shopping malls, in addition to interest from fixed deposits in five banks. All these sources of passive income bring him over $40,000 each month. He enjoys his life in one of the prettiest places in his country. Mr B is now financially independent.  

Mr C is already a multi-millionaire professional with a net worth of $25 million. He has invested his money into his group of business ventures, from which he earns a handsome monthly salary of $40,000. He remains deeply involved in the company’s management, and it is well known that the company would shut down without him. He has not detached himself from his firm, and spends the bulk of his time involved in its running. He has no sources of passive income. Even though his net worth is in the millions of dollars, Mr C would not be considered financially independent.

According to the Wikipedia, you are financially independent when you have enough income to cover your living expenses for the rest of your life without needing to be employed or dependent on anyone else. Income you earn without having to work in a salaried job is known as passive income.

I think of financial Independence as a state in which you are able to enjoy the lifestyle of your choosing for the rest of your life without having to worry about whether you will have enough money to sustain it. In order to do this, financial independence must meet one of the following criteria —

Some people think of financial independence as a state in which they no longer have to do anything for the rest of their lives. Later in this chapter, I’d like to help you understand why such a notion is not only incorrect but harmful in terms of achieving your Vision, Mission and goals, and living a happy, loving, successful and fulfilling long life. The most important point to understand is that financial independence is one of our 11 important life areas. Succeeding in achieving financial independence dramatically changes your life and improves your ability to meet the Vision, Mission and goals you have set for your life. Financial independence frees you up to devote your time to the things that really matter in life. In the words of Felix Dennis, British publisher, poet and philanthropy, “Money is exactly like sex. You think of nothing else if you don’t have it, and think of other things if you do.”

Why be financially independent?

Let me get the obvious answers out of the way first. Having an assured and independent source of income for the rest of your life means —

Not having to panic when unexpected bills appear

Never having to worry about losing your home

Choosing when and where you work, what you do, and who you work with and for

Being able to volunteer for causes you care about

Knowing your children will be provided for – financially at least – if you pass away,

Not being that much affected by changes in financial regulations about pensions and superannuation

Sleeping soundly at night

Being able to take a few calculated risks, such as moving to a different country or launching a start-up, without jeopardizing your quality of life.

Beyond these, there are solid existential reasons for taking financial independence seriously. Let me share a few of them —

Bad things happen. They’re called the four big D’s — death, disease, divorce and reDundancy. Quite frequently they are also the financial wake-up call you didn’t expect — or want. Financial independence makes ‘bad things’ a non-issue.

Work is uncertain. Never has the future of careers been more uncertain. Even jobs once considered irreplaceable — such as airplane pilots — have been taken by surprise. In many fields, computers with artificial intelligence have made human beings redundant. The new career path is based on continuously learning new skills. Or on being financially independent and doing what you choose.

Pension uncertainty. Remember, the age of retirement, the percentage of pension, the tax rate that will apply to wealth and income, all these depend on the whims and plans of governments you cannot predict or control. The rudest shock after a lifetime of toiling is to discover that your pension is not adequate for your lifestyle needs. Financial independence can bail you out.

Life becomes more awesome: The best reason for seeking financial independence may just be that life becomes that much more awesome. You no longer have to do anything you don’t want to. You can travel at will, be where you want, and who you want to be. Get more family time, be with children and grand-children. Play with ideas, start start-ups or just go on a treasure hunt in the Caribbean.

Meet the FIRE movement

Once upon a time, financial independence used to be regarded as an old age phenomenon, specifically for retired pensioners. Today, more and more young and dynamic professionals have realized that financial independence can be the one objective that enables them to realize their life’s Vision, Mission and goals in life. The surge has acquired momentum and the movement is today referred to as FIRE — Financial Independence, Retire Early.

The young men and women who follow the FIRE dream rigorously track down every last penny of their income. They believe that every dollar equates to a certain number of “hours of life energy,” in the words of Vicki Robin, a FIRE guru. If you make $300 a day and want to buy a suit worth $100 pair, you ask yourself: Is that suit really worth nearly a third of a day of my precious time on earth?

Robin, 72 years old now, made herself financially independent at age 23 when she unexpectedly received a fat inheritance and parlayed it into a stream of passive income through investments. Naturally frugal, she lived modestly but in her chosen lifestyle. It was only when people began asking her how she had managed to achieve such an enviable independence that she realized that she had lessons to share about financial independence. Her first book, Your Money or Your Life, which first hit the bookshelves in 1992, with its nine-step program to change your relationship with money, remains a valuable fount of wisdom for an unlikely audience — today’s vibrant population of young millennials.

If you’re looking at a retirement period of about 30 years, Robin recommends that we assume a modest rate of 4% return on investment. This, she feels, would nicely average out the ups and downs of inflation and market changes. Her rule of thumb is that you need to save up at least 25 times your annual expenses to achieve financial independence.

Let us understand her arithmetic. If your annual expenses are Rs 12 lakhs, you’d need to invest 25 times that amount, or Rs 3 crores. At an interest 4% per annum, this investment would yield the Rs 12 lakhs you need every year, and in perpetuity. The 4% rule is a solid method, validated by experience and economics, but it works best for a traditional retirement period of about 30 years, says John Salter, a professor of financial planning at Texas Tech University. If you’re aiming for a FIRE lifestyle with early retirement, and up to 50 or more years of independent life, you’d have to watch your withdrawals more closely and tweak your investments a little in case of drastic market changes.

The FIRE movement comes in many flavors, each with its own spending goals and interpretations of Robin’s prescriptions. Regular or plain vanilla FIRE is for all those people who want to exit the rat race early but might like to occasionally enjoy a good restaurant or hire a plumber to fix their broken toilet instead of doing it themselves. Then there’s barista FIRE for those interesting in supplementing their savings with a part-time job, perhaps at a Starbucks, in order to qualify for health insurance, a key necessity for early retirees.

Frugal FIRE adherents base their ideology on the writings of Pete Adeney, a.k.a. Mr. Money Mustache, a FIRE hero who in 2011 started blogging about his retirement at age 30 with savings from his short career as a software engineer and the frugality and DIY spirit that contributed to his success. Adeney, in his 40s now, has inspired training camps in his name, some of them selling out within minutes, almost as though it were a Taylor Swift concert.

Finally, fat FIRE is for people who want to spend a healthy amount in retirement, maybe because they want to keep living in an expensive city and may need higher savings goals.

Tips for financially independence

You may be thinking that financial independence is all about having enough money to cover all your expenses and then a little more for unexpected contingencies. In practice, the road to financial independence is a journey with twists and turns along the road. Making enough wealth to set you free is merely the first and most important step on the longer journey of your life.

When young Warren Buffett finished college, he had the princely sum of $9,800 in his pocket. “But by the end of 1955, I was up to $127,000,” he says. “I thought, I’ll go back to Omaha, take some college classes, and read a lot—I was going to retire! I figured we could live on $12,000 a year, and off my $127,000 asset base, I could easily make that. I told my wife, “Compound interest guarantees I’m going to get rich.”

As he always does, Buffett instinctively understood both the importance of financial independence and the power of compounding in helping him ‘retire early’. I have learned my lessons from the wisdom of people like Buffett. I want to give you six simple points to consider when you plan for your own financial independence. Statistically, only a minuscule percentage of human beings become billionaires or even millionaires, but here’s the good news — becoming financially independent does not require you to be fabulously wealthy. It has only one requirement: that you earn as much money as you need to life your chosen lifestyle without depending having to work for it or depending on anyone else’s kindness or resources.

I would like to share, in no particular order, some tips for your own financial independence.

1. Lifestyle: Determine the lifestyle that you would like to pursue for the rest of your life and which would make you happy. Remember that as you evolve towards financial independence, you may start with a simpler lifestyle and graduate towards your dream lifestyle. In the earlier chapter on Lifestyle choices, I tried to help you understand the importance of being deliberate about how you choose your material manifestation and personal presentation. Financial independence works when it enables you to sustain the selected lifestyle for yourself and your family.

2. Money: Based on your choices of lifestyle, calculate the amount of money that would give you financial independence. This is obviously easier said than done. Unless you win a lottery or come up with the “next big thing”, you, like most other people, may have to reach financial independence in stages. During these stages, you may elect to compromise on your lifestyle a little. For example, your chosen lifestyle may require three top-notch cars. However, you may decide that you will start your journey with no cars, using other transportation methods to save money for investing until you can generate enough passive income to live your dream.

