Is it possible to achieve financial independence if you are not earning enough?

I remember one of my junior interns telling me how she is left with barely ₹500 every month after having paid off all her expenses. When I asked her about her investments, she retorted, “What investment is possible with such a meagre amount?” Another businessman living near my house is grumbling about his inability to earn only small profits due to various reasons. Both complain of low earnings and attribute this reason to their inability to invest. 

However, do low earnings really inhibit investments? This question also gains precedence considering how many people misconstrue investments as only the domain of the rich.

Apart, ambiguity regarding what “financial independence” is and how it holds distinct meanings for different people must also be considered while planning your finances. This means how you misconstrue financial independence is different from how others view it. For example, an attempt at wealth creation may be one of the steps in your personal finance journey; others may just want to be free of debt and secure enough for their loved ones.

Too low to invest?

The first lesson in personal finance is savings. Save more and spend less. This will leave you enough to invest. If you have too many responsibilities and essential expenses eating away at your earnings, try building up a passive income source(s) that you can use to invest. Obviously, with time, your earnings would increase in the form of bonuses, appraisals and windfall earnings from businesses, which means that you would come across numerous prospects of increasing your income and investments.

You think of financial independence only when you have less money. This is because the few pennies in your wallet tend to make you financial insecure. This will make you strive to learn about essential personal finance habits that you must adopt to save and invest more. Thinking of financial independence when you earn more does not make sense.

Defining financial independence

You obviously do not want a life riddled with debts. This explains why you must not rely on credit cards or incur unwanted debt. Instead, lower your expenses to the bare minimum so that you may start investing early.

Starting early also means starting from scratch. Also, with time at your side, it would be easier for you to gain considerable wealth after two to three decades when you will be nearing retirement. The essence of retirement planning is to start planning early and regularly for a long period.

Let us understand how a minimum investment of ₹500 done every month in a mutual fund for 30 years can help you attain considerable returns. In this, let us assume that the investments had not been prepped up every year and that the investments had continued unbridled for the coming three decades.

Stepping up your investments

It is obvious that your earnings would not be limited to the same wages year after year. Higher wages or appraisals or increased money in hand make way for stepped-up investments, thus, helping you to gain more with time. A nominal step up by 10 per cent each year can push up the earnings by up to two to three times, thus, justifying the need to increase investments with time while also giving enough time for your investments to grow.

Assuming that you step up your investments by 10 per cent each year, your mutual fund earnings would now be

Earning from bank deposits

Not all investments may be in mutual funds. You can start parking your funds in government-sponsored schemes like the Public Provident Fund (PPF) or simple recurring deposits with the bank. The former is however time-bound, which means that you must opt for it only when you are ready to stay invested in it for the next 15 years. The benefit of compounding can be enjoyed only in long-term investments, which means that you must be willing to stay put for a prolonged tenure.

Monthly investment: ₹500

PPF interest rate: 7.1%

Investment tenure: 15 years

Total value of the returns earned: ₹1,60,812

Stepping up the monthly investments by one per cent in PPF would yield

Monthly investment: ₹500

Step up in investments: 10%

Total investment: ₹1,90,635

PPF interest rate: 7.1%

Investment tenure: 15 years

SIP returns: ₹1,10,233

Final amount on maturity: ₹3,00,869

One may argue that the most difficult part of investing is finding a system that works. However, personal finance analysts argue that it’s sticking to that system that many investors find difficult. The stress of market movements coupled with the inability to understand how money works and grows with time causes many people to retract their investments much before they have reached their financial goals.

Secure your family’s financial future

Apart, from the returns, you may be concerned about your family’s well-being in your absence. This is mostly true of people who are the sole breadwinners in their families. Defining financial independence and planning for it is incomplete unless you have secured enough finances for your dependents.

The only two certainties in life are death and taxes. There is no way you can rid yourself of them. So, the best way out is to plan your investments in a way that takes care of those relying on your income to maintain their lifestyle. Check how much money your family needs every month to maintain its daily expenses. 

