Opinion – Grain in Grain: Three Steps to Declaring Your Own Independence

Financial independence cannot be confused with the absence of work or leisure. You are independent when the income from your financial assets is able to cover all your expenses. So you have more flexibility and can choose to follow your life purpose. For those who wish to have this control, I describe below three necessary steps for you to plan your financial independence.

Don’t wait to get old to understand that it’s important to have accumulated capital. As one of America’s greatest songwriters, Tennessee Williams, describes:

“You can be young without money, but you can’t be old without it.”

Anyone can achieve independence, but few plan for it and even fewer people put into practice the plan they have devised.

Since most cannot, the most natural thing is to blame someone or something, for example, the government, the market, the children, the parents, the wife or bad luck.

The steps are simple, but not easy. The hardest thing is the discipline to honor the plan.

set the value

The first step is to define the amount needed to achieve financial independence.

For this step, I make two alerts.

If you are very young, understand that in the future you will have a family and the necessary amount should go up. So, already consider this elevation.

Also don’t estimate an unrealistic value in relation to your current income. Undoubtedly, we would all like to have an income of R$50,000 per month. However, if you already have a family and your total expense is R$10,000 per month, setting a goal of R$50,000 is unrealistic to begin with.

Assuming you want your independence to be achieved if you have an income of R$10,000 per month.

The rule for calculating required equity is simple. Just multiply that value of R$10 thousand by 300.

In this example, you would need to have a net worth of R$ 3 million to have the desired income with peace of mind.

Yes, it is possible to have the same income with less equity. But, this would mean investing in assets with greater risk and this could compromise their independence.

Take a moment now and calculate your goal.

The vast majority of people cannot define this first step. So if you’ve already done so, congratulations. But don’t celebrate too much, as the next ones will be more challenging.

schedule time

Having defined the equity, now is the time to define the term or horizon to achieve the objective.

If you are reading this article on holiday, you may possibly think: tomorrow I will think better. Be careful not to fall into the trap of procrastination.

Here comes the first tip in this part of the plan. The shorter the time to accumulate capital, the greater the effort or proportion invested in risky assets.

You can set the deadline you want and move on to the next step, but if you are undecided, I detail a tip that will help you.

For moderate portfolio risk, the term rule evolves approximately with the amount to be invested.

For example, if you can save 10% of the income you want to earn, that is, if you intend to have an income of R$10,000 and can save R$1,000 monthly, your term would be close to 60 years with a conservative return.

For every additional 10% you manage to save, you reduce the term by approximately 20%. Thus, saving 20% ​​of the income, the term drops to 46 years. Obviously this rule of thumb is not accurate, but it serves to guide you.

The ideal is to perform the calculation on a spreadsheet or financial calculator.

Determine target profitability

The target profitability to be used must be real, that is, above inflation.

Inflation can be expressed as the variation of the IPCA.

The rate of return needs to be above inflation, as the latter only corrects for the loss of purchasing power. Therefore, the real rate is the portion that will provide the growth of the portfolio.

Considering interest rates at this point, you can assume a return of 4% a year above inflation if your profile is conservative, 5% a year for a moderate profile and 6% a year for an aggressive allocation.

At this point, it is very important to assess your investor profile. It’s no use committing to a higher return goal than your profile supports.

More aggressive portfolios will at times show negative results. If you do not support these oscillations, you can exit applications precisely at inappropriate times.

With the plan in hand, you must now look for the right products to put it into practice.

Take advantage of this commemorative date to plan your financial independence and to create milestones for monitoring results.

Michael Viriato is an investment advisor and founding partner of Investor’s House

(Follow and like De Grão em Grão on social networks. Instagram.)

If you have questions or suggestions for topics that you would like to see commented on here, please feel free to send them by email.