Sunday, December 28, 2014

Opinion: Financial freedom is never a taboo for savers

To those who wonder if and when it is possible to earn their financial freedom, there are two questions to be asked – can you control your expenses and how much you save toward this goal? Rest you can see for yourself.

I made few assumptions for the model. One is 35 years old. Has an income of Rs.50,000 a month. His regular expenses are at 50% of income. Other expenses like paying towards insurance premiums etc. are at another 25%. Hence he can save 25% of income towards retirement kitty. It is also assumed that income grows at 5% every year and expenses too go up accordingly. If he puts the 25% savings into deposits or bonds and manages to earn 10% on the savings, he can retire comfortably at the age 50. And he can live off rest of the life from the income his accumulated savings earn.

Accelerator mode: If one can save incremental 2% savings a year to accelerate this scheme and boost the returns by diversifying savings into index funds and ETF’s, he can retire by 45.

How one can save this additional 2% a year? Fixing the finances would be one of the ways. Refinancing higher cost loans with lower rates, paying off credit card bills and treating it as a buffer would help too. When the income grows on yearly basis, spending should not be increased at the same pace. One can go for bargain buys for the necessities, avoid impulse spending by procrastination and extend the life of goods by maintaining them well etc. Basically avoid spending to impress others and look to get the value out of all your spends.

Aggressive mode:  For an aggressive saver and an informed investor, who saves 40% of his income and manages to earn 18% on his savings with a balanced portfolio of deposits, bonds, ETFs, mutual funds and good quality index stocks, retirement or financial freedom is just 6 years away.

Though 40% would look a higher number, it is not impossible to achieve. Count the contributions towards Provident fund, gratuity earnings, investments made to save tax into your savings. They would be already 15-20% of your income for salaried people. You need to make additional conscious efforts to boost it to earn your financial freedom.

Life does not follow any model. Many unplanned expenses come in the way that would delay reaching the goal but yet one can earn financial freedom if one can manage his/her spending, saves regularly and earn consistent returns.

(Inspired by the article on MarketWatch: How to retire early — 35 years early Link: