Seven Money Resolutions for 2011:
#4 — Work Towards True Financial Independence

by Vinaya HS on December 28, 2010

in Finance

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Resolution #4:
I will work hard towards becoming truly financially independent. I want my money to work for me and not the other way around.

So, what exactly is financial independence?

  1. Freedom from financial reliance on loved ones.
  2. Freedom from financial reliance on creditors.
  3. Freedom from financial reliance on employment.

This still is the best definition of financial independence that I have come across. And financial independence is my foremost goal. Having cleared all of my liabilities earlier this year (which means that I can place a check against #1 and #2), I have been doing a fair bit of thinking on how I want to get to #3. My thoughts follow.

I’d like to split my target for financial independence into two stages:

  • Level 1 Financial Independence — where the sum of income from sources other than my regular job is equal to or exceeds my monthly living expenses.

  • Level 2 Financial Independence — where the sum of income from my investments is equal to or exceeds my monthly living expenses.

Right now, Level 1 is a medium-term (less than three years away) goal and Level 2 is a long-term (three or more years away) goal for me. Getting to Level 1 would mean that I achieve #3 — freedom from financial reliance on employment — but that would be inadequate over the long-term. Getting to Level 2, however, would mean true financial independence, but getting there is a tough task.

Let’s make some rough calculations. Suppose you estimate your monthly living expenses to be Rs 30,000. You’d need to have a corpus in the region of Rs 5,000,000 earning between 7% — 8%. Light years away from where I am today. :-) But as the saying goes, a journey of a thousand miles begins with a single step.

Accordingly, I am structuring two portfolios:

  1. A Passive Income Portfolio for Level 1 Financial Independence.
  2. An Investment Income Portfolio for Level 2 Financial Independence.

The names are slightly misleading. Let me explain.

My Passive Income Portfolio

Since I already have a couple of sources of income (the sum of which is less than my monthly living expenses) aside from my regular job and since I don’t need this income right away, I’m socking it away in a liquid mutual fund. At the same time, I’m also working on bringing-in other such sources of income (I need to do this given the irregular nature of such income and given that the sum of these should be equal to or exceed my monthly living expenses).

So long as I don’t need this income, I plan to build a corpus in the liquid mutual fund and gradually do an STP (Systematic Transfer Plan) into my Investment Income Portfolio (described below). But, were I to need this income each month (say due to prolonged unemployment or other such reasons), I’ll stop the STP and use the income.

My Investment Income Portfolio

This portfolio would be my ticket to Level 2 Financial Independence — a portfolio that can generate investment income (in the form of interest, dividends, etc.) each month sufficient to cover my monthly living expenses. Ideally speaking, I’d never need to draw any of the principal ever. This is my dream.

I’ve just started putting this portfolio together. So it’s too early to talk about it. I promise to write in detail when I have everything in place.

Know what would be the icing on the cake? Still having Level 1 Financial Independence when you achieve Level 2 Financial Independence. That would take care of any inflationary concerns.

What do you think?

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 3 comments… read them below or add one }

Ashutosh December 28, 2010 at 10:07 AM


Thanks for “thinking through”

I have been, off and on, thinking about these things for the approx the last two years. And also have taken the first few steps in the thousand mile journey. However now what is required is the patience and persistence to keep walking :)


Vinaya H S December 28, 2010 at 1:25 PM


You said it right — patience and persistence. The reward at the end is worth it.

Anoop December 31, 2010 at 7:35 PM

I agree personal insurances are necessary, but having said that don’t you think it would be difficult to pay premium during down times namely job loss, I don’t really think pooling in from emergency funds for premium payments during down times are a wise choice.. Insurance premium take away money from your pocket, It can cover up only during hospitalization or critical illness, What would your advice be in such a scenario? I believe instead of paying premium for personal insurance which gradually takes away money from your pocket and you get no return anyway other than some tax benefits, I would rather put the money in another lock in S/B bank account as critical illness / accident fund.. Our employers are always there to provide us personal insurance cover if necessary.. There are lot of assumptions that one can make here..
What do you think?, do you think it would be a wise choice to have a critical illness fund just like emergency fund ?

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