“Greed is good”
said Gordon Gekko in Hollywood movie “Wall Street”. Wealth and
accumulating it is considered as an occupation of capitalists and is often seen
in a negative connotation. I have heard stories of how parents forbid their
grown-up kids from investing in the stock market, equating it with a den of
speculation. Is the pursuit of wealth an endeavor, which is smeared with greed
and negative karma.
My profession includes investing in the stock markets - the temple of capitalism - gives me
an opportunity to interact with different people, who are rationally expected
to always keep maximizing their wealth. Everyone wants to get a slice of the wealth
creation with greed and fear being an integral part of the ecosystem.
So what is wealth building and how is it related to Financial Independence. What is this new cult “FIRE” (an acronym for Financial Independence Retire Early) all about?
FINANCIAL
INDEPENDENCE
Wikipedia
defines Financial independence (FI) as the status of having enough income (from
investments, passive businesses, real estate, etc.) to pay for one's reasonable
living expenses for the rest of one's life without having to rely on formal
employment.
The concept of
financial independence seems quite an intuitive and realistic financial goal
for everyone joining the workforce. However, paradoxically its actually pursued
by a fraction of the population. This unpopularity of financial independence as
a concept is due to some of the myths surrounding wealth, the perpetual halo of
advertising induced consumption, and our experiences. We shall discuss and
dispel some of these myths and dwell upon the steps to achieve Financial
Independence.
Myth
#1: Financial Independence is a goal for the golden years
One of the most
popular goals of saving and investing are building a retirement corpus so that
you can retire peacefully. Most people assume that financial independence is
for leading a happy and work-free life beyond the age of sixty. Retirement for
most people means not working beyond the age of sixty and ‘enjoying’ life by
engaging in activities or hobbies you might have dreamed about while having an
active career. All of these are myths. Financial Independence means freedom to
work for whatever you desire. It means the freedom to choose your work. It means
pursuing your passion. It means working on projects you like and with people
you like. It means you no longer have to worry about money. It’s a state of
feeling empowered. Thus, the faster you achieve Financial Independence, the
faster you can start enjoying your life.
Always remember, time is the biggest component in creating substantial wealth.
How
to achieve Financial Independence:
There are two inter-linked approaches to Financial Independence. 1) increasing income through wealth building and 2) expense reduction. Both these are necessary and interlinked steps towards achieving the ultimate goal of Financial Independence.
WEALTH BUILDING
Isn’t having a life more important than
blindly running after money.
Wealth building is accumulating money over a
period of time by systematically saving and investing the earned income.
Systematic wealth creation is essential to achieve an individual’s financial
goals.
While all of
this is well known and seemingly understood, there are lots of myths
surrounding the concept of wealth.
Myth
#1: Wealth is having access to status symbols of living a grand life.
Most parents
want their kids to get into a well-paying job so that they can lead a ‘good
life’. A good life is defined by having a 4-Wheel drive SUV, a large house, etc.
The Fact is that
true wealth is none of the above. It is one that helps us lead a happy and
peaceful life. Wealth leads us towards being financially independent, as we
discuss elsewhere in this post. Wealth is more of an absolute concept, not a
relative one.
Myth
#2: Wealth Building is a mad rush to earn money at any cost and with no limit.
Earning money is an end in self.
Earning money is
not an end in itself. Building wealth is a means to an end. The ultimate
objective is leading a happy, satisfied, fulfilling, and enriched life.
If we make money an end in itself, we shall end up being like a rat running on the Hamster wheel. The faster we run, the higher is the speed of the wheel. Higher the speed of the hamster wheel, the faster we need to run.
The same happens to us in our careers. The harder and smarter we work, the better will be our income. This leads us to spend more as consumption ‘appears’ to give us happiness. The higher spend lifestyle forces us to earn more to keep living the ‘good life’. This appears like a virtuous cycle. But it soon turns into a hamster wheel (or a vicious cycle), because we do not know when or how to slow down.
Myth
#3: Consumption means happiness. We can get happy by buying things we
desire.
We never derive
permanent happiness by spending money to satisfy our desire. In fact, it may
make us more anxious. We know that human beings have 3 basic needs, but
unlimited wants (this is being taught in every elementary economics class). It
is these unlimited wants that appear to create a false sense of happiness. You
satisfy one, and the other unsatisfied one is ready to create anxiety.
All of us need to have a definite plan to build wealth which includes a) improving your quality of work by equipping yourself with relevant skills to do well in your career, b) spending judiciously and saving enough to achieve your financial goals and c) investing systematically to achieve an optimal return on your savings while balancing the risks.
EXPENSE
CONTROL
Expenses or Consumption gets equated to happiness. An advertisement for a watch shows how we are overjoyed to receive our newly purchased object of desire. We are bombarded with such messages, all of which have a common thread running through them – consumption.
It’s true that
spending on needs and essential wants can improve our happiness and living
standards up to a limit. However, beyond a point, incremental happiness is
limited to higher levels of spending. In fact, at times, spending can be
counter-productive and can induce anxiety.
Regular savings
can inculcate discipline and can result in a balanced approach to consumption.
One of the best hacks to expense control is to not let your standard of living
increase at the same pace as your income. Learn to live significantly below
your means. Lower expenses have twin benefits – 1) they increase your savings
and 2) reduce the required corpus for financial independence.
So how do reduce your annual expenses? By penny-pinching, by living like a miser! Absolutely not. You reduce your expenses by spending carefully on wants (differentiating them from needs), not spending to please others, not spending on ‘status symbols’. You will notice a significant reduction in expenses, without impacting your routine life or happiness. As you reduce the dependence on material stuff for deriving happiness, you start appreciating the real and lasting source of satisfaction, like helping others, pursuing your passion, enjoying nature, etc.
RETIRE
EARLY
One of the goals
of the FIRE movement towards achieving early financial independence is to
Retire Early (RE). However, retirement means different for different people.
For some retirement means not working actively but spending time on hobbies
like painting, gardening, etc. However, you will quickly get bored in pursuing
such activities and will once again yearn to get back to work. I believe the
best way to retire is to pursue your IKIGAI.
IKIGAI is The Japanese concept of living a fulfilling life. According to Hector Garcia - the
co-author of IKIGAI: The Japanese Secret to a Long and Happy Life, your IKIGAI
is at the intersection of what you are good at and what you love doing.
Pursuing your IKIGAI, in words of Warren Buffett, is like ‘tap-dancing to
work’.
In their book on
IKIGAI, Hector Garcia and Francesc Miralles break down the ten rules that can
help anyone find their own IKIGAI:
1. Stay active
and don’t retire
2. Leave urgency
behind and adopt a slower pace of life
3. Only eat
until you are 80 percent full
4. Surround
yourself with good friends
5. Get in shape
through daily, gentle exercise
6. Smile and
acknowledge people around you
7. Reconnect
with nature
8. Give thanks
to anything that brightens our day and makes us feel alive.
9. Live in the
moment
10. Follow your
IKIGAI
You should
pursue your IKIGAI on achieving your Financial Independence to lead a
satisfactory and fulfilling life.
If you have read this far, I am sure you would want to pursue the goal of financial independence. Remember Financial Independence is a means to an end and not an end in itself. I sincerely wish you all the best in your pursuit.
Thank you very much for your time!
You may contact me in case you need to ask or tell me something.
Aaditya Chhajed
M: +91-9404055222.
Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all investment-related documents carefully.
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