We had an interesting discussions around the concept of Financial Freedom during our Delhi’s Inner Circle Meetup (A closed community of 250 members).
Our conversations started with the topic of financial planning and how everyone should have separate goals (buckets) to allocate funds.
The argument was that we can become financially free if we stick to financial management systems proposed by various financial experts.
One of the Inner Circle members, Ashish, attended some paid workshop on wealth generation and he was very excited with what he learned. He explained 6 Jars theory which I don't agree with.
Select Your Favorite Section
- #1. Why People Fail At Financials
- #2. Calculations based on proposed financial plan
- #3. I tell you why their plan failed at giving me financial freedom.
- #4. Becoming Financially Independent First
- #5. Financial Freedom is the final step
Concept of 6 jars financial theory
- 55% on essentials and regular monthly needs
- 10% on luxury and lifestyle (play)
- 10% on financial freedom (retirement)
- 10% on education and self improvement
- 10% long term investment (goal based investment)
- 5% give and charity
Allocation of the funds can be changed a little bit based on the personal financial situation. It’s easy to understand the concept, right?
But it’s hard to follow this system. It looked like a great plan on the papers but most people fail at the implementation.
I have also written similar on the financial planning
Unfortunately, even my system failed at giving me financial freedom. I was aware of this financial model but I struggled hard to follow the system.
#1. Why People Fail At Financials
Psychological financial needs
events in life
I do not buy stuff just because some gadget is in the trend or to show off things to the world.
But most of the people buy things just because someone else is buying.
That’s why e-commerce companies are selling so much stuff online. They are selling products on discounted prices so that people can buy more than their actual needs.
That’s called impulsive buying.
Next time, when you see any advertisement then observe what they are selling.
A product or A dream.
Most likely they will sell you a dreams of a bigger house, bigger car, fashionable clothes and better gadgets that will make you look cool.
I understand that 10% bucket of luxury fund can be used on buying lifestyle items. But we will talk about in the later section why it would fail.
Psychological Financial Needs
I personally have psychological financial needs. Even if no one is trying to sell me a lucrative travel package, I love to travel and willing to spend whatever is required to experience tension-free travels.
I understand that it’s not a necessary to waste money on the travel still I want to travel.
Foreign travel (also known as WORLD TRAVEL) is a psychological need created by the society, banks and travel companies. I started realising that after travelling a couple of countries and staying there for more than month long vacations.
I started asking question from myself, what does this travel means to me?
Why someone has to travel to a foreign country? Why can’t we get the fulfilment of travel by visiting local places?
As a kid, I used to go to Nani or Mausi house in the vacations. Those were the best times. And best way to spend summer vacations.
Then I started hearing that rich people go to Shimla (Or nearby hill stations) for the vacations.
So hill station vacations were perceived as a luxury vacation.
A step ahead, the elite class was enjoying their vacations in Goa and Kerala which was beyond the reach for regular people like us at that time.
The moment regular people followed elite class for Goa vacations, Elite class moved to Thailand/Singapore/Bali.
Now everyone is going to Asian countries while the Elite class is enjoying vacations in Europe.
Europe trip costs minimum 5 lakh which is still beyond the reach of regular people.
When regular guys like You and Me will be in Europe for the vacations, the Elite class will move to Moon & Mars. Space travel is going to be a big vacation industry in the future.
That’s what we discussed in our Delhi Meetup. But our discussion did not end here.
We all were at the consensus that financial planning is not going to work unless we take care of our psychological needs.
Because we spend money unplanned (irrationally) on our psychological needs.
Unexpected Events in Life
The third part for which we can’t plan in the advance. That's why we call them unexpected events in our life.
I suggest you to buy only medical insurance and term life insurance to protect you against medical emergencies and uncertain life loss of primary earner.
But you can not take insurance plan for an unexpected invitation of a marriage of your cousin.
You got it. There are not only bad expected events but good unexpected
events as well, that give a big blow to your pocket.
Every time I was trying to stick to my financial plan there was some event related to marriage, birthday, anniversary and some unexpected losses in business & personal life.
You either have to throw parties on the events or buy gifts for the person who is inviting you on the event. If you are a married person with a kid, then you will have 3 birthdays and one anniversary every year. On an average one event every quarter.
#2. Calculations based on proposed financial plan
Let’s assume that you have Rs. 1,00,000 monthly income. Following would be your allocation of funds as per the financial plan.
- 55% on essentials and regular monthly needs - 55,000
- 10% on luxury and lifestyle (play) - 10,000
- 10% on financial freedom (retirement) - 10,000
- 10% on education and self improvement - 10,000
- 10% long term investment (goal based investment) - 10,000
- 5% give and charity - 5000
If you have to buy a luxury watch, Camera, iPhone or vacation package then you would need at somewhere between 60,000 to 1,00,000 rupees.
