Financial Independence: The Basics of FIRE Explained

With Independence Day just around the corner, when is the best time to consider another form of freedom: financial independence? The concept of financial independence has gained popularity lately through the FIRE strategy, which stands for Financial Independence, Retire Early.

That said, let’s dive into what this means and how you can work towards your own financial freedom.

Understanding Financial Independence

“Financially independent” means the state where you have enough wealth to live on without having to work actively for necessities. It’s about having the freedom to make life decisions without being overly stressed about the financial impact. Being financially independent means that you don’t need your paycheck to pay for your daily costs.

The benefits of achieving financial independence are numerous. You gain the freedom to pursue passions without worrying about income, spend more time with family and friends, travel, or even retire early if you choose. 

However, there are some common misconceptions about financial independence. Some people believe it’s limited to the rich. In reality, financial independence is achievable for many people with careful planning and disciplined financial habits. And with that, comes the concept of FIRE.

What is FIRE (Financial Independence, Retire Early)?

“Financial Independence, Retire Early” is what financial independence stands for. The goal of this financial plan is for people to become financially independent. With this strategy, individuals aim to have the option to retire much earlier than the traditional retirement age. 

The core idea is to aggressively save and invest a large portion of your income during your working years, allowing you to accumulate enough wealth to support your lifestyle without the need for traditional employment.

It’s important to note that “retirement” in FIRE doesn’t necessarily mean stopping work altogether. The key is having the financial freedom to make choices without being dependent on a regular paycheck.

Source: howtomoney

To achieve financial independence, it’s crucial to determine your FIRE number—the amount of savings you need to live off of without working. A popular method for this is the 4% rule, which suggests that you can safely withdraw 4% of your investment portfolio each year in retirement. without running out of money. To calculate your FIRE number using this rule, multiply your annual expenses by 25. For example, if you need ₹10 lakhs per year to live comfortably, your FIRE number would be ₹2.5 crores (10 lakhs x 25). 

However, several factors can affect your FIRE number. These include your desired lifestyle in retirement, inflation rates in India, healthcare costs, and potential family responsibilities. You should also think about how taxes will affect your withdrawals and how the Indian stock market will perform in the long run. Currently, the LTCG tax is set at 12.5%, after the 2024 interim budget. 

How to become financially independent?

Mindset and Goal Setting

The journey to financial independence starts with the right mindset. It’s about valuing long-term financial security over short-term pleasures. Setting clear financial goals is crucial. These objectives must be time-bound, meaningful, quantifiable, achievable, and targeted (SMART). An example of a SMART goal may be, “By the time I’m 50 years old, I want to have saved ₹5,00,00,000 in my retirement accounts.” 

Budgeting and expense tracking

Creating a comprehensive budget is a fundamental step towards financial independence. A budget indicates areas where you can make savings and helps you figure out where your money is going. 

There are many tools available to help with budgeting, from simple spreadsheets to sophisticated apps. Regular review and adjustment of your budget are important as your financial situation changes.

Aggressive Saving

A high savings rate might seem extreme, but it’s a powerful way to accelerate your journey to financial independence. To achieve this, you’ll need to live well below your means and prioritise saving over spending. Start by aiming for a savings rate of 20% and gradually increase it as you find ways to reduce expenses or increase income. 

An emergency fund is also crucial to achieving financial independence. This is a savings account with 3-6 months of living expenses, used only for unexpected costs like medical emergencies or job loss. An emergency fund prevents you from derailing your financial plans when life throws curveballs.

Smart Investing

The stock market has historically provided higher returns compared to other investment options, making it an essential tool in your financial independence toolkit.

To get started with investing:

• Educate yourself: Before jumping in, take time to understand the basics of investing. Learn about different types of investments, how the stock market works, and various investment strategies. 
• Choose the right investment platform: Select a reliable broker or investment platform that aligns with your goals. Look for the top trading app in India, preferably the one with low fees, good research tools, and excellent customer service like Dhanush.
• Build a diversified portfolio: Spread your investments across different asset classes (like stocks, bonds, etc.) and sectors to manage risk and increase potential returns.
• Explore other investment options: Look into instruments like Public Provident Fund (PPF), National Pension System (NPS), and tax-saving ELSS mutual funds that offer tax benefits under Section 80C.

Conclusion

As we celebrate India’s Independence Day, it’s an opportune time to reflect on our personal financial independence. The journey to financial freedom in India comes with its own unique challenges and opportunities. Your financial independence day need not have a fixed date like our national Independence Day, but with dedication, discipline, and smart planning, you can work towards your future.

Dhanush, powered by Ashika Group, offers a user-friendly platform with comprehensive research tools, real-time market data, and expert insights to support informed decision-making. Dhanush comes with the benefits of a full-service broker at a discount broker value.

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Disclaimer: The information provided in this blog is for educational purposes only and should not be construed as financial advice.