Financial Independence and aim to Retire Early with SIP

India celebrated its Independence Day on 15^th August making it a proud moment for all Indians. On this occasion let us reflect on what independence means to a common man.

As independent individuals, we have achieved commendable self-sufficiency in the years since India first hoisted the tricolour on 15^th August 1947. Speaking of which, we as individuals should also reflect on how self-sufficient we are financially. Why link finance to national freedom, one may ask. Well, freedom is not only political, it also encompasses the individual freedom of thought, action and financial independence of the people who make up the masses. It is widely predicted that India is on its way to becoming the 3^rd largest economy in the next 5 years. Isn’t it then imperative that we as the people who make up the human resource of this great economy should take steps towards our financial independence?

What is financial freedom?

Financial freedom is the freedom from the worry of depending on a salary or business income to meet your day to day living expenses. This is the stage when our income generating engagements like a job or business, are not done to sustain us. This is a stage when we work, and at the same time do not need to worry about our regular expenses. In other words, this is the stage when we are financially secure and not dependent on the income from our employment.

The way to reach this destination is to make your savings work as hard as you work to make a living. Your target is to reach the sweet spot where your savings or investments starts working harder and generating the income for you to be liberated from the pressures of maintaining a job to sustain your lifestyle.

When should we start planning for financial independence?

Traditionally, our retirement years was thought of as the time when we will be free from the worries of earning and start doing things we have wanted to all our life but could not be due to pressures of a job or a business. We presume that we need to look at financial freedom as retirement planning. However, this does not need to be the case. Retirement today has come to be thought of as a time when you retire from the worries of a work grind and direct your time towards things you love to do like starting a business of your own, or going on a world tour or taking up a hobby or writing that book that was always stuck in the mind; age has got nothing to do with this retirement.

FIRE: a way towards financial freedom

In recent times FIRE- “Financial independence, retire early” has become a goal for many individuals. This is the epitome of personal independence where a job does not rule your time, nor are you dependent on anyone else for income. Retirement, in this context, does not mean the official retirement age.

How is it possible? You need to save a sufficiently large corpus to generate cash-flows which will meet all your expenses. With so many mounting responsibilities how can one retire early? All these questions can be answered with one simple sentence- “We can aim for FIRE with proper financial planning that involves minimalistic living and investing most of our earnings”.

Suggested reading: what is financial independence and how SIPs can help?

How does financial planning for FIRE work?

Financial planning refers to assessing your current financial situation and the future goals and needs and planning investments in order to achieve those goals and finance the future requirements. In order to reach FIRE, you would need to assess your income and expenses and build up a corpus that can sustain many years of your annual expenses e.g. 20 years, 25 years or even more. A budget helps in assessing what is the least you need to spend for subsistence. All wasteful and unnecessary expenses need to rationalize or eliminated from this budget.

This financial plan includes a strategic investment plan with an objective of generating cash flows for you in the form of capital appreciation or income generation (like dividends and interest etc.). The investment avenues could be any or a mix of mutual funds, stocks, bonds etc.

You also need to think of the time when you would start withdrawing from the corpus you have built up. The financial plan should also include a plan for withdrawing your money and this can be through dividends or systematic withdrawal plans etc.

You may also like to read: Importance of discipline in savings and investments

What are the investment avenues that you can explore?

All types of investments do not generate cash flows. A car or residential property may constitute your financial plan as goals to be achieved but they may not take you to your financial freedom, as these will not generate any cash flows.

To reach financial independence, you need to have assets that generate cash flows to provide for your recurring expenses as well as emergency expenses like medical bills etc. Your expenses will also not remain same due to effects of inflation. Income, interest or dividends from your assets should also grow over time. Hence these investments should generate some extra income for you to reinvest, as you cannot let your assets dwindle if you are to reach true FIRE.

How to draw up a financial plan and ensure its success?

The following steps may help you achieve FIRE if executed meticulously with a financial advisor’s help.

