How much you should earn to achieve financial freedom – Much less than you think!

We all look for job security. Unfortunately it does not exists at least in private sector. So why not look for financial security or freedom instead. After all we all work for money.

So what financial freedom really means? Does this means having tonnes of money

As per Wikipedia definition of financial freedom

“Financial independence is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses”

So what it takes to achieve financial freedom ?

Does one needs to have a fat pay cheque to achieve financial freedom some day?

Answer is a NO.

Financial freedom cannot be achieved with a very  good salary. This may confuse you. So I will go by some examples

  1. Bjon Borg – Richest tennis star of early eighties. Purchased an island in Sweden. Retired from active tennis at the age of 26 only to loose all his wealth and was in heavy debt. Tried to make a comeback to tennis court but his magic was gone..
  2. Mike Tyson – World heavy weight boxing champion of late 80s. Lost all his money, family due to bad spending habits. Was last heard working as a bouncer in a night club for living.
  3. Michael Jakson – King of Pop. Same story of spending without thinking. Was almost bankrupt and was practicing for his next show on his last day to clear his debt despite his body was completely unfit for this.
  4. Amitabh Bachachan – Our own Bollywood super star who had everything one can aspire for. Did not planned his finances well and was bankrupt in 2000. Although his story of recovery is equally interesting.
  5. Vijay Mallya – Ex billionaire Business tycoon turned absconder struggling with law and debt burden.

List is endless but all I want is to make a point. So now you must be realizing that

  1. High salary cannot assure financial freedom.
  2. Being wealthy does not means financially free.
  3. No matter how much money you make, poor financial planning will make you poor ultimately.

So what is the formula for financial freedom?

It’s a 3 step process

  1. Spend less than what you earn
  2. Invest your surplus money wisely with right risk allocation
  3. Give it time and let power of compounding to do the magic.

The first one you need to take care. For the second one you need a proper investment of your savings with right risk allocation. This is most important as higher risk can drain your corpus and lesser returns will delay the process. With right risk allocation you can control risk by 100% as per your needs and achieve higher returns as well.

For the third part none of us need to worry about. Time and power of compounding will take care of it..

So now let us start with a difficult case and prove how financial freedom can be achieved without much salary.

Let’s take case of Ram who is 22 years of age. Just got placed in an IT company and salary is really modest at Rs 3 lacs p.a. While this is what most IT services company pay to college grads from tier 2 and 3 colleges. Some of his colleagues from tier 1 college joined IT Product Company at much better CTC of 15 lac p.a. So what should Ram do?

Cursing his luck? College? Grades? Well I can tell you few things which will be shocking.

Let’s assume Ram does not takes any action and

Let things happen as they come.

Gets very modest growth in terms of salary hike

All he does is he takes the 3 steps mentioned above for financial freedom perfectly. If he does so you know what will happen?

In 25 years from now he will have more wealth than 99% of his fat salary earning colleagues who are not following the 3 steps mentioned above. He will be financially free while most of his colleagues still need to work to pay their bills.


Let me show you how.


Assuming Ram’s salary of Rs 3 lacs p.a we can safely assume his take home will be around 20 K p.m.

He can expect an average p.a.  Hike of 10% hike at least for next 10 years even if he is an average performer.

All ne now needs to do is save Rs 5k per month and invest in a right portfolio which is risk allocated.

So let’s get on with math and see how the magic happens

He starts saving Rs 5k every month and put them into risk allocated portfolio. After 5 years he increases his monthly allocation to 10k per month. After 15 years his allocation increases to 15k per month and lastly from 20-25 years his allocation is Rs 20K per month.


Assuming a return of 20% p.a. on an average which is quite possible.

(Please read my earlier posts below in case you are not convinced.)

  1. How to make twice the return of best performing equity fund in 4 easy steps.
  2. All season portfolio

His value of total corpus at the end of various milestone will be as follows.

  1. 5 years – Rs 4.95 lakhs
  2. 10 years – Rs 22.21
  3. 15 years – Rs 70.11 lakhs
  4. 20 years – Rs 194.25
  5. 25 years – Rs 508 lakhs

So his corpus is around Rs 5 cr 8 lakhs when he is 47 years. Add to this is his PF money which was deducted from his salary and that will be around Rs 65 lakhs @ 8.5 % per annum


So his total corpus @ 47 years of age is Rs 5.7 crores.

Now since his money is in risk allocated portfolio so his downside is extremely limited. He can easily afford to withdraw Rs 7 lacs p.m. from this corpus with his corpus also increasing in long run. His monthly withdrawals will increase @ 8% every year as well. So 7 lacs  p.m. salary after 25 years from now if adjusted with 8% of inflation will be roughly a salary of Rs 1 lac p.m. at current rate which is roughly 5 times his current take-home salary. Good enough to retire and do things you want to do.


Now let me clarify that whatever I have written till now is nothing new except the risk allocation part. Most financial plan revolve around these 3 steps only except they are not equipped with risk allocation strategy. This is the key differentiator here is how it creates magic

Lets compare the risk allocated financial planning with standard financial planning.

  1. Helps you achieve min 20% of return on your portfolio – without this even 15% is very high
  2. Limits your downside – Without risk allocation downside cannot be protected to such an extent.
  3. Let’s you withdraw 7 lacs p.m. from a corpus of 5.7 cr – Max withdrawal will be Rs 5 lacs p.m.
  4. The corpus will also increase @ 4% p.a..- Corpus will stagnant
  5. Your monthly withdrawals will increase @ 8% p.a. – Monthly withdrawals will not increase.

So we have shown how one can achieve complete financial freedom in 25 years with a very modest salary of 3 lacs p.a. at present and free of all kinds of financial worries. If your salary is slightly higher it will take much less time to achieve your goal.

If you have questions or need more clarity please do write to me

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