Have you ever wondered how much money you need to accumulate so that you can stop working and live free?
Unfortunately, most people aren’t familiar with the concept of a freedom number. Because of this, they don’t know when they’re going to have enough money to stop. Instead, they’ll work and save more than they need, wasting years of their life in the process!
Besides that, the idea of financial freedom is foreign to most people. To no fault of their own, they’ve been conditioned from a young age to go to school, get good grades, and work the next 40 years before retiring!
However, as financial literacy spreads, more people are discovering there’s an alternative path. You no longer have to spend the majority of your life stuck working in the accumulation phase. Instead, by learning your freedom number and working towards it, you’ll have the option to stop and do whatever you want!
If you’re like most people, you have to go to work each day, regardless of whether you want to or not. After all, you need to make money to afford your lifestyle and pay for your monthly expenses.
While you need to earn income, too often it comes at the expense of your most precious resource, time. You’re given a finite amount of time. On top of that, you never know how much of it you have left!
Most people use their time to make money, but time is limited. So, what if you could use your money to receive time, instead? Thankfully you can!
Your freedom number is the amount of passive income or invested assets that you need to be free to do as you please. It provides a concrete amount of money that will support your lifestyle and cover all your bills. Once you’ve reached it, spending your time at work is no longer a requirement, it becomes an option instead!
While many busy professionals do save and invest for their futures, they don’t always have a stopping point. Without knowing their freedom number, they’ll keep spending time to have more!
But when you focus on more, you’re never going to have enough money. After all, more is not a concrete number and therefore it won’t ever get reached!
However, calculating your freedom number helps you determine what is enough. By figuring it out, you’ll have a stopping point as well as a long-term financial goal. Once you’ve reached it. you’ll have the freedom to live however it is that you see fit!
Unlike some retirement figures, a freedom number isn’t some arbitrary net worth that’s pulled out of thin air. Instead, it’s well thought out and tailored to you. It’s based on your spending, your lifestyle, and even your dreams!
When it comes to your freedom number, the main financial concept involves replacing your active income with passive. The most common ways to do this are with cash-flowing assets, withdrawing from a portfolio of equity investments, or using a combination of both!
To begin figuring out your freedom number, you first need to understand your ideal lifestyle. From there, you’ll learn the amount of income you need to support it!
Calculating your freedom number starts with determining how you want to spend your time. So, when you reach the point of no longer having to work, will you continue to? Will you travel the world? Or is there something else that’s more important to you and the legacy you want to leave behind?
No matter your answer, getting clear on your dreams will help you throughout the process of building independent wealth. When times get tough or appear uncertain, your dreams can provide the motivation you need to endure and continue pushing forward!
For instance, you may need to make some hard decisions or even sacrifices now, to live your ideal lifestyle in the future. Not only that, but your loved ones may question many of your choices, let alone your sanity. To overcome any doubt that surfaces, you’ll need to be confident in your dreams and what you’re after so that your opinion isn’t swayed!
As your dream and vision for the future take shape, you’ll have created an ideal lifestyle that allows you to start backing into your freedom number!
With your dream in mind, begin estimating the types of expenses that you’ll incur. You’ll need to include your primary costs, like housing, transportation, and food. Not to mention, plenty of money for the experiences you’d like to have, too!
For example, if you envision living in a foreign country, you need to have a good idea of what it’s going to cost. While you may benefit from geoarbitrage, you still need to determine your overall monthly spending to figure out your freedom number.
As each of your budget categories develops, you’ll begin to understand your future recurring costs. Not only will this help establish your future spending plan, but it shows your dreams are possible, too!
In my experience, most people tend to underestimate the amount of fun money they need. Given their sudden influx of time, they tend to spend more than they’ve planned. Therefore, you may want to consider doubling this expense, if not raising it even more!
To calculate your freedom number, you need to include your yearly expenses, too. This includes your nonrecurring costs and irregular expenses. By accounting for them, your freedom number won’t come up short!
At this point, you’ve created a dream and estimated its cost. Now, you need a financial strategy that allows you to pay for it.
One way to satisfy your expenses is by earning passive income or mailbox money. It’s generated from cash-flowing assets, like rental property, royalties, or real estate syndications. Once your passive income fully supports your living expenses, then you’ll have enough to be free!
Calculating your freedom number using passive income is simple. If you plan to spend $5k per month in the future, then you’ll need at least $5k in passive income to satisfy your needs and wants!
Another way to pay your future expenses is by accumulating assets, like stocks and bonds. Then at the point when you want to stop working, these assets will slowly be converted into your income using a safe withdrawal rate.
When you use this strategy in the decumulation phase, both your expenses and withdrawal rate impact your freedom number. The higher your expenses and the lower your safe withdrawal rate are, the more money you’re going to need!
However, there’s been extensive research done on safe withdrawal rates. The most widely accepted analysis of them comes from the Trinity Study. During it, researchers tested several different portfolios of stocks and bonds to determine a reliable safe withdrawal rate.
They found that a portfolio made up of 50% stocks and 50% bonds would allow retirees to make a 4% inflation-adjusted withdrawal each year. In every case their money lasted for at least 30 years. But in many instances, their fortunes had grown larger, too!
To calculate your freedom number using a 4% safe withdrawal rate, take your monthly spending and multiply it by 12 to get your yearly amount. Then, take the yearly amount, multiply it by 25, and the result is your freedom number!
For example, imagine that you estimate that you’re going to spend $5k per month. If you multiply it by 12, your yearly spend is $60k. Then multiplying it by 25 gives you a freedom number of $1.5 million!
Regardless of how you choose to build wealth, determining your freedom number can be liberating. Rather than being in the dark, it provides a concrete amount of money that you need to be free!
Fortunately, the main factors that go into determining your freedom number are within your circle of control. You get to choose your dream and the amount you’ll spend which dictates the amount you’ll need to earn!
Besides that, here are a few more ways that you can reach your freedom number faster:
Whether you realize it or not, calculating your freedom number forces you to think ahead. It makes you consider your future, your dreams, and everything that’s possible. Not only that but also their cost. Because once you know the cost, you’ll understand what it takes to turn your dreams into reality!
Too often, people fall for the most common money myth of them all – you can only retire once you reach a certain age. But in reality, you can stop working and live free the moment your freedom number gets achieved!
What can you do to reach your freedom number faster? Comment below.
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