How many times did you wake up in the morning and felt like not wanting to go to work? Most of us would have felt that way at least a few times in our careers. How many times did you drag yourself to office despite wanting to take the day off? For most of us, not going to work is not an option. Why do we work? There can be a variety of motivations for working; some people enjoy the job they do, others like power and prestige associated with their jobs, some people have great co-workers, but the most important motivation for working is money.
There is a saying that, money cannot buy happiness, yet we spend the greater part of our lives in the pursuit of money. Such is the importance of money because it enables us to fulfil our needs and those of our families. However, there is something even more important than money. It is freedom. Freedom can have multiple connotations depending on the context, but in whatever form, freedom is empowering and enables human to achieve their potential. In this blog post, we will discuss how wealth gives us freedom in different stages of life.
Money and wealth
The dictionary meaning of money and wealth is quite similar; many a times the two words are used synonymously. However, it is important to understand the difference between the two. Money is a medium of exchange and a store of value. We pay money to buy something and receive it by selling something; hence it is a medium of exchange. When you buy something for Rs 1,000, the economic value of the product is Rs 1,000. Money is the essential part of all economic transactions in the modern world. One cannot have wealth without money.
However, wealth is more than simply having money. A common definition of wealth is “lots of money”. However, “lots of money” can be subjective and differ from person to person. For some people Rs 10 lakhs can be a lot of money, while for others Rs 1 Crore can be a lot and yet for some others, even Rs 20 Crores may not be lot. We need to have a better definition of wealth. Robert Kiyosaki, a well known personal finance author, defined wealth in terms of “the ability to survive a number of days forward”. If you can survive for 10 years without working, you are wealthier than the person who can survive 5 years without working.
Readers should note that, we italicized the words without working in the previous line because it is very important in the context of wealth. From a young age, most of us are instructed by our parents to study well in school so that we can go to a good college. In college we asked to work hard, so that we can get a good job when we graduate. Once we get a job, we are asked to save a portion of our income for future needs like buying a vehicle, house, children’s education, retirement etc. Finally, when we retire, we want to ensure that, our savings can last for our lifetimes.
Essentially we have three stages in life - student life, working life and retired life. Working life is the period where we are working to earn money, but even in our student lives, most of us are studying with the ultimate objective of securing a good job and career. Now as students, children may have different motivations, but the objective of almost all parents is to see their children well settled in their careers when they grow up. Finally, when we retire, we get to enjoy the fruits of the hard work we put in our student and working life.
We can draw similarities with these stages of life with ancient Indian culture. In our ancient scriptures there were four stages of life – Brahmacharya (student life), Grihastha (working life), Vanaprastha (retired life) and Sanyasa (state of detachment). Each stage of life has different objectives. We have to go through these stages of life and fulfil the objectives in different stages. The journey to fulfilment can be long and hard, but nonetheless, it is a journey we have to undertake. In India ancient culture, the final purpose of life was said to be Moksha. While a common interpretation of Moksha is deliverance from the cycle of life and death, in our ancient texts Moksha was possible even in our lifetimes – it was known as Jivanmukti. The essence of Jivanmukti is “liberation from obstacles to an unrestricted life”.
My interest is in the world of finance and not philosophy but I found the concept of Jivan mukti particularly relevant in the context of financial freedom. If you have financial freedom you are liberated from many restrictions; you can choose to lead the life in the way you want to and not the way you have to. The essence of financial freedom is that, you can sustain your lifestyle without having to work for a living. There is a difference between working for living and working for pleasure or your own satisfaction. When you have to work for a living you have considerably less degrees of freedom than if you were working for your own satisfaction. Financial freedom can ensure that, you do not have to work for a living to sustain your lifestyle and take care of all the needs of your family.
You may like to read here What is Financial Independence and its importance
Wealth in the context of financial independence
Let me now share you Robert Kiyosaki’s perspective on financial independence; I keep referring to Kiyosaki in my blog because he has explained the concept of wealth, financial independence and how to achieve it very lucidly in his book, “Rich Dad Poor Dad”. Kiyosaki’s framework for achieving financial independence is investing in assets.
Assets, from a financial perspective, are investments which generate future cash flows. Your gold or diamond jewellery, unless you plan to sell it in the future, is not an asset because it does not generate future cash flows. The house where you live in and the car which you drive are also not assets from a Kiyosaki perspective because these will not create cash flows for you.
What are assets? They are stocks, bonds, gold, mutual funds and other investments which appreciate in value over a period of time and can also provide income through dividends, interest etc. Assets create wealth in the long term; your income and savings may not be sufficient to create wealth. Wealth generates cash flows which enable you and your family to sustain your lifestyle, without relying on income from your profession; this is the essence of financial independence.