1. Goal Assessment: The first step to any action is the ‘why’ for the action, asking yourself why you are doing it. So, the first step in financial planning is to gauge why you need the plan? What is your goal? Your goals are specific to you. You might be having a family and your goals of FIRE will differ hugely from your friend who is single and is planning to achieve FIRE by the same age 40, which brings us to the consideration of the next step.


2. Risk assessment: Here you need to assess how much risk you can take for your investments. considering your dependents and your financial commitments. You will naturally not be able to take as much risk as your friend earlier who is single and does not have the commitment to provide for a spouse and children or think about their financial freedom too. Assessing your risk appetite in this way will give an indication of what kind of investment instruments you can invest in. For example, equity investments can generate high returns but also come with high risk.


3. Investment window: To plan for FIRE you need to also assess the time you have left to save up the target corpus. You may need to readjust one of the parameters to reach your target. For example, you may want to take up a weekend engagement to augment your income to save more or push your retirement goal to a later age or shrink your expenses to the bare minimum and save every penny. The strategy that you adopt in order to save and invest will be unique to you.


4. Budget: Saving needs a budget where your expenses can be categorised as ‘needs,’ ‘wants’ and ‘desires.’ Wants and desires are the types of expenses that you can forgo and invest the money you would have otherwise spent on those. Focus only on the needs like rent, electricity, education etc.


5. Invest, not save: Saving is not enough. You need to invest the money you saved, as a result of your budget discussed earlier. Invest it in a mix of instruments aligned to your risk appetite and investment time horizon. Certain expenses like payment to be made as taxes could be reduced by planning for investments into tax saving instruments. The financial plan should also factor in this aspect as well. Mutual funds are one of the investment options as they give you diversity and simplicity of investment. Choosing the SIP and SIP Top up can help you reap the benefits of compounding and rupee cost averaging while being easy on your pocket over long run.

How can a mutual fund SIP help investors in planning for financial independence?

All your plans need a robust investment plan as well. After budgeting, setting a goal etc. you also need to find an appropriate investment vehicle that will help you achieve your goals. Mutual funds are a convenient option that can align with your goals and specific profile. SIP can help you to reach your financial goals over sufficiently long investment horizon.

1. Start early: The very essence of FIRE is to start investing as early as possible so that you can achieve financial independence at the earliest. With mutual fund SIP you can start investing small amounts from early on in your career and over a 15-to-20-year time frame you can potentially save up a corpus, as a result of the power of compounding that comes as a benefit of SIPs.


2. Power of compounding: In long term investments like Mutual Fund SIP, the returns get compounded i.e. you can get profit on accumulated profit, over the long investment tenures. The power of compounding can grow your wealth over the years. Remember to increase your SIP amount as your income keeps increasing to reach your goals faster.


3. Rupee cost averaging: A great feature of SIP is the rupee cost averaging benefit. When you buy units of a mutual fund you do so at the prevailing NAV at the time of purchase. Now since you are purchasing units of the mutual fund scheme at different dates the NAV keeps fluctuating. When markets fall, the NAV is low, and you are allotted more units at the same amount of your SIP and in up market situations you benefit with the larger number of units you bought at the lower NAV. Over time, this cycle gives you a rupee cost averaging benefit where the average cost of your mutual fund scheme (NAV) becomes lower giving you returns.
   
   Suggested reading: how to create long term wealth through SIPs


4. Stay invested: Make an honest effort to stay invested regardless of market ups or downs as well as adopt a minimalist lifestyle that will help you save/invest more. Long term investments can help you build up amounts of wealth which could then be reinvested for a regular cash flow.

In the end, remember that achieving your financial freedom is a part of independent living and the sooner you achieve it, the faster you will be able to do things as per your own choice. Financial independence and retiring early is possible if you plan early and invest for a long enough period. Discuss the best options for investments based on your profile with your financial planner or mutual fund distributor.

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