What’s Your Financial Freedom Number?

Achieving financial freedom is a goal many people strive for, but to get there, you need to know exactly how much money it will take to reach that point. This number is often referred to as your “Financial Freedom Number,” and it’s the amount of money you need to live comfortably without relying on active income, such as from a job or business. It’s the amount that allows you to cover all of your living expenses, pursue your passions, and enjoy life without financial stress.

Understanding your Financial Freedom Number is crucial in setting clear, actionable financial goals that will guide you toward a secure and stress-free future. Here’s how to calculate it and take the steps to achieve financial freedom.

Step 1: Understand Your Living Expenses

The first step to determining your Financial Freedom Number is understanding your current living expenses. This includes everything you spend money on each month, such as:

• Housing (rent/mortgage, utilities)
• Food (groceries, dining out)
• Transportation (car payments, gas, insurance, public transportation)
• Insurance (health, life, home)
• Debt Repayments (student loans, credit cards, personal loans)
• Healthcare (medical bills, prescriptions)
• Entertainment (movies, subscriptions, activities)
• Savings/Investments (retirement, emergency fund, other investments)

Once you have a comprehensive list of all your expenses, total them up to determine how much money you need to live each month.

Step 2: Annualize Your Expenses

To determine your Financial Freedom Number, you need to calculate your annual living expenses. Multiply your total monthly expenses by 12 to get the yearly amount.

For example:

• If your monthly expenses are $3,000, your annual expenses will be $36,000 ($3,000 x 12).

Step 3: Calculate Your Financial Freedom Number

Now that you know your annual living expenses, the next step is to figure out how much you need to invest or save to generate enough passive income to cover those expenses. A common rule of thumb is the 4% Rule, which suggests that if you can withdraw 4% of your investments each year, your money will last indefinitely.

To calculate your Financial Freedom Number using the 4% Rule, divide your annual expenses by 0.04 (4%).

For example:

• If your annual expenses are $36,000, divide by 0.04:
  $36,000 ÷ 0.04 = $900,000

So, in this example, your Financial Freedom Number would be $900,000. This means you would need $900,000 invested in assets that generate a 4% return per year to cover your expenses without working.

Step 4: Factor in Future Expenses

While the 4% rule is a good starting point, it’s essential to account for future changes in your living expenses. Consider:

• Inflation: Your expenses will likely rise over time, so you’ll want to plan for future increases.
• Healthcare Costs: As you age, healthcare expenses tend to rise. It’s important to plan for this, especially as you near retirement.
• Lifestyle Changes: You may want to increase your spending in some areas (like travel or hobbies) once you have the freedom to do so.

Step 5: Adjust Your Financial Plan

Once you know your Financial Freedom Number, the next step is to adjust your financial plan to reach this target. Here are a few steps to help you get there:

1. Save and Invest Aggressively: Start saving a portion of your income each month. Consider investing in low-cost index funds, real estate, or other passive income-producing assets to grow your wealth.
2. Cut Unnecessary Expenses: Review your spending habits and eliminate unnecessary costs. Prioritize saving and investing over discretionary spending to help reach your goal faster.
3. Increase Your Income: Look for opportunities to increase your income, whether through career advancement, side hustles, or investments.
4. Track Your Progress: Regularly assess your financial situation and track how close you are to reaching your Financial Freedom Number. Reevaluate your expenses and savings strategies as necessary.

Step 6: Achieve Financial Freedom

Achieving financial freedom isn’t about achieving a specific number but about making decisions that align with your values and goals. Once you’ve built up your wealth to the point where your investments can cover your living expenses, you’ll be able to make choices based on what you want, not what you have to do.

Final Thoughts

Your Financial Freedom Number is a powerful tool in your journey to financial independence. By calculating your annual expenses, determining how much you need to invest, and taking steps to build wealth, you can set a clear path toward achieving financial freedom. It will take time, effort, and discipline, but with a clear goal in mind, you can make the right choices to secure your financial future.

Start planning now, and take small steps today to make your financial freedom a reality tomorrow.