Is it possible to achieve financial independence if you don’t earn enough?
I remember one of my junior trainees telling me that she barely had ₹500 every month after paying all his expenses. When I asked her about her investments, she replied, “What investment is possible with such a small amount?” Another businessman living near me complains about his inability to earn only small profits for various reasons. Both complain of low incomes and attribute this to their inability to invest.
However, does low income really inhibit investment? This question is also gaining importance given the number of people who misinterpret investments as being solely the domain of the wealthy.
Additionally, the ambiguity regarding what “financial independence” is and how it has distinct meanings for different people must also be considered when planning your finances. This means that the way you misinterpret financial independence is different from how others perceive it. For example, an attempt to build wealth may be one step in your personal financial journey; others may simply want to be debt free and secure enough for their loved ones.
Too low to invest?
The first lesson in personal finance is saving. Save more and spend less. This will leave you enough to invest. If you have too many responsibilities and essential expenses are eating away at your income, try creating one or more passive income streams that you can use to invest. Obviously, over time, your income would increase in the form of bonuses, appraisals, and windfall gains from businesses, which means you would encounter many prospects for increasing your income and investments.
You only think about financial independence when you have less money. Indeed, the few pennies in your wallet tend to make you financially insecure. This will inspire you to learn about the essential personal finance habits you need to adopt to save and invest more. Thinking about financial independence when you earn more doesn’t make sense.
Defining Financial Independence
You obviously don’t want a debt-ridden life. This explains why you should not rely on credit cards or incur unwanted debt. Instead, cut your expenses to the bare minimum so you can start investing early.
Starting early also means starting from scratch. Also, with time on your side, it would be easier for you to build up considerable wealth after two to three decades as you approach retirement. The essence of retirement planning is to start planning early and consistently for a long time.
Let’s understand how a minimum investment of ₹500 made each month in a mutual fund for 30 years can help you earn huge returns. In this, suppose that the investments were not prepared every year and that they continued without restraint for the next three decades.
Increase your investments
It is obvious that your earnings would not be limited to the same salary year after year. Higher salaries or appraisals or increased cash on hand make way for increased investments, helping you earn more over time. A nominal 10% increase each year can double or triple profits, justifying the need to increase investments over time while still allowing your investments enough time to grow.
Assuming you increased your investments by 10% each year, your mutual fund income would now be
Earn bank deposits
Not all investments can be in mutual funds. You can start putting your funds into government-sponsored schemes like the Public Provident Fund (PPF) or simple recurring deposits with the bank. The former, however, is time-limited, meaning you should only opt in when you’re ready to stay invested in it for the next 15 years. The compounding advantage can only be enjoyed in long-term investments, which means you have to be prepared to stay put for an extended term.
Monthly investment: ₹500
PPF interest rate: 7.1%
Investment period: 15 years
Total value of returns earned: ₹1 60 812
Increasing monthly investments by one percent in the PPF would pay off
Monthly investment: ₹500
Ramp-up of investments: 10%
Total investment: ₹1 90 635
PPF interest rate: 7.1%
Investment period: 15 years
SIP returns: ₹1,10,233
Final amount at maturity: ₹3 00 869
Arguably the hardest part of investing is finding a system that works. However, personal finance analysts say it’s sticking to this system that many investors find difficult. The stress of market movements, coupled with the inability to understand how money works and grows over time, causes many people to withdraw their investments long before they have reached their financial goals.
Secure your family’s financial future
Returns aside, you may be worried about the well-being of your family while you’re away. This is especially the case for people who are the sole breadwinners in their family. Defining financial independence and planning for it is incomplete unless you have secured enough funds for your dependents.
The only two certainties in life are death and taxes. There’s no way to get rid of it. So, the best solution is to plan your investments to take care of those who depend on your income to maintain their way of life. Check how much money your family needs each month to maintain daily expenses.
Check the future value of money, then decide how much insurance you need. Contrary to the very cliché tendency of many people to opt for the standard ₹1 crore amount of insurance. This is because the amount of insurance you need depends not only on how much money your family will need in the future, but also on the future value of your other investments.
You can use the online Inflation and Future Value Calculator to check how much money your family would need to maintain their current lifestyle.
Assuming your family needs ₹5 lakh every year to pay for his essential expenses. Assuming an inflation rate of 7%, the necessary annual expenditure would be ₹19,34,842 after 20 years. Faced with financial distress due to death, people need at least five years to deal with sudden physical and financial losses. In view of this, you must take out an insurance policy of at least ₹96,74,210.
If you have children who are planning higher education abroad or aiming for a degree in management, you can opt for higher insurance coverage. However, before arriving at the final corpus of insurance you would like to purchase, you need to estimate how much you will earn from Systematic Investment Plans (SIPs) and lump sum investments in mutual funds or how much pension that your nominee would receive investments in popular pension schemes like the National Pension Scheme (NPS) or other pension schemes sold by insurance companies in India.
If you have obtained a home loan, you should either consider taking out home loan insurance or opt for separate insurance equivalent to the amount of the loan. This will mitigate the risk of the loan burden falling on your family members in your absence.
Many social media influencers claim that living on rent may be more financially feasible than buying your own home. The idea seems appealing however is not viable enough given the pressure of constantly changing locations, dealings with belligerent landlords and, last but not least, skyrocketing rents.
Start by buying a small house whose equivalent monthly payments (EMI) would be equivalent to the rent you pay each month. With more income in hand, increase EMIs to prepay the loan. This will help you get rid of the loan well before the stipulated period. However, if you have taken out a large home loan, take out home loan insurance or something quite different that your family can use to pay off the loan amount in your absence.
Plan your retirement
Lower income should not be an excuse for not planning for retirement. If you’re still struggling to understand what a poor future looks like, look around and realize how many people struggle with money-related anxiety issues. Regardless of your low income, you still need to find a way to save for your investment. Have a long-term plan in mind, say until age 60, when most people choose to relax and focus on another phase of life.
Estimate the amount you will need and decide your investments accordingly. Alternatively, opt for the simple rule of thumb that requires parking an amount equal to at least 75% of monthly expenses (which will continue even after retirement) each month. Start with basic EPF/PPF/NPS contributions before moving on to equity and debt funds. You can also take advantage of a hybrid fund or a balanced advantage fund to reap the benefits of market turmoil.
Redefining Financial Independence
Don’t give in to the usual advice to invest to create a corpus of at least 30 to 45 times your annual expenses. Instead, decide for yourself based on how much you earn, how far can you stretch to earn extra income, essential expenses each month, superficial expenses, and how much you have left to invest.
Change your outlook on money. Don’t invest after spending enough. Only spend what’s left after you’ve invested enough.
Saving and investing enough does not mean living hand to mouth. In fact, go for a frugal lifestyle to make sure you have enough left over for tomorrow, even if it means cutting back on extra expenses and living a few steps below our current lifestyle.
There may be no tomorrow
Start planning today; in fact, now. A small lifestyle change today will ensure you live comfortably after retirement, even without income. Sacrificing your love for new electronic gadgets will ensure that your dependents don’t end up throwing rock bottom in the event of an unfortunate death.
“Yesterday is gone. Today is the day you have to plan for tomorrow.”
If you still underestimate the importance of financial independence, remember that money is time. First, it frees up your time so you can use it to pursue what you wanted. Respect both your time and your money. Your relationship with money is reciprocal in nature. You take care of it today so it can take care of you tomorrow.
Financial independence is not a distant dream. The search for financial freedom is a reality and a fact that defines us. And, if you still think money can’t buy happiness, try borrowing or living on other people’s means. You will know where you stand in society.
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