What is your Financial Freedom number and how do you achieve it?
To start off I think it’s important to understand what Financial Freedom really is, a nice starting point is to think of it as a time when you no longer have to work for your money, but instead your money now works for you.
Financial Freedom is having control of your financial situation and understanding what works best for you. You understand where your money is best spent and saved. You essentially reach a point where money is no longer a worry in your life, this is not because you have an infinite amount of money but rather because you have taken control of your financial situation and understand your spending habits. Financial Freedom means you have bought back your time which allows you to do what you want with it.
What is this Financial Freedom Number people speak of? Well, this number is simply what you need to not worry about earning a salary anymore and it is calculated by:
- Taking your total monthly expenses and multiplying them by 12
- Divide this number by 0.05 to give you the total you need in today’s money
The 0.05 is the drawdown on your investment (in this case a 5% drawdown).
Below we’ll give you a few examples of Financial Freedom numbers:
- If your total monthly expenses are R20 000, then multiply this by 12 (gives us R240 000), then divide by 0.05 = our financial freedom number of R4 800 000
- If your total monthly expenses are R25 000, then multiply this by 12 (gives us R300 000), then divide by 0.05 = our financial freedom number of R6 000 000
- If your total monthly expenses are R30 000, then multiply this by 12 (gives us R360 000), then divide by 0.05 = our financial freedom number of R7 200 000
- If your total monthly expenses are R40 000, then multiply this by 12 (gives us R480 000), then divide by 0.05 = our financial freedom number of R9 600 000
- If your total monthly expenses are R50 000, then multiply this by 12 (gives us R600 000), then divide by 0.05 = our financial freedom number of R12 000 000
In these examples we use a 5% drawdown because it gives our investment a chance to keep up with inflation. If you start drawing down 8 -10%, it greatly reduces the chances of your money lasting you in the long run as your investment will struggle to keep up with inflation.
If by chance you have R4 800 000 sitting in the bank and you only require R20 000 per month to survive, you could essentially ‘retire’ now and do what you really want to do with your time.
Reduce your expenses and your Financial Freedom number will be more attainable.
To summarise the above, reaching your Financial Freedom is not about having all the money in the world, its not about having more money than your friends or family – its about you going through a process of understanding money and cutting out expenses that aren’t necessary to your happiness. If you currently get a cappuccino every day which costs you R30 a shot, by cutting this out of your life will give you an extra R11 000 a year OR more importantly it will reduce your expenses by R11 000 a year meaning you will need R220 000 less capital to reach your financial freedom number (R11 000/0.05 = R220 000). Maybe you’re a box a day smoker too, cut that out with your daily cappuccino and you’ll need around R500 000 less to reach your financial freedom.
The key takeaway from this all is that you need to be in control of your money and know where it goes in order to budget more effectively and allow yourself the chance of reaching your Financial Freedom as quickly as possible.