Financial independence is not a black or white condition but one you can move towards in planned stages moving from partial financial independence to absolute. My research has unearthed three distinct levels of financial independence.

— Budget financial independence: Think of this as a pit stop on the way to total financial independence, because it involves several trade-offs. Let us assume that you’re willing to live at a lower middle class lifestyle level for some years in order to save money for a higher level of independence. As a couple, you are willing to make certain trade-offs such as one of the spouses continuing to work, or finding a residence with lower monthly outgoing costs. The income from one spouse’s part-time job and your investments, together with your other earnings are yielding enough income to support a lower middle-class lifestyle.

Congratulations! You have reached Budget Financial Independence.

— Baseline financial independence: This is the next level of financial independence and is linked to the median level of income in your country. This is a comfortable income level that would support many more than modest lifestyles.

— Blockbuster financial independence: The amount of money that would give you total financial independence for the rest of your life would vary from country to country and lifestyle to lifestyle. For example, if your dream lifestyle is a villa in a rural setting, you might need significantly less income than if your choice of lifestyle was upper-class urban. Further down in this chapter I will share with you the different ways in which you could calculate and achieve Blockbuster Financial Independence in your life.

3. Duration: Your estimated amount should cover at least 12 years, and preferably the rest of your life from your current age. If you have a family, it must obviously be based on a larger calculation that gives you and your partner financial independence, and cover your expenses towards your children until they reach their own adulthood.

4. Making money: In general, there are two roads to financial independence, and I would like to expose you to both. A single, one-time, lump sum bonanza is an attractive option — if you can achieve it. It would require a unique idea, a stroke of luck, clever marketing, and a massive push at the right time to the right person. The second path is the one of passive income — where strategic multiple investments generate streams of regular income that make you financially independent. Let consider each of these in turn.

In mid-2013, a young man called Scott DeLong launched a startup called ViralNova with two freelance writers. Working hard, they managed to grow their website to Buzzfeed’s size and scale — about 100 million readers without any investment or outside funding. Within a year, it was earning millions of dollars annually. DeLong made a smart decision at this point — and sold his profitable website to an investor for $100 million.

DeLong is a great example of a man who was lucky enough to get a single, one-time, lump sum bonanza.

Akshay (not his real name) remains my favorite example of a person who made himself financially independent through passive income streams. For years he worked hard, lived frugally and saved and invested money. He bought land, properties, a farmhouse, agriculture lands, and also placed money in fixed deposits and other investments. Akshay today has 30+ sources of passive income. He earns the equivalent of more than $40,000 per month from rent alone. Financially independent at last, he is now doing what he loves – traveling and taking photographs. He enjoys a fantastic lifestyle in almost all the 11 areas of life.

What tips about financial independence can we learn from the stories of Scott DeLong and Akshay?

Try to come up with a brilliant, popular idea — the Next Big Thing

Build it up and then sell it for a one-time lump sum.

Enjoy Financial Independence.

OR

Work hard, save a lot, live frugally, and invest wisely to compound your money.

Invest in property and immovable in addition to building financial assets.

Set up multiple streams of passive income.

Enjoy Financial Independence.

5. Create the right mindset: I have learned through my own experience and observations that acquiring abundance in a single shot requires a mindset that embraces abundance even before there is abundance to celebrate. I call this the abundance mindset. Big things start happening when you dare to think big, reach for the stars and feel sure that they are there for you. This is how the wealthiest men and women in the world think. Think like a legend. Think like Mark Cuban, who built up broadcast.com and then sold it to Yahoo! for $5 billion, and now lives the life of the luckiest man alive.

If your plan is to gain financial independence through passive income streams, this requires a very different mindset. What does this entail?

— First, trim the non-essentials from your life — including negativism, toxic people and time wasters, and those whose own minds are self-limited. Remember that whether you are a student, a starting professional or a struggling entrepreneur, you can and will get where you want to be by starting from where you are.

