Lesson 3: Your Financial Independent Number
Do you know how much money you need to achieve financial independence? If you’re like most people, you don’t. In fact, finances are often something people put on the back-burner.
Isn’t becoming financially independent one of the most important decisions that you can make? A decision that allows you to live your life on your own terms?
A common reason that people make finances a low priority, is that they don’t know where to start.
That’s why I’m here to help.
By the end of this lesson you will be able to calculate how much money you need in order to reach financial independence.
How much do you really need?
The answer to how much money you need to become financially independent depends on the kind of life you want to live.
If you want to own several multimillion dollar homes, a yacht, and three lamborghinis, you’re going to need a lot of money. Much more money than if you want to own a home in Alaska where you envision spending your time fishing and hunting.
The formula, however is the same.
You can figure out how much you need to become financially independent in two simple steps.
Step 1: Figure out your yearly expenses
The first thing you need to do is to figure out how much you spend each year.
To do this you simply add up all of your monthly expenses and multiply by 12.
For this example let’s think about Jon who’s 30 years old and lives in an expensive city. We will come back to Jon’s story throughout this course.
$400 Dining and Entertainment
$50 Subscription Services
Jon is spending $3,800 a month or $45,600 a year.
Keep in mind that this number is going to be different for everyone depending upon their needs and/or desires.
Step 2: Calculate how much money you need to reach financial independence
There is a simple method that you can use to figure out how much money you need to reach financial independence based on your lifestyle.
To define that number you need to know two numbers.
Your yearly expenses (see above)
The Safe Withdrawal Rate is a highly agreed upon percentage (4%) that you can use to figure out how much money you can withdraw from your investment accounts each year, without running out of money before you die.
The calculation to define financial independence is simple. It’s your yearly spending divided by the Safe Withdrawal Rate.
In Jon’s case it’s $45,600 (his yearly expenses) divided by 0.04 (4% - the Safe Withdrawal Rate).
Jon’s financial independence number is $1,140,000.
This means Jon will need to have $1,140,000 before reaching financial independence.
You will learn exactly how Jon can reach that number and how long it will take him in the next few units.
EXERCISE: Math Time
Finding your financial independence number is the first step in understanding how to achieve financial independence.
Step 1: Calculate your yearly expenses
Step 2: Calculate your financial independence number by using the Safe Withdrawal Rate (4%)
To complete this exercise, feel free to use this Google Sheet. When it opens, go to File > Make a copy to make a version that you can edit. You can also do this exercise with pen and paper.
In this lesson you learned how to calculate your financial independence number.
In the next lesson you’ll learn how to develop the mindset necessary in order to start working toward this number.