All of us are aware of the fact that the journey to financial independence is a long and challenging one. But, we rarely pace our journeys the right way. This invariably means that we end up burning ourselves out. This renders us incapable of seeing our journeys through to a fulfilling finish. Therefore we must break our journey down into phases and pace our efforts optimally through each phase. And today I cover the major challenges involved in each phase and how we can work around them to pace our journeys effectively.
The first phase in the marathon journey to financial independence is the early years of our career. This phase begins from the day we begin our careers until we are around the age of say 30. This phase would be the first time in our lives where we earn an income of our own. The major challenge during this phase is the possibility that we may display polarised investment behaviour. We either ignore the importance of managing our money and achieving financial independence altogether. On the other hand we may get over zealous and try to do too much. So we actually end up achieving very little. This is extremely dangerous because any mistakes during this phase of our journey could see us trying to catch up for the rest of it. Therefore our main aim during this phase should be to set a robust foundation for our finances. We must make investing and managing our money a part of our lifestyles. Some action points to achieve during this phase include:
- Creating an adequately sized emergency fund (6-24 months worth of expenses)
- Choosing a comprehensive term insurance plan to adequately insure our lives (15-20 times our annual income)
- Choosing a comprehensive medical insurance plan to secure our finances against a medical emergency
- Staying away from all forms of debt
- Investing our savings every month with a multi asset class approach that includes all major asset classes (equity and debt ) to a set asset allocation plan.
The important thing during this phase is to make small but consistent efforts on all these fronts mentioned above. It would allow us to make the most of our individual incomes which are likely to be modest during this initial phase of our journeys. This would make investing and managing our money a lifestyle change over a period of time and prepare us effectively for the next phase.
The next phase of the marathon towards achieving financial independence occurs during the peak growth phase of our careers, say between the ages of 31 and 50. Those navigating this phase need to maintain the momentum created in the first phase. We must meet our responsibilities in the present while providing for our future goals. This is a phase during which our income would see constant and significant growth. So the financial resources available to mould our financial future would also increase. Therefore we would need to go beyond just doing the basics. There are three main things that we need to do to ensure this. Firstly, the increase in our income during this phase must translate into a higher savings rate. Not an upgrade in our standard of living. Secondly, we must have clarity on our financial goals and what we want to achieve with our money. Thirdly, this is a phase where we can seriously consider working with a professional financial planner or advisor. In today’s times a net worth of a few crores is not an aspiration, but a necessity. And as the amount of money we manage keeps increasing, the responsibility to manage it well also increases. Working with a competent financial planner would give greater clarity and purpose to the way we manage our money. This would ensure that the momentum we have created through our discipline in the past is optimally maintained.
If we have laid the groundwork effectively during the initial phases, we would be well placed to enter the final phase of our journey to financial independence. This phase ideally begins post the age of 50. This is where we would be achieving most of our financial goals and making sure that we have enough to live comfortably. The challenge during this final phase would mainly be to ensure that we consolidate the good work done in the past without getting complacent. Very often all of our work done in the past gets negated because we have no clear plan for what comes next. This phase would therefore be the ideal time to think about wealth transmission. We may also start thinking about any philanthropic aspirations we have at this point. This can again be done with help from professional financial planners and concerned legal professionals. Taking care of all of these aspects in order of their relevance over each of the three phases would ensure that our journey to financial independence is smooth and optimally paced from start to finish.
