Freedom and happiness

In personal finance, specific problems are always much easier to tackle than general ones. If someone asks me to recommend some mutual funds suitable for investing for five to 10 years, not only is the answer straightforward, but the process by which the answer is reached is almost self-evident. However, larger, more conceptual problems are not so simple to reason about. For example, think of a question like "What should my overall financial strategy be?" The answer needs to incorporate long-term goals, spending habits, income levels, and family situations into a comprehensive plan that evolves with time. While specific investment picks can be plug-and-play, big-picture finances need customisation and frequent reassessment.

Basically, such a question can be paraphrased as "Please plan my entire life's finances." It's more of a topic for consultation than a question as such, but people do ask it. And yet, there's an even more conceptual question that comes up increasingly, and that is, "How can I achieve financial freedom by age X?". The value of X is generally something that is well short of the usual retirement age. To answer this requires not just financial planning but almost a lifestyle overhaul. It involves optimising savings rates, investing aggressively, minimising expenses, and potentially considering non-traditional income sources. It often requires focusing on this goal, guiding all major life decisions.

However, the concept of 'financial freedom' itself is highly personal and subjective and cannot have a clear, universally accepted definition. Achieving it by a certain age will mean very different things to different people based on their personality, interests, responsibilities and outlook on life. So in effect, a question about pursuing early financial freedom is as much about understanding someone's motivations and aspirations as it is about the numbers. The financial plan flows from the life plan, not vice versa.

Many people dream of achieving financial freedom early in life. The routine of working to earn money is a major part of our lives, and breaking free from it represents a significant form of liberation. Financial freedom comes in various levels, with the highest being the ability to live without needing to work for income. Some individuals, such as those with substantial inheritances, may not need to work. However, for most people, reaching this level of financial independence requires a lifetime of work if it's achievable.

Nevertheless, attaining financial freedom earlier in life through prudent saving and investing is possible. This doesn't necessarily mean complete independence from work but can provide a substantial benefit. For those who earn salaries, gaining some level of financial freedom early on has become increasingly important compared to a couple of decades ago.

Even though India is, in general, much more prosperous than it was a decade or two ago, potential professional and financial instability is a background fear for a lot more people. Amidst various job-related challenges, it is undeniable that individuals who have adequate savings tend to be the most stress-free. Unfortunately, the proportion of younger salary-earners - those in their 20s and 30 - who save is quite low. The young generation is almost uniformly dedicated to negative savings! As soon as people start earning, they take on some EMIs, essentially spending future savings today.

This sounds like the same crusty advice that older people always give the young, but it is true. Regardless of the job market's condition, early career savings significantly contribute to later-life happiness. Individuals with savings enough to cover a year or two of expenses, including EMIs, generally feel more secure about their career choices. Moreover, financial security empowers them to negotiate better employment terms, as they can afford to take risks.

The reality is that achieving this level of financial security is the closest many will come to financial independence. The concept is straightforward: the first step is to start saving, and the second is to save sufficiently. However, beginning this process is challenging, especially amidst a hyper-persuasive consumer culture that constantly lures you to spend. Nonetheless, this is the path to true financial independence for most people.

Also read: Investing needs time and attention