Financial Independence, Early Retirement: What To Do In Your 20s To Retire Before 40 – NDTV Profit

Savings or pocket money should be redirected to a bank account to earn interest

Financial analysts have stressed the importance of attainingfinancial independence at a young age, especially for thoseyoungsters in their 20s who areprofessionals working inindustries. Financial independence is key to early retirement and theconcepts are inter-related to each other. If one does not achieve financial independence on time, then it is difficult to retire early. To provide a comprehensive guide on understanding financial independence for early retirement, Chartered Accountant (CA) Rachana Ranade, recently addressed a session inThrive 2021- an event organised by stocks and mutual fundsinvestments platformGroww.

According to CA Rachana, financial independence means that instead of us working for money, money should work for us. She explained that a movement known as 'FIRE' predominantly started in the US, which comprises of two basic concepts - financial independence and early retirement. FIRE is an abbreviation, in which 'F' stands for financial, 'I' stands for independence, 'R' stands for retire, and 'E' stands for early.(Also Read:Balancing Income And Expenses: How To Create A Monthly Budget And Stick To It)

There are two types of income, explains CA Rachana. One is active income and the other is passive income. Active income is what one earns through a job, by putting in actual efforts in work. Whereas, passive income is what one can earn by not putting in any physical effort. Passive income is mostly earned through investing in equity etc.

Financial independence is achieved when two major conditions are fulfilled. Firstly, if the passive income of an individual exceeds active income, then there is a possibility of achievingfinancial independence. Secondly, if an individual is not completely dependent on a full-time job, but has other sources of income that can earn revenue, then financial independence can be achieved. The FIRE movement of the US, which zeroes in on early retirement with financial independence,is based upon three major parameters.

How long will it take for youto achieve financial independence?

One can know at what age he/she will retire by following a three-step process, according to the FIRE method:

Step 1: Determine your savings percentageThis means that one must fix a certain amount of percentage of the income for savings. According to FIRE method, it should be around50 per cent to 70 per cent of total income.

Step 2: Calculate your target retirement amountFor knowing your retirement fund or retirement corpus, multiple your annual expenses with 25. If one needs to know the annual withdrawal amount after retirement, then multiple your retirement corpus amount with four per cent.

Step 3: How long will it take for you to achieve FIRE?For knowing at what age one will retire, visithttp://fireagecalc.com/. Input your data such as the amount of saving, amount of investment etc, and you will be able to find your retirement age.

According to CA Rachana, some of the major points to keep in mind in order to save more and attain financial independence are as follows:

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Financial Independence, Early Retirement: What To Do In Your 20s To Retire Before 40 - NDTV Profit