In this article I am going to give you a solid fool-proof plan with which you can make your life more meaningful and create your own retirement plan and financial freedom without depending on anybody. If you are working for someone else right now and plan to start a business in the near future, this article will be really valuable to you. Before we talk about financial freedom, lets define what is freedom for us today. Do you think you are free? Do you know what freedom means, or what it means to you? I believe freedom is not having to work for a living. That doesn’t mean I don’t respect work. In fact, work is the only thing that deserves worship next to the universe. I believe in working because we want to rather than because we have to.
If we have to work for a living – it means we are slaves. In olden days people used to be slaves for Kings and a few powerful men. Now we are slaves of a system. Being a slave to work for a living means that there is no time to do work on the things that matter. The kind of work that can change your life and your world. And if you are increasing the cost of your living as you move forward in life, you are imprisoning yourself. It is hard to reduce the standards of living. It is easy to maintain and not upgrade. The simpler your lifestyle is the more free you are to do what you want to do.
Working for a living means working to meet our basic needs. Basic needs always have been and always will be food, clothing, shelter and a few more things. But sometimes we would feel that having a TV, the latest Apple product and an Internet connection are also basic needs. What are your basic needs? That’s a question that you have to answer for yourself and define how much money per month would you need to meet all those needs.
If you want to free yourself up to do the kind of work you love to do and want to do you need money every month which is not generated by trading your time. Passive income or active income always needs to be on a monthly basis because our bills are generated every month.
Passive income in its best form is buying real estate and renting it out so that it generates income every month. If your monthly expenses are, say, Rs.50,000 – then you can have real financial freedom if you own a piece of real estate which generates that income on a monthly basis. It can be an apartment complex of 4 houses where each house generates Rs.12,500 per month – and it will help you pay your bills and save some as well.
Of course the income is not 100% passive. You have to do some maintenance for it. But renting out real estate has the highest predictability and “income passivity”. Publishing a book and earning royalties from its sale is also passive income but in this case the predictability is not high. Predictability of income becomes important because our monthly bills are predictive. That’s why a lot of people get lured towards a “stable job” where they can get a standard, fixed monthly income.
I have given Rs.50,000 as a ball park figure because I believe it is the average monthly expenditure of a upper middle class household in a city like Bangalore. If they own a home they will be paying EMI for it or else they will be paying rent which doesn’t make a huge difference. I prefer renting rather than owning homes for various reasons and that would be a topic for an another post. For some this figure can be lower and for some it may be higher but it doesn’t matter – what matters here is the PLAN! I have included a ready-reckoner for various income levels in the later part of this post.
Real estate is such a good thing for enabling freedom because you can increase your rent at the same rate of inflation and you need not worry about future buying power your money. Prices go up, the rental income also goes up!
You Need Rs.20,000,000 (2 Crores) for Lifetime Freedom
But the real problem here is that to create an asset which generates Rs.50,000 passive income per month you will need at least Rs.2 crores of cash to begin with. (The usual rate of rental income is 0.25% of the asset value).
Most of us cannot accumulate 2 crores even if we work as an employee for our entire lives because even if we earn that much we have bills to pay and we will end up spending it. For most of the people who are employees there is no light at the end of the tunnel.
Most of them will not “think” and they may “dream” of quitting the job one day and starting a business but it may never happen because they are so dependent on the monthly income from the job that the very thought of quitting the job is frightening. The entire “plan” gets postponed until they retire and their dreams are buried. But you have a better chance because you are reading this article. This article is priceless for those who value freedom. Freedom is priceless… but with my plan you can buy your own freedom.
It is obvious that one cannot earn Rs.2 crores as a salaried employee. But as a business man you may be able to. At least you have a better shot at it than any other avenue of making big money. For average Joe’s like us, being a sports star, celebrity, winning the lottery, being a (corrupt) politician or being a hot shot corporate CEO is not realistic and the probability is very less. There is too much competition and too little opportunity that only 1 in a several thousand people can ‘get’ it.
But again the problem with business is that you need a start up capital and the FREEDOM of time to work on your business and grow it. Big bucks can be made only from a solid long-term sustainable business and for that you need to invest years into it. No one can build a business part time while working on a job because they will lose out business to the people who do it full time and with total focus and dedication.
Buy 5 Years for Freedom (Price: Rs.30 Lakhs Only!)
Let us consider that you need some start-up capital and 3-5 years to grow your business to a level that it start generating enough income to pay your salary (I mean the salary you can withdraw from your own business). Once you reach that level, whatever profits you accumulate which is more than what you pay for yourself can go into your ‘freedom plan’.
And the good thing about business is that it can grow exponentially and you may reach your goal sooner than you expect. Nowadays a lot of internet related businesses can be started with no capital and you can make a lot with just your focus and reinvesting the profits into the same website or internet project.
So you need 3-5 years of time initially to establish a business which may help you earn enough (2 Crores in this example) to buy your freedom in the future. This can also be your retirement plan. It is as real as it can get.
For buying your freedom for life which costs Rs.2 Crores you need to first earn for 3-5 years of freedom so that you can invest your time into building your business. Considering that your monthly expenses are Rs.50,000, 3 years of freedom costs Rs. 18 Lakhs and 5 years of freedom costs Rs. 30 Lakhs. Now this seems like an easier target to achieve.