Means you have to wait for at least 6 months when your luxury & lifestyle jar would be able to fund your impulsive desire.
Can you hold your impulses for 6 months? You know the answer.
Most of the people will spend out money from their education or long term investment jar.
Even if you can hold you impulse for 6 month, there would be an unexpected event that will take out at least 20,000 rupees from your luxury jar, and you have to hold your impulse for another 2 months.
The harsh reality is that you will be not able to run your house staying within the 55% limit. There are always some over expenses on unexpected things every month.
Sometimes, you have to buy a new AC, kitchen appliance or money goes into repairing something.
You feel bad when you fail to stay within the financial plan.
I believe that we should not cut the corners to live the life. I tried to follow the advice of financial experts to get ultimate financial freedom. But they taught me how to cut the happiness from each corner of life.
#3. I tell you why their plan failed at giving me financial freedom.
They did not tell me how to enjoy life NOW rather than waiting till 60s
They failed to tell me how to increase my income rather than cutting the expenses
That’s where my own understanding came (of course after failing multiple times)
Retirement Planning is a myth. You can never ever become rich by investing in the retirement plans.
These banks made you believe that you will die happy after having 2 crore rupees at your retirement age of 60. The only purpose is that you should keep funding the banks until 60 years of age.
The buying power of 2 crores rupees after 30 years would be similar to what 20 lakhs rupees has today. You don’t have to trust me blindly, just look around and see what is the lifestyle of an independent retired person.
Can he go to a Europe trip with his retirement money? Absolutely NO.
Today’s retired people are living within their means. The system taught them how to live an average life and they don’t even have any ambitions left to enjoy the life.
You will never become rich unless you become independent of your active income. Even a business owner is stuck with active income.
Job: You won’t get salary without going to your job.
Business: You won’t get income without opening your shop.
Consultant: You won’t get payments without completing your client’s work.
You must have at least one passive source of income to become financial independent. Financial Freedom is the second phase that can never be achieved without become financial independent.
Mark down the potential passive income streams that you can generate for yourself in next 6 months.
#4. Becoming Financially Independent First
Reduce Active Income
- Coaching Classes (Online/Offline)
- Speaking Gigs
Increase Passive Income
- Investments (Stocks, Rent from Real Estate, Interest On Deposits)
- Info Products on Automation (Kindle Books, E-books & Courses)
- Blogging (Affiliate Marketing, Advertisements)
- Software Products (SaaS Tools)
- Memberships (Newsletters, Community, Courses)
It will take time to get passive income. By that time support yourself with active income.
If you need electricity from a generator then you have to keep feeding the machine with diesel every day. You will always have recurring cost of diesel to generate electricity.
That’s like having an active income. Your time is diesel that generates money for you.
Someone may install solar panels on their roof and get electricity without having recurring cost. Yes, there is a significantly high cost upfront and some maintenance cost thereafter.
That’s like having a passive income from a blog like CashOverflow. It took me 18 months to generate my first income from my blog but now I publish less than one article per month.
The blog generates money for me even if I do not login into my website for the entire month.
Money is just one side of financial freedom.
Financial freedom is not actually dependent on the amount of money that you have in your account.
There are so many people in this world who have multi crore rupees in their account but they are not FREE.
At the same time, I met a few people who don’t have a lot of money but they are living a financially free life.
#5. Financial Freedom is the final step
Know Your Needs
Make Passive Income * Multiple Sources
ZERO Active Income
(Say NO to your clients/job)
Most people won’t get freedom because they don’t know their needs.
They always live with a feeling of scarcity. They want to hoard as much as possible for their future needs.
No freedom is possible if you don’t know your needs. You will always feel less even after having more than your needs.
If your needs are having a decent house, decent car, decent food, decent gadgets, two vacations per year and a high speed wifi - then it can be taken care of.
If you don’t know how big is sufficiently big for you then you never gonna happy even if you get what Ambanis or Zuckerbergs of this world have in their accounts.
I know that 3 BHK is sufficiently big to accommodate my family and guests, so I will feel happy even if my neighbours have 5 BHKs and 7BHK houses adjacent to me.
After knowing your needs, you
should multiply your passive income sources.
The last step is saying NO to active income. It’s very hard step because we are habitual of saying YES to money all the time.
I learned to say NO to active income after I started making passive income.
I didn’t want to show the email snapshot but the conversation would be incomplete. Even Inner Circle members insisted me to show an example where I said NO to money.
This email is in the context of a consulting project where I quoted 1.5L monthly price.
I was able to say NO to negotiations because I was not afraid of the loss. I know my basic financial needs have been taken care of. All the active work is optional for me. I pick the work that I enjoy doing.
I am not yet completely financial free because my passive income sources are at amateur level.
I still have 50% active income, look at my annual income stats of 2018.
I will announce my financial freedom when I will have 7 sources of passive income and 0 source of active income.
What is your financial freedom plan?