— Find role models and mentors of passive income generation and study their minds and their methods. Warren Buffett, whose company Berkshire Hathaway was described by Bill Gates as the most stable company ever, has over 90+ sources of passive income.

— Learn to feel comfortable putting things on autopilot. This means creating a certain system in which things will run without you, setting things up so that they work well, and then letting go. Hire the best of the best and then leave them free to do their job. Automate your operations with advanced software, create self-running processes and systems, and then step back and let them earn money for you.

A friend of mine, let’s call him Ajay, is a learning machine, continually absorbing lessons from what he sees around him. His father had a group of businesses but Ajay found himself a job in a software company in Bangalore with a starting salary of $500 after completing his technical education. He soon realized how foolish he had been: instead of managing his father’s business and spending quality time in Bhubaneshwar, he was toiling like a servant in Bangalore. He lost no time in returning home and getting started managing his father’s business.

One day, in casual discussion, he asked me if I would mentor him and help him put things on auto pilot.  “I want to life my life on my terms and enjoy it to the fullest extent possible,” he said, “while managing my family business smoothly.”  

I took on the challenge. First we listed the processes he currently employs in the running of his business. In the process, we realized that many of them were orthodox and outdated. To remedy this, we then created new processes and Standard Operating Procedures (SOP) for each activity in his business.

We then hired a professional to run the business following the processes and SOPs we had developed. Rather than just recruit from among family and friends, we interviewed widely and without hurry, selecting only the best of the best.

I show him the video of Warren Buffet office and his headquarter where less than 30 people control business worth 300 billion dollars. On my suggestion, he now created a home office with a team of seven security staff to audit and monitor feeds from 10 security cameras. This became his business headquarters.

The final touch was to install state of the art software to help run his business. This finally automated his operations and gave him the confidence that his businesses could run almost without him. Along the way, we sold a few of his loss-making businesses and invested the money in land and fixed deposits, creating a monthly passive income stream of at least $2,000 from rent alone.

Today, Ajay lives the life of his choice as a private investor, reaping the harvest of his passive income streams.

6. Invest in Lucky Lands: I am a great believer in what I call Lucky Lands — that blessed piece of property that will enrich your life and give back endlessly, like the cow Kamadhenu. It is that fortunate plot of land whose value will multiply beyond your wildest imagining, giving you returns that will set you free for the rest of your life.

A friend of mine makes an income of about $1.5 million per year from government construction contracts tenders. With a profit margin of between 10 and 15%, he earns $150,000 to $ 300,000 every year. In 2005, he invested around $25,000 on a piece of land, whose value zoomed in 14 years to $2 million. That’s what I would call a Lucky Land.

He and his father have perfected the art of finding lucky lands. Instead of just buying any land that happens to be available at a low price, they research and identify properties whose value is likely to rise because of planned development or growth such as highways, bridges or residential estates. Once they find a likely plot, they move in and buy it. You can start your own search for Lucky Lands by paying attention to local development news in the papers or television. Watch out specially for news about where development projects like highways, better roads, dams and hydroelectric projects, power plants, railway lines, airports, new construction and housing and so on are announced. Your Lucky Lands would be right in those neighbourhoods, because development creates new job opportunities, attracts people, increases the demand for property, and pushes up prices.

People who buy Lucky Lands regret only that they did not think of it earlier. My friend and his father calculated that they could have shut down their construction business much earlier had they begun investing in Lucky Lands sooner and retired with an income in the crores of rupees — far, far more than their business’s net worth.

7. Invest wisely. The goal is always to generate passive income streams that can generate your lifestyle goals and set you free. There are many different sources of such passive income streams, starting with the most obvious one, the stock market. However, playing the stock market can be demanding and risky if you were not willing to put in the time and effort to research the companies you wanted to invest in. Warren Buffett’s secret was that he dug deep into the companies he wanted to invest in and understood them thoroughly before he invested in them.

Another passive income stream could be investing in building a house and then renting it out. A string of rented properties is a great way to achieve a substantial passive income.

Women and financial independence

We are living in the best of times and in today’s world it’s extremely easy for women to achieve Financial Independence.

Today’s world, with heightened awareness and sensitivity to the unique strengths and potential of being a woman, brings special opportunities for women seeking financial independence, which is also specially significant for them. A woman may face greater uncertainties in life than men, more so in old age and even more so if she is widowed or single. The iconic, talented and independent actor Priyanka Chopra said, “When a woman is financially independent she has the ability to live life on her own terms. . . Financially independence gives you the ability to protect yourself when life happens, to stand on your own feet and say alright I can do something about it without being helpless.” She’s dead right.

Here is quick advice from women who achieved financial independence and shared their lessons.

Joan Smalls, who is continuously ranked in Forbes’ top-20 Highest Paid Models list, and earned an estimated $5.5 million in 2015, describes herself as incredibly prudent with her money. “I splurge every once in a while on a great vacation or if I like a piece of jewellery that I think is cute, but for the most part I save my money and think wisely.” Her parents taught her to “try and be as independent as you can and to not have to rely on anyone but yourself and just to be wise and don’t live above your means.”

Sophia Amoruso, founder of cool-girl retailer Nasty Gal and the inspiration behind Netflix series Girlboss, says, “If you’re not saving, start now. Put away 10 per cent of your income into a savings account and just leave it,”

Jennifer Lawrence, one of the wealthiest and most influential women in Hollywood, consistently ranked in Forbes’ Highest Paid Actresses list, has strong views on how unfairly women are paid. She says, “Be brave and negotiate a better pay. Be tactical. Don’t be afraid to fight for your financial worth.”

Marie Kondo, the queen of decluttering and cleaning up, who became a household name after her Netflix series,says that eliminating unnecessary expenses can feel incredibly liberating. Try letting go of that costly gym membership and replacing it with a straight-up no-frills exercise plan. Or if you’re subscribing to multiple streaming services you barely use, trying whittling it down to just one or two.

The One Habit

Develop the habit of saving and investing wisely. A person who does not have a saving habit will not be able to take even the first step towards financial independence. But equally, having massive savings that you have not ploughed into carefully selected investments will not generate the passive income streams you need to become financially independent. Think of investing in stocks and shares, Lucky Lands, or dream up your own creative ideas for multiplying and compounding your savings through smart investment.

One Last Thing

As you might learn from studying the life of Warren Buffett, saving and investing can itself be a lifelong occupation. Buffett is a legend because of his deep expertise and wisdom in that area. However, for those of us who may not have the inclination or skills to make a lifelong profession of investment planning, I would strongly recommend seeking, finding and retaining a reliable, trustworthy personal financial planner, one who understands the market, will pay personal attention to your investments and passive income streams, and will go the extra mile for you. In the long run, and with long term financial independence as your goal, such a person could help you reach freedom much earlier than you would have on your own, alone.

I’d like to end with my favorite nuggets of wisdom — and a tip from a man who became, as he puts it, “a filthy rich bastard”, the British publisher Felix Dennis.

The British publisher, estimated to be worthy over $ 750 million when he died, puts a bright spin on this advice by advising detachment from the outcomes, a point I have emphasized in an earlier chapter. Seeking without wanting, says Dennis, is a guarantee, who burned the candle at both ends in his fully-fired thrust to become rich.

“You have to persuade yourself that you absolutely don’t care what happens,” he says. “If you don’t care, you’ve won. I absolutely promise you. . . the man or woman who truly doesn’t care is going to win.

He clarifies: it’s not about pretending to not care. The moment you are able to strive for financial independence while not caring at all if you will succeed — that’s when your financial independence will truly be assured.

________________________

References

She retired at 28 with $2.5 million https://money.cnn.com/2017/08/02/pf/early-retirement/index.html

Three levels of financial independence https://www.financialsamurai.com/three-levels-of-financial-independence/

Priya is Chopra on financial independence https://www.awakenthegreatnesswithin.com/35-inspirational-priyanka-chopra-quotes-on-success/

Why be financially independent? https://www.moneyschool.org.au/investing/financial-independence-important/

The $100 million story of Scott DeLong https://www.businessinsider.in/One-guy-launched-a-website-and-made-millions-without-hiring-a-single-employee-now-hes-sold-it-for-100-million/articleshow/48005564.cms

Felix Dennis tips for getting really really rich https://www.inc.com/articles/2008/07/dennis.html