(Please note that all the figures here are based on the assumption that the average monthly expense would be Rs.50,000 and based on the current price of goods and services in 2013. Considering an average inflation of 10% per year, do your own math if you are reading this in future!) If your monthly expense or the required “income” is different, have a look at the following chart. For the sake of simplicity I have kept the amount as Rs.50,000 through out this article.
If you are confident that you can build a sustainable business in 3 years, well and good. But it is always good to give it some buffer so let us consider it 5 years. You need to buy yourself 5 years of freedom before you can quit your job and start working on your business. The thought that you have 5 years of income even if you quit your job will give you confidence to quit your job. How do you buy 5 years of freedom? You do it by buying one month at a time.
Buy Monthly “Units” of Freedom
There are 60 months in 5 years. If you invest Rs.50,000 now in an instrument which will grow at least at the rate of inflation then you can redeem this ‘month’ in the future for any month by selling that instrument.
This is how 5 years of freedom looks like. Each unit of investment (the money bag) gives you 1 month’s “income” and it can be redeemed at any point in the future.
The investment instrument can be savings account, fixed deposit, precious metals or mutual funds. The future sale price of your investment will be enough to meet that month’s expenses. For example if you are investing Rs.50,000 in a fixed deposit today and this Rs.50,000 is your monthly average expenditure including some savings, then 5 years from now this Rs.50,000 will grow into Rs.74,000 approximately at 8% compounded annual growth rate (CAGR) and if you “redeem” this “month”… that is liquidate the fixed deposit in a month 5 years from now, the monthly expenditure relative to the cost of living at that point would be more or less Rs.74,000.
I am not an investment adviser but my personal preference would be to invest 33% in fixed deposits which is the least risky and also the one which gives least growth. 33% in mutual funds which is ‘subject to market risks’ but gives some good returns. The rest of the 33% can be a combination of precious metals, digital assets, loans to friends, cash and so on. The priority in these investment units is liquidity and each unit should be able to cover a month’s expenses. If you buy (invest in) 60 such units, you are buying 60 months of freedom to start with.
I would prefer the first 20 months to be in the most easy liquidation state – so the first 20 units would be in the form of savings account or fixed deposits. Fixed deposits are recommended because if you plan in such a way that the fixed deposit unit matures on a month that you need to liquidate it, it gives an illusion of getting a salary and helps you keep your mind calm. Money in the savings account may be tempting and we may end up spending it by sabotaging our future freedom. As the next 20 months near, you can start working on converting more solid assets into semi-solid or liquid assets.
What if You Fail in Business?
Now the best part about this ‘Buying Your Freedom’ plan is that if you fail in business and don’t end up making any money at all in those 5 years you can get a job again and continue your life. It will not be like the end of the world. In fact, you can get a better job now because as an entrepreneur you will learn faster and gain more experience in the 5 years than a person who never knew business. You will be able to ‘Sell’ yourself because you would have learned Sales and Marketing naturally while running your business. What I am talking about is the worst possible scenario. More often than not it need not be this bad.
If Your Business does Moderately Well
In a better scenario you would earn enough money to sustain yourself for a few more years and you can try to make your business work in that time. To lay it out more clearly, if you are not able to establish a business which earns you Rs.50,000 or equivalent inflated amount after 5 years, you would be earning at least Rs.25,000 and within another 1 year you may be able to double that figure.
And even if you are not able to earn that much in another 1 year you can then go and work for someone, need not be a full time job but a part time job which helps you make enough to pay the bills. By this time you would have automated your business a little bit and then you can maintain its income level with a relatively smaller focus on it.
If Your Business is Above Average
In the best case and preferred scenario you would be able to replace your job’s income from your own business at least given that you have worked for five years on it and from that point; life would be much better as an entrepreneur than a salaried employee because you get at least some partial freedom. You can withdraw salary from your own business which would be equivalent to the salary that you would get working for someone else.
If you are not able to earn all the 2 Crores to create passive income for a lifetime you will be at least able to invest in a small real estate and get some small monthly passive income and rest of it you can earn from your own business and pay a salary to yourself. Say you have 2 small houses rented out which generate Rs.15,000 per month. This is much much better than working for someone else your whole life. You are at least getting partial freedom and your life will be exciting as an entrepreneur.
Striking it Rich
If you work really hard you can buy your entire life’s freedom by earning Rs.2 Crores (or equivalent amount according to inflation at that time). There is also a matter of luck involved in this but I define luck as the meeting point of preparation and opportunity. You will never come across an opportunity if you do not prepare yourself. Those who achieve this kind of financial freedom are the ones who were prepared and waited for an opportunity. Now, How is this a bad plan?
The Real Price to Pay
We are lucky to be in a country and a good point in the history of mankind that these things are possible. There is nothing stopping us from executing this plan. It has a price. The price is sacrifice, living below your means, spending some extra time in financial planning and patience.
To save 20%-30% of the income to buy your first 5 years of freedom would mean living in a smaller house, making do with a smaller and older TV, not eating out at luxury restaurants, wearing less expensive clothes than your colleagues, driving a cheaper car and so on. But this is a small price to pay for something as priceless as freedom. You can buy all the fancy stuff and boys toys after you buy your life’s freedom. Do not enslave yourself by spending now on things which are not as important as freedom.
Finally remember that all things start with desire. If you have read this entire article (which is a boring article for someone who doesn’t want or plan to have freedom in life) then it means that you have the desire to be free in your life! Fuel that desire and go buy your freedom! It’s out there. Good Luck!