Check the future value of money and then decide how much insurance you must buy. Contrary to the much clichéd tendency of many people to opt for the standard ₹1 crore insurance amount. This is because how much insurance you must buy depends not only on how much money your family would need in future but also on the future value of your other investments.

You can use the online Inflation & Future Value Calculator to check how much money your family would need to maintain their current lifestyle.

Assuming that your family need ₹5 lakh every year to pay for its essential expenses. Assuming the inflation rate at seven per cent, the yearly expenses needed would be ₹19,34,842 after 20 years. In the face of financial distress due to death, people need at least five years to cope with sudden physical and financial losses. Taking this into consideration, you must buy an insurance policy of at least ₹96,74,210.

If you have kids who might be planning higher education in foreign lands or aiming for a management degree, you may opt for a higher insurance cover. However, before arriving at the final insurance corpus that you would want to buy, you must estimate the amount you will earn from systematic investment plans (SIPs) and lump sum investments in mutual funds or the pension amount that your nominee would receive from investments in popular pension schemes like the National Pension Scheme (NPS) or other pension plans sold by insurance companies in India.

If you have secured a home loan, you must either consider buying home loan insurance or opt for a separate insurance cover equivalent to the loan amount. This will mitigate the risk of the burden of the loan falling on your family members in your absence.

Many social media influencers argue that it may be financially more feasible to live on rent than to buy your own house. The idea though seems enticing is not viable enough considering the strain of changing locations continuously, dealing with belligerent landlords and, last but not the least, skyrocketing rent charges.

Start with buying a small house whose equated monthly instalments (EMIs) would be equivalent to the rent that you pay every month. With more earnings in hand, step up the EMIs to prepay the loan. This will help you get rid of the loan much before the stipulated period. However, if you have taken a huge home loan, buy a home loan insurance cover or an altogether different insurance plan that your family may use to pay off the loan amount in your absence.

Planning for retirement

Fewer earnings should be no excuse to not plan for retirement. If you still find it difficult to comprehend what a poverty-stricken future looks like, look around yourself and realize how many people are dealing with money-related anxiety issues. Irrespective of your low income, you must always find a way to spare for your investment. Have a long-term plan in mind, say till the age of 60, which is when most people choose to relax and focus on a different phase of life.

Estimate how much you will need and decide your investments accordingly. Alternatively, opt for the simple thumb rule that requires one to park an amount equal to at least 75 per cent of the monthly expenses (that will continue even after retirement) every month. Start with the basic EPF/PPF/NPS contributions before moving on to equities and debt funds. You may also tug in a hybrid fund or a balanced advantage fund to avail the benefits of market tumults.

Redefining financial independence

Do not give in to the usual advice of investing to create a corpus of at least 30-45 times your yearly expenses. Instead, decide for yourself depending on how much you earn, to what extent can you stretch yourself to earn additional income, essential expenses every month, cursory expenditure and the amount left to invest.

Change your outlook toward money. Do not invest after you have spent enough. Spend only what is left after having invested enough.

Saving and investing enough does not translate to living hand to mouth. In fact, opt for a frugal lifestyle to ensure that you have enough left for tomorrow, even if it means cutting down on additional expenses and living a few rungs lower than our current lifestyle.

There might not be a tomorrow

Start planning from today; in fact, now. A small change in lifestyle today will ensure that you live comfortably post-retirement even in the face of no income. Sacrificing on your love for new electronic gadgets will ensure that your dependents do not end up scrapping the bottom of the barrel in the event of your unfortunate demise.

“Yesterday is gone. Today is the day that you have to plan for tomorrow.”

If you are still underestimating the importance of financial independence, remember that money is time. First, it frees up your time so that you can use it to pursue what you wanted to. Respect both your time and money. Your relationship with money is reciprocal in nature. You take care of it today so that it can take care of you tomorrow.

Financial independence is not a distant dream. Seeking financial freedom is a reality and a fact that defines us. And, if you still think that money can’t buy happiness, try borrowing or living on others’ means. You will know where you stand in society.