Read Why Mutual Funds are the best Investment Asset Class
Concept of ownership versus dependence on career path
Unless you are living in an authoritarian state, nobody can take what you own. India is a democratic country and the wealth you have, is something you own. Many people, especially higher up in the corporate ladders, believe that they own their jobs as well; unfortunately, the reality is very different. You may be a star performer at work and may be doing great in your career, but you are still dependent on your employer for your income. The corporate world is replete with examples where one time star performers were relegated to sidelines and ultimately outside the company when organizational situations changed.
Your aspirations change over time, but the dependence on your employer does not change unless you have sufficient wealth to take care of your aspirations. Ownership frees you from dependencies. Asset and ownership are synonymous; it gives you greater degree of control over your destiny. Your returns or income may still be dependent on market forces, but you have much more freedom in choosing what to do and when to do.
Financial independence is not just about retirement planning
Financial independence is obviously the goal of retirement planning. An important aspect of financial independence in retirement planning is the ability to maintain your pre-retirement lifestyle, even after retirement. People who think that, their retirement is secured by pension, provident fund, life insurance policy or post office scheme returns are sadly mistaken. Pension or provident fund cannot assure lifestyle because they constitute only a small portion of your regular income in your working careers.
While financial independence is the most importance objective of retirement planning, financial independence is not just about retirement planning only. When people are doing well in their careers, they can be lulled into false sense of security and complacency. Based on my 18+ years of experience in the corporate sector, I can say that corporate fortunes are quite fickle; I have seen many a rising star fall by the wayside in the corporate rat race, due to circumstances beyond their control. There are also others who have different passions in life but are stuck in jobs that they do not enjoy, yet they have to, because they need the money. Financial independence not only frees you up from stress related to job insecurity, it can, in fact, lead to better career choices and progression. With financial independence you can devote most of your energies to career decisions that are best for you, not the sub-optimal ones which look safe but may not be the best for you.
Financial Independence can help you give back to the society. Many of us want to do something for the society but are constrained in our abilities and efforts, because a lot of effort goes into meeting the financial needs of our own families; if we are not comfortable about our own financially security, how can we think of giving back to our society or community? On the other hand, if you are financially independent, you can devote your efforts and resources (financial or otherwise) towards charitable endeavours that can benefit less fortunate sections of our society. These endeavours help nations to lift themselves up and benefits wider sections of the populace.
You do not have to wait till retirement to be financially independent
When you retire, you have to be financially independent; you have no other choice, unless you want to be a burden on your children. Being financially independent when you retire is a compulsion and even today we see so many examples, where people are not financially independent when they retire; they expect their children to take care of them.
On the other hand, there are also examples, albeit fewer, of people who retire from active careers at a young age, say by the time they are in their thirties or early forties because they accumulated sufficient wealth to sustain their lifestyles and that of their families from the income from their assets.
I am not simply talking about dotcom millionaires who are able to take early retirements by selling their companies at huge valuations but also people, who were able to accumulate adequate wealth by following the tenets of saving and investing from an early stage in their careers. Some of these people were able to start a business, which could form a sustainable source of income and wealth creation for them in the long term. There were others that I know, who pursued their passions, whether in photography or travel or music, without having to worry about, how to pay their children’s school fees or other regular expenses, because these expenses were taken care of, by the income from their assets.
This is all fine but how can I build assets and wealth
Some people are born with wealth or inherit wealth, but most of us need to create wealth ourselves. So the moot question is how to create wealth? Even those who have wealth through inheritance or otherwise, should ask themselves, if their wealth in productively employed to get the best possible returns. Money can create more money. Money when invested intelligently grows in value over time, through the power of compounding.
What is the power of compounding? It is simply the fact that, money is productive; it can be used to make more money. If you invest money intelligently, you will make more money; the money earned through investing can be re-invested again to make even more money, e.g. interest on interest, profits earned on profits re-invested.
One of most important ingredients in the money making recipe is time. The more time you give for money to grow, the more it will grow. Over a long period of time, the power of compounding can be magical. That is why it is so important to start investing from a young age. Obviously, in order to invest money, you need to save first. Saving capacity of each individual differs depending on their incomes and lifestyles. But even small amounts of savings made every month, when invested intelligently can create assets which can go a long way towards financial independence. For example, even if you are to save just Rs 2,000 every month and invest it in diversified equity mutual funds, assuming 15% annualized returns; you can accumulate a corpus of Rs 1.4 Crores in 30 years.
Did you know what diversification is and how to take advantage of it?
In this blog post, we discussed how wealth sets you free in different stages of life. Savings and investments are essential components of financial freedom. Many of us save a portion of our income but savings alone will not lead to wealth creation and financial freedom. Saving and investing with focused, goal oriented approach will lead to financial freedom. You should know that, you will not get results overnight; patience and discipline are key ingredients in wealth creation. The journey towards wealth creation is a philosophy that you have to embrace and in the long run, you will be rewarded with financial independence.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.