Attaining Financial Freedom

Dear Friends,

                   Wish you a very happy Republic Day!

The “SIgaram” page (https://penguwin.com/sigaramsip-kodeeswaran/) that we dedicated for Systematic Investing during Pongal was quite a hit among investor community such that the server that hosts the PenguWIN website choked because of unprecedented traffic and I had to reach out to GoDaddy (hosting provider), to upgrade the hardware. I hope that the interest that was generated among people actually motivates them to start investing for long term resulting in wealth creation. One observation that I wanted to share, based on my experience in this profession is that quite a number of people are interested in making the right financial investments. But many of them are unable to get their priorities right and investing, wealth creation takes a back seat with their money languishing in instruments yielding negative real returns like Bank Savings account and Fixed Deposits. Please remember that, like regular exercising is a must for maintaining good health, following a financial discipline is of paramount importance towards long term wealth creation.

I was thinking about a personal finance topic related to Freedom and Independence when the concept of “Financial Freedom” came to my mind and I decided to choose that for this blog.

So, what is Financial Freedom?

“Building sufficient sum of money (corpus) through prudent investments that can cater to all financial requirements and goals for the rest of the life”

Let me illustrate this with an example. Ajay, 35, is a Project Manager with a MNC taking home Rs. 1 Lakh per month. His family comprises of his wife, Shwetha, home maker and daughter Sana, 8 years. His monthly expenses amounts to 60,000/- He has 3 key Financial Goals:

1. Buying a Luxury Sedan by 2020 at a cost of Rs. 10 lakhs in today’s value
2. Sana’s higher education in 13 year’s time which would cost 25 lakhs in today’s value
3. Sana’s marriage in 16 years’ time at a cost of 30 lakhs in today’s value

Lets assume that the inflation for the monthly expenses and all the goals is 7%. Other than the flat that the family lives, they have a piece of land in suburbs that is valued at 30 lakhs. Ajay and family also have investments in Bank FDs, Mutual Funds and Provident Fund to the tune of 60 lakhs. So, Ajay and family’s current Networth is about 90 lakhs as on date (excluding the flat he lives)

Considering a life span of 80 years, Ajay would need Rs. 60,000/- per month to cover his expenses for the next 45 years (This would typically go down post his loan repayments and retirement but for sake of simplicity, I am ignoring them). The present value of this assuming that the corpus would yield 2% more than inflation (9%), would amount to Rs. 2.25 Crores. If we add the amount that is required for the goals, the corpus requirement will increase to 2.76 Crores.

So, if Ajay has Rs. 2.76 Crores as on date, then he will be able to cover all his expenses till 80 years and also take care of his financial goals. I.e. the Corpus required for Ajay to attain his Financial Freedom is Rs. 2.76 Crores. His current corpus is Rs. 90 lakhs which means he has a shortfall of 1.86 Crores. Ajay has to mitigate this risk by taking a life insurance cover for 1.86 Crores (and can keep reducing the same as corpus grows) and also work with his financial advisor and create a plan for attaining the requisite corpus based on his future income potential.

Now that we have understood what Financial Freedom means, what is the significance and what are the takeaways?

• Financial freedom does not mean that once we achieve it, we need to stop earning and retire. Its gives a good perspective of our financial requirements over the life time.
• Life is full of uncertainty and the confidence that a Financially Free person would get is immense (he/she is relieved of the pressure). Pressure can take a toll on people and once you attain Financial Freedom your outlook towards life changes.
• A significant number of people are into their current jobs because of the pay cheque, while their heart yearns for doing something different. Once you attain Financial Freedom, this can become a reality.
• Try to create a financial plan (working with your advisor) in such a way that you attain your Financial Freedom atleast by late forties or early 50’s and not wait until 58/60 years – Earlier the better.
• The Corpus requirement for Financial Freedom is dependent on the returns from the corpus and Inflation. So, even if someone has a considerable corpus, if the returns generated by the corpus is poor then your Corpus will not help you sail through your entire life span. This typically happens when your Asset Allocation is skewed towards assets that does not yield positive real returns.

Please feel free to write to me or call me if you have any questions or suggestions.

 <Blog # PenguWIN 1023 – Attaining Financial